ENSERCH EXPLORATION INC, 424B1, 1995-09-21

ENSERCH EXPLORATION INC
424B1, 1995-09-21
CRUDE PETROLEUM & NATURAL GAS

Previous: MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND OF MLMSMST, N-30D, 1995-09-21

Next: RESIDENTIAL ASSET SECURITIES CORP, 8-K, 1995-09-21

<PAGE>

Filed pursuant to Rule 424(b)(1)
SEC File No. 33-60461

PROSPECTUS

20,000,000 Shares

[LOGO OF ENSERCH EXPLORATION INC. APPEARS HERE]

COMMON STOCK
----------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
OF THE 20,000,000 SHARES OF COMMON STOCK BEING OFFERED, 16,000,000 SHARES ARE
BEING OFFERED FOR SALE IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS
AND 4,000,000 SHARES ARE BEING OFFERED CONCURRENTLY FOR SALE OUTSIDE THE UNITED
STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." THE
COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "EEX."
ON SEPTEMBER 20, 1995, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE
NEW YORK STOCK EXCHANGE WAS $12 PER SHARE. PRIOR TO THIS OFFERING, HOWEVER,
ONLY A LIMITED NUMBER OF SHARES HAVE TRADED PUBLICLY. FOR A DISCUSSION OF THE
FACTORS CONSIDERED IN DETERMINING THE PRICE OF THE COMMON STOCK IN THIS
OFFERING, SEE "UNDERWRITERS."
----------------
SEE "RISK FACTORS" ON PAGE 7 FOR INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
----------------
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. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
----------------

PRICE $11 A SHARE

----------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
-------- --------------- -----------
<S> <C> <C> <C>
Per Share................... $11.00 $.55 $10.45
Total(3).................... $220,000,000 $11,000,000 $209,000,000
</TABLE>
--------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at
$1,250,000.
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
3,000,000 additional shares of Common Stock at the price to public less
underwriting discounts and commissions for the purpose of covering over-
allotments, if any. If the U.S. Underwriters exercise such option in
full, the total price to public, underwriting discounts and commissions
and proceeds to Company will be $253,000,000, $12,650,000 and
$240,350,000, respectively. See "Underwriters."
----------------
The shares of Common Stock are offered, subject to prior sale, when, as and
if accepted by the Underwriters named herein and subject to approval of
certain legal matters by Davis Polk & Wardwell, counsel for the Underwriters.
It is expected that delivery of the shares of Common Stock will be made on or
about September 26, 1995 at the office of Morgan Stanley & Co. Incorporated,
New York, N.Y., against payment therefor in New York funds.
----------------
MORGAN STANLEY & CO.
Incorporated

BEAR, STEARNS & CO. INC.

DEAN WITTER REYNOLDS INC.

HOWARD, WEIL, LABOUISSE, FRIEDRICHS
Incorporated

SMITH BARNEY INC.

September 20 , 1995
<PAGE>

[Three pages containing maps follow the cover page of the prospectus.

1st Map page
------------
Enserch Exploration logo appears in upper right hand corner of page.
The page contains the heading "Offshore Gulf of Mexico Leaseholdings and Major
Deepwater Plays."

In the center of the page, there appears a map illustrating the Texas and
Louisiana coastlines. The map outlines the following offshore areas in the Gulf
of Mexico which border along the Texas coastline starting from the south and
continuing northward along the coast to the Louisiana border: South Padre
Island, North Padre Island, Mustang Island, Matagorda Island, Brazos, Galveston,
and High Island. The map also outlines the following offshore areas in the Gulf
of Mexico which border along the Gulf Coast of Louisiana from west to east: West
Cameron, East Cameron, Vermilion, South Marsh Island, Eugene Island, Ship Shoal,
South Timbalier, Grand Isle, and Main Pass. In addition, the map outlines the
following areas from west to east in the Gulf of Mexico: Corpus Christi, East
Breaks, Garden Banks, Green Canyon, Ewing Bank, and Mississippi Canyon.

The map is a representation of various gas and oil leases within the Gulf
of Mexico. Enserch Leases are depicted by yellow squares, Dalen Leases are
depicted by red squares, and the May 1995 High Bid Blocks are depicted by blue
squares. Within the Matagorda Island sector, there are six Dalen Leases and one
Enserch Lease. Within the Brazos sector, there are five Dalen Leases and three
Enserch Leases. Within the High Island sector, there are seven Enserch Leases.
Within the West Cameron sector, there are nine Dalen Leases, five Enserch
Leases, and six May 1995 High Bid Blocks. Within the East Cameron sector, there
are eight Dalen Leases, nine Enserch Leases, and eight 1995 High Bid Blocks.
Within the Vermilion sector, there are six Dalen Leases, three Enserch Leases,
and three May 1995 High Bid Blocks. Within the South Marsh Island sector, there
are five Dalen Leases and three Enserch Leases. Within the Eugene Island sector,
there are two May 1995 High Bid Blocks and one Enserch Lease. Within the Ship
Shoal sector, there are two Enserch Leases and eleven Dalen Leases. Within the
South Timbalier sector, there are three Dalen Leases, seven Enserch Leases and
one May 1995 High Bid Block. Within the Grand Isle sector, there is one Enserch
Lease. Within the Main Pass sector, there ar six Dalen Leases, one Enserch
Lease, and three May 1995 High Bid Blocks. Within the Garden Banks sector, there
are six Enserch Leases. Within the Green Canyon sector, there are eight Enserch
Leases and twenty May 1995 High Bid Blocks. Within the Ewing Bank sector, there
are two May 1995 High Bid Blocks and one Enserch Lease. Within the Mississippi
Canyon sector, there are three Enserch Leases, one Dalen Lease, and one May 1995
High Bid Block.

The first map page also portrays three enlarged inserts of the Mississippi
Canyon, Garden Banks, and Green Canyon regions, each depicting various wells and
locations. The following legend, as set forth at the top of the page, is
associated with these inserts: a gas well is depicted by a hollow sun; a gas
condensate well is depicted by a solid sun; an oil well is depicted by a solid
circle; a plugged and abandoned well is depicted by a hollow circle with a cross
through it; an abandoned location is depicted by a hollow circle with a diagonal
slash through it; a dry hole with oil show is depicted by a hollow half sun; a
P&A well with oil show is depicted by a half-filled circle with a cross through
it; and a surface location is depicted by a hollow circle.

The Mississippi Canyon insert appears to the right of the Legend column as
a three by three grid containing nine blocks. The first row consists of Block
438, Block 397, and Block 398. The second row consists of Block 482, Block 441,
and Block 442. The third row consists of Block 526, Block 485, and Block 486.
The map indicates a platform location within Block 482. Within Block 441, the
map depicts three gas condensate wells, three gas wells, three plugged and
abandoned wells, one dry hole with oil show, and one abandoned location. Block
442 depicts one surface location and one plugged and abandoned well. Block 485
depicts one gas well.

The Garden Banks insert at the bottom left of the page is depicted as a
four by two grid containing eight blocks. The first row of blocks consists of
Block 342, Block 343, Block 344, and Block 345, and the second row consists of
Block 386, Block 387, Block 388, and Block 389. Each block depicts an area three
miles wide. Block 344 depicts one gas condensate well. Block 387 depicts one
plugged and abandoned well, one oil well, two surface locations, and two P&A
wells with oil shows. Block 388 depicts four oil wells and one surface location.

Finally, the Green Canyon insert at the bottom right of the page depicts a
three by three grid containing nine blocks. The first row consists of Block 209,
Block 210, and Block 211. The second row consists of Block 253, Block 254, and
Block 255. The third row consists of Block 297, Block 298, and Block 299.
Block 254 depicts three oil wells, one gas condensate well, one plugged and
abandoned well, two P&A wells with oil shows, one surface location, and one
abandoned location.

2nd and 3rd Map Pages
----------------------
On pages 2 and 3, there appears under the heading "Major Producing
Properties Onshore Field Locations," a map of most of the 48 contiguous United
States with the exception of some of the far northern states and states
bordering the east coast. The map is divided into the following three regions:
the Gulf Coast, East Texas, and North Central Texas and Other. The map depicts
various Enserch onshore field locations with a blue circle and Dalen onshore
field locations with a purple circle. The Enserch locations are identified as
follows: in the Gulf Coast Region (in the southern half of Texas), locations at
Fashing, Sheridan, and Rancho Viejo; in East Texas, locations at Freestone, Tri-
Cities, Opelika, Willow Springs, Whelan, and N. Lansing; and in North Central
Texas and Other Region, locations at Boonsville, Luther and Hardeman County. The
Dalen locations are identified as follows: in the Gulf Coast Region of Texas,
locations at Los Indios, Guerra and Provident City, NE; in the Gulf Coast Region
of Louisiana, locations at Riceville, Lake Arthur and Turtle Bayou, NE; in the
East Texas Region, one location in Texas at Bald Prairie and one location in
western Louisiana at Logansport; in the North Central Texas Region, a location
at Katz; in southeastern New Mexico, one location at Townsend Deep; in northeast
Utah, locations at River Bend and Pleasant Valley; in southwest Wyoming,
locations at Fontenelle and Wamsutter, NE; and in Western Oklahoma, one location
at Cheyenne.

Page 2 of these materials also depicts a map under the heading
"International Indonesia" of the island of Java, surrounded to the north by the
Java Sea, to the east by the Bali Sea, and to the south by the Indian Ocean.
There also appears an enlarged insert of the Tuban Block (a north central
section of the island). This insert depicts the MUDI #1 Discovery, MUDI #2,
MUDI #3, and MUDI #1-ST as three oil wells and one P&A well with oil show.]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

<PAGE>

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY EEX OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF EEX SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES UNDER ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.

----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 10
Market Price of Common Stock and Dividend Policy.......................... 11
Capitalization ........................................................... 12
Pro Forma Financial Information........................................... 13
Selected Financial and Operating Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 28
Management................................................................ 49
Security Ownership of Certain Beneficial Owners and Management............ 53
Relationship Between EEX and ENSERCH...................................... 54
The Reorganization........................................................ 55
Certain Transactions...................................................... 56
Description of the Capital Stock.......................................... 57
Certain United States Tax Consequences to Non-United States Holders....... 58
Underwriters.............................................................. 61
Legal Matters............................................................. 65
Experts................................................................... 65
Certain Definitions....................................................... 66
Index to Financial Statements............................................. F-1
</TABLE>
<PAGE>

AVAILABLE INFORMATION

EEX 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 EEX 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. Copies of such materials can also be obtained
from the Public Reference Section of the Commission, Washington, D.C. 20549,
at prescribed rates. The Common Stock is listed on the New York Stock Exchange
("NYSE"). Reports, proxy statements and other information concerning EEX can
be inspected and copied at the offices of the NYSE at 20 Broad Street, New
York, New York 10005.

EEX 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 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 Section of the Commission,
Washington, D.C.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

Incorporated by reference in this Prospectus as of the date of its filing,
and subject in each case to information contained in this Prospectus, are the
following documents filed by EEX with the Commission pursuant to the Exchange
Act: (i) EEX's Annual Report on Form 10-K for the fiscal year ended December
31, 1994; (ii) EEX's Quarterly Report on Form 10-Q/A-1 for the fiscal quarter
ended March 31, 1995 and Quarterly Report on Form 10-Q/A-1 for the fiscal
quarter ended June 30, 1995, and (iii) EEX's Current Reports on Form 8-K dated
April 13, 1995, June 21, 1995, and August 16, 1995.

Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for all purposes to the extent that a
statement contained in this Prospectus modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.

EEX will provide without charge to each person, including any beneficial
owner, to whom a copy of this Prospectus is delivered, upon the written or
oral request of such person, a copy of the documents incorporated in this
Prospectus by reference (other than exhibits to such documents unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Written or telephone requests for such
documents should be directed to M. G. Fortado, Esq., Enserch Exploration,
Inc., 300 S. St. Paul, Dallas, Texas 75201, (214) 670-2649.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. Unless
otherwise indicated, references in this Prospectus to (i) historical financial
data of EEX reflect EEX following completion of the Reorganization (see "The
Reorganization"), (ii) pro forma financial data reflect the preceding, the
DALEN Acquisition and the Garden Banks and Green Canyon Transactions (see
"Business--Recent Developments") and (iii) pro forma as adjusted financial data
reflect the preceding and the issuance of Common Stock offered hereby (assuming
no exercise of the U.S. Underwriters' over-allotment option) and the
application of the net proceeds therefrom. References to the "Offering" refer
to the shares being offered in the United States and Canada by the U.S.
Underwriters and the shares being offered concurrently outside the United
States and Canada by the International Underwriters. Unless otherwise
indicated, references in this Prospectus to reserves, acreage, production,
drilling activity and other operating data reflect the combined data of (i) EEX
following completion of the Reorganization and the Garden Banks and Green
Canyon Transactions and (ii) DALEN. Certain terms relating to the gas and oil
industry are defined in "Certain Definitions."

THE COMPANY

Enserch Exploration, Inc. ("EEX"), a 99.2% owned subsidiary of ENSERCH
Corporation ("ENSERCH"), is an independent energy company that has been engaged
in the exploration for and the development, production and sale of natural gas
and crude oil since 1918. EEX is one of the largest independent exploration and
production companies in the United States, with a reserve base of approximately
1,768.2 Bcfe at June 30, 1995. Approximately 77.2% of these reserves on an
energy equivalent basis consist of natural gas. EEX has grown through
exploration, development and acquisition activities concentrated in major
production basins located offshore in the Gulf of Mexico and onshore in East
Texas, North Central Texas and the U.S. Gulf Coast.

EEX's primary objective is to increase production, reserves and cash flows
through the full exploitation of its large portfolio of developed and
undeveloped acreage. EEX plans to achieve this objective by pursuing the
following strategy:

. Pursue balanced growth through a combination of low risk development
projects, high potential exploration activities and strategic
acquisitions.

. Apply technology to development and exploration projects to reduce risks
and efficiently produce reserves.

. Emphasize efficient exploitation of producing properties through low cost
operations.

. Utilize tight sands and subsea operating experience to expand operations
both domestically and internationally.

. Maintain a strong balance sheet to provide flexibility to pursue future
growth.

EEX has extensive experience in reservoir management and believes it has
particular competence in the exploitation and development of tight sands
reservoirs. EEX's successful completion of subsea development operations in the
deep water Gulf of Mexico using bundled flow lines to tie back to conventional
shallow water production facilities, coupled with the use of technology such as
3-D seismic, has enabled it to become one of the few independent gas and oil
companies to successfully develop deep water Gulf of Mexico reserves as well as
operate such fields. EEX's two most recent deep water Gulf of Mexico
development projects, the Garden Banks and Green Canyon projects, are currently
under development. Initial production from the Garden Banks project is expected
to commence in September or October of 1995 and from the Green Canyon project
in the next three to four years.

3
<PAGE>

EEX is beginning to realize the benefits of its strategy, as evidenced by the
recent developments described below, each of which involves one or more
elements of EEX's strategic plan.

RECENT DEVELOPMENTS

DALEN ACQUISITION

On June 8, 1995, EEX acquired all the capital stock of DALEN Corporation
("DALEN"), an independent gas and oil company engaged in the exploration for
and the development and production of natural gas and crude oil (the "DALEN
Acquisition"). Through the DALEN Acquisition, EEX acquired proved reserves
totaling 396.8 Bcfe at June 30, 1995, and other assets for a purchase price of
$340 million and refinanced DALEN's $115 million of bank debt. The DALEN
Acquisition was funded through EEX's $350 million revolving credit facility and
a $150 million bridge financing facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." DALEN's activities have been oriented primarily toward
natural gas and are concentrated in selected major production regions,
including the Gulf Coast, the Gulf of Mexico and the Mid-Continent. DALEN was
an attractive acquisition for EEX because several of DALEN's operations are
located in fields that are either near or producing from formations from which
EEX is also producing. EEX believes that DALEN's property base has significant
exploitation and development potential. The DALEN Acquisition is a key step in
EEX's growth plan from which EEX expects to realize near term benefits. The
geologic similarity and proximity of DALEN's major producing properties to
EEX's properties permit EEX to apply its expertise, particularly with respect
to tight sands reservoirs, to these properties, from which EEX expects enhanced
production and cash flows. The enhanced production capabilities which EEX
expects to apply to DALEN's property base have been reflected in an
approximately 20 Bcfe increase in proved reserves from the DALEN properties
since year-end 1994 estimates. Such increase is based on estimates as of July
1, 1995 by DeGolyer and MacNaughton, independent petroleum consultants ("D&M").
In addition, production from the DALEN properties was 32 Bcfe during the six
months ended June 30, 1995. EEX also expects to realize cost savings through
the integration of the companies' operations. Synergistic opportunities for
operating efficiencies and cost reductions are expected to result in improved
financial results for the combined companies.

GREEN CANYON PROJECT

On April 25, 1995, EEX and an affiliate of Mobil Corporation ("Mobil")
entered into a letter of intent for Mobil to purchase a 40% interest in EEX's
Green Canyon project. An affiliate of Reading & Bates Corp. had previously
signed a letter of intent to purchase a 20% interest in the project. Upon the
completion of these transactions (collectively, the "Green Canyon
Transaction"), EEX will own a 40% working interest and remain the operator of
the project. D&M has as of March 1, 1995, initially estimated gross reserves,
including royalty interests, at the Green Canyon project to be 85.5 MMBbls of
oil and 149.5 Bcf of natural gas, of which 49.2 MMBbls of oil and 102.2 Bcf of
natural gas are in the proved category. EEX's initial interest in the Green
Canyon project proved reserves, excluding royalty interests, amounted to 42.2
MMBbls of oil and 87.8 Bcf of natural gas, for a total of 341.2 Bcfe; after
completion of the Green Canyon Transaction, EEX's interest in the Green Canyon
project reserves will be 136.5 Bcfe. Based upon its experience and results to
date in the Green Canyon project, EEX intends to expand its holdings in this
area. On May 10, 1995, EEX, on behalf of its Green Canyon co-venturers,
submitted the highest bids on six blocks within ten miles of the proposed
location of the Green Canyon production facility and to date has been awarded
exploration and development rights on five of them. EEX believes it is
advantageously positioned to fully develop its Green Canyon holdings with the
backing of its partners, each of which has considerable offshore experience.

GARDEN BANKS PROJECT

In April 1995, after evaluating EEX's development plans for Garden Banks
Block 388, another affiliate of Mobil exercised its option to acquire a 40%
interest in EEX's Garden Banks project (the "Garden Banks Transaction"). The
transaction was closed on August 9, 1995. EEX's remaining interest in the
Garden Banks reserves, excluding royalty interests, is 20.5 Bcf of proved
natural gas reserves and 16.9 MMBbls of proved oil and gas liquids reserves.
Both the Garden Banks and Green Canyon Transactions illustrate EEX's strategy

4
<PAGE>

of reducing its risk by limiting its working interest participation in high-
risk ventures. These arrangements also enabled EEX to reduce its capital
commitments with respect to these projects while still participating in the
potential rewards from bringing these properties to production.

INTERNATIONAL OPERATIONS

EEX is focused on expanding its activities in areas where its experience and
technical competencies can be exploited. EEX believes that international
exploration and development activities will be an important source of growth.
On June 12, 1995, EEX announced the conclusion of a Memorandum of Understanding
to form a joint venture with ONGC Videsh Limited, a wholly-owned subsidiary of
the Oil & Natural Gas Corporation Limited of New Delhi, India, to explore and
develop hydrocarbon resources in India and other countries. Joint ventures such
as the one planned with ONGC Videsh Limited are expected to enable EEX to
broaden the utilization of its expertise in the exploitation of mature natural
gas and oil fields and to develop offshore geologic structures utilizing its
experience in subsea completion technology and floating production technology.
By combining with co-venturers that have a high degree of knowledge and
experience with geologic conditions in their local regions, EEX believes that
it can reduce the risks inherent in expanding beyond its core operations in the
United States.

EEX acquired all of its currently owned international properties in June 1995
when it purchased all the international gas and oil operations of ENSERCH,
which consisted of concessions in Indonesia, Malaysia and Israel. The
Indonesian properties contain proved reserves of 4.1 MMBbls of oil. EEX had
previously managed these properties for ENSERCH for several years.

A major effect of the above-described recent developments has been to
increase EEX's net proved reserves. See "Business--Recent Developments." The
following table sets forth EEX's net proved reserves at June 30, 1995, and its
net production for the year 1994 and present value of estimated future net
revenues (after-tax) as of December 31, 1994:
<TABLE>
<CAPTION>
JUNE 30, 1995 1994 DECEMBER 31, 1994
NET PROVED RESERVES NET PRODUCTION PRESENT VALUE
--------------------------- ----------------- OF ESTIMATED
OIL AND OIL AND FUTURE NET
GAS GAS LIQUIDS TOTAL GAS GAS LIQUIDS REVENUES
(BCF) (MMBBLS) (BCFE) (BCF) (MMBBLS) (IN MILLIONS)
------- ----------- ------- ----- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
EEX(1).................. 1,035.1 56.1 1,371.4 67.1 2.2 $ 853.6
DALEN................... 330.6 11.0 396.8 54.4 2.6 262.0
------- ---- ------- ----- --- --------
Pro forma combined...... 1,365.7 67.1 1,768.2 121.5 4.8 $1,115.6
======= ==== ======= ===== === ========
</TABLE>
--------
(1) Includes reserves of EEX following completion of the Reorganization and the
Garden Banks and Green Canyon Transactions.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered............. 20,000,000 shares (1)
Common Stock to be outstanding
after the Offering.............. 125,874,242 shares (1)(2)
Use of Proceeds.................. To reduce debt incurred in connection with the DALEN
Acquisition.
NYSE symbol...................... EEX
</TABLE>
--------
(1) Assumes the U.S. Underwriters' over-allotment option is not exercised.
(2) Includes the issuance of 1,240,000 shares of Common Stock, as adjusted, in
connection with the acquisition of the international gas and oil operations
of ENSERCH and excludes the 2,000,000 shares of Common Stock issuable under
the 1994 Stock Incentive Plan and 500,000 shares issuable under the ENSERCH
Employee Stock Purchase and Savings Plan. See "Management," "The
Reorganization" and "Certain Transactions." After the Offering, ENSERCH
will own beneficially approximately 83.4% of the outstanding Common Stock
(approximately 81.5% assuming the U.S. Underwriters' over-allotment option
is exercised in full). See "Security Ownership of Certain Beneficial Owners
and Management."

5
<PAGE>

SUMMARY FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
EEX PRO FORMA AS ADJUSTED(1)
-------------------------------------------------------- ---------------------------
SIX
SIX MONTHS YEAR MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30, ENDED ENDED
---------------------------------- -------------------- DECEMBER 31, JUNE 30,
1992 1993 1994 1994 1995 1994 1995
---------- ---------- ---------- -------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE, OPERATING AND RESERVE DATA)
STATEMENT OF INCOME DA-
TA:
Gas and oil revenues... $ 170,257 $ 187,366 $ 177,807 $ 95,001 $ 89,380 $ 321,098 $ 137,632
Other revenues......... 1,287 2,430 1,333 209 268 1,438 340
---------- ---------- ---------- -------- ---------- ----------- ------------
Total revenues......... 171,544 189,796 179,140 95,210 89,648 322,536 137,972
Total expenses......... 172,730 174,611 147,111 75,793 94,053 269,559 142,949
---------- ---------- ---------- -------- ---------- ----------- ------------
Operating income (loss)
...................... (1,186) 15,185 32,029 19,417 (4,405) 52,977 (4,977)
Income (loss) before
income taxes.......... (18,175) (13,358) 11,467 9,737 (6,981) 42,245 (13,244)
Net income (loss)...... (18,623) (9,960) 11,801 9,935 (4,538) 28,214 (10,444)
Net income (loss),
adjusted to include
pro forma income taxes
on partnership
operations (2)........ (11,754) (8,692) 7,477 6,318 (4,538) 28,214 (10,444)
Net income (loss) per
share (2)............. (.11) (.08) .07 .06 (.04) .22 (.08)
Weighted average shares
outstanding........... 105,695 105,695 105,695 105,695 105,695 125,821 125,821
CASH FLOW DATA (IN THOU-
SANDS):
Net cash provided by
operating activities.. $ 85,246 $ 79,523 $ 61,682 $ 43,522 $ 37,827 $ 169,215 $ 58,121
Net cash used in
investing activities.. (58,702) (129,083) (108,784) (64,966) (350,606) (185,589) (11,358)
Net cash provided by
(used in) financing
activities............ (25,683) 48,932 46,993 21,614 316,670 28,504 (8,891)
EBITDA (3)............. 92,050 103,794 104,983 60,364 42,139 199,729 69,455
OPERATING DATA:
Sales volumes:
Natural gas (Bcf)...... 65.2 70.0 67.1 35.4 34.5 121.5 54.9
Oil and condensate
(MMBbls).............. 2.3 2.1 2.0 1.0 1.2 4.1 2.0
NGLs (MMBbls).......... .5 .3 .2 .1 .2 .7 .3
Total (Bcfe).......... 82.2 84.9 80.5 42.1 42.7 150.2 69.2
Average sale prices:
Natural gas (per Mcf)
(4)................... $ 1.82 $ 2.09 $ 2.15 $ 2.21 $ 1.94 $ 2.06 $ 1.81
Oil and condensate (per
Bbl).................. 19.20 17.24 15.38 15.20 16.98 15.80 17.19
NGLs (per Bbl)......... 13.38 12.09 10.85 10.01 11.01 9.28 9.34
Total (per Mcfe)...... 2.07 2.21 2.21 2.26 2.09 2.14 1.99
Costs and expenses (per
Mcfe):
Production and operat-
ing (5)............... $ .36 $ .37 $ .39 $ .37 $ .46 $ .36 $ .49
Exploration............ .14 .10 .11 .11 .13 .06 .08
Depreciation and amor-
tization.............. .93 .92 1.00 .97 1.09 1.03 1.07
General, administrative
and other............. .28 .35 .25 .19 .35 .25 .32
Taxes, other than in-
come.................. .19 .19 .16 .16 .18 .15 .11
GAS AND OIL PROVED RE-
SERVE DATA (AT PERIOD
END):
Gas (Bcf).............. 1,101.4 1,086.5 1,041.7 1,365.7
Oil (MMBbls)........... 39.2 39.3 50.6 67.1
Total (Bcfe)........... 1,336.6 1,322.3 1,345.3 1,768.2
BALANCE SHEET DATA (AT
PERIOD END):
Property, plant and
equipment--net........ $1,018,403 $1,046,360 $1,254,014 $1,746,210 $ 1,660,910
Total assets........... 1,068,811 1,111,495 1,381,235 1,841,337 1,787,337
Long-term debt,
including current
portion (6)........... 266,000 298,000 155,855 503,858 242,108
Owners' equity......... 671,706 630,685 736,008 731,333 939,083
</TABLE>
--------
(1) See "Pro Forma Financial Information" included elsewhere in this
Prospectus.
(2) Net income and per share data for periods prior to 1995 include a pro forma
provision for income taxes on partnership operations based on the
applicable federal statutory tax rate.
(3) EBITDA is earnings before interest, income taxes, depreciation and
amortization, (sale) writedown of inactive pipeline and write-off of gas
and oil assets. EBITDA is presented here to provide additional information
about EEX's ability to meet its future requirements for debt service,
capital expenditures and working capital. EBITDA should not be considered
as an alternative to net income as an indicator of operating performance or
as an alternative to cash flows as a measure of liquidity.
(4) Approximately 20% of EEX's natural gas sales are under long-term fixed
price contracts which generally exceed short-term spot market prices. A
significant portion of deliveries under these long-term fixed price
contracts are made during the winter heating season. EEX also realized
gains from hedging transactions equivalent to $.07 and $.12 per Mcf for the
year ended December 31, 1994 and the six months ended June 30, 1995,
respectively. Sales from DALEN properties are predominantly in the short-
term spot market. DALEN did not hedge its natural gas sales during these
periods. As a result, the pro forma average natural gas sales prices for
the year ended December 31, 1994 and the six months ended June 30, 1995
were 4% and 7%, respectively, below EEX's historical prices.
(5) Excludes production, severance and ad valorem taxes.
(6) Includes capital lease obligations.

6
<PAGE>

RISK FACTORS

In addition to the other information set forth elsewhere in this Prospectus,
the following factors relating to EEX and the Offering should be considered
when evaluating an investment in the shares of Common Stock offered hereby.

UNCERTAINTIES IN ESTIMATING RESERVES AND FUTURE NET CASH FLOWS

There are numerous uncertainties inherent in estimating quantities and
values of gas and oil reserves and in projecting future rates of production
and net revenues 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 represent estimates
only and should not be considered 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 in reserve estimates could adversely affect EEX's future prospects
and the market value of its securities.

RESERVE REPLACEMENT UNCERTAINTIES

EEX's gas and oil exploration, development and production operations involve
numerous risks that could result in the failure to find new reserves or fully
produce existing reserves. EEX's prospects for growth and profitability depend
predominantly on its ability to replace present reserves through exploration,
development and acquisition. 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 EEX will decline as gas and oil are produced from its existing
proved developed reserves. There can be no assurance that EEX's exploration,
development and acquisition activities will result in significant additional
reserves or that EEX will continue to be able to drill productive wells at
acceptable costs. If prevailing gas and oil prices were to increase
significantly, EEX's costs to add reserves could also be expected to increase.
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 or workover requirements for wells cannot be
predicted with any certainty.

EXPLORATION, DEVELOPMENT, PRODUCTION AND SELLING RISKS

EEX's operations are subject to the risks and uncertainties associated with
finding, acquiring and developing gas and oil properties, and producing,
transporting and selling gas and oil. EEX incurs significant expenditures in
connection with the identification and acquisition of properties and the
drilling and completion of wells. EEX's operations may be materially
curtailed, delayed or cancelled as a result of numerous factors, including
accidents, title problems, weather conditions, compliance with governmental
requirements and shortages or delays in the delivery of equipment. Drilling
may involve unprofitable efforts, not only with respect to dry wells, but also
with respect to wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of
drilling, completion and operating costs. Various field operating conditions
may adversely affect EEX's production from successful wells. Close well
supervision and effective maintenance operations can contribute to maximizing
production rates over time, but production delays and declines from normal
field operating conditions cannot be eliminated and can be expected to affect
adversely revenue and cash flow levels to varying degrees. Most wells can be
expected to require recompletions or workovers during their productive lives.
In addition, EEX's ability to sell its gas and oil production is dependent on
the availability and capacity of gas and oil gathering systems, pipelines and
other forms of transportation. Federal and state regulation of gas and oil
production and transportation, general economic conditions, quality of the
hydrocarbons and changes in supply and demand all could materially adversely
affect EEX's ability to sell its gas and oil production. See "Business--Sales"
and "--Government Regulation."

7
<PAGE>

OPERATING HAZARDS

EEX's operations are subject to the hazards inherent in the gas and oil
industry, including fires, explosions, blow-outs, pipe failures, abnormally
pressured formations and environmental accidents such as gas leaks, oil spills,
ruptures or discharges of toxic gasses, the occurrence of any of which could
result in substantial losses to EEX due to injury or loss of life, severe
damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. In accordance with
customary industry practice, EEX maintains insurance against some, but not all,
of the hazards described above. There can be no assurance that any insurance
will be adequate to cover any losses or liabilities. EEX cannot predict the
continued availability of insurance, or availability at commercially acceptable
premium levels. See "Business-- Government Regulation."

DEEP WATER RISKS

EEX's offshore Gulf of Mexico gas and oil reserves include properties located
in water depths of 1,400 to 3,400 feet. Drilling operations in these depths are
by their nature more difficult than drilling operations conducted in shallower
water because they require the application of more advanced drilling
technologies, involving a higher risk of technological failure and inevitably
resulting in significantly higher drilling costs. EEX's deep water wells are
completed utilizing subsea completion techniques that involve the installation
of subsea wellheads and the use of bundled flow lines to tie back to production
facilities. The installation of these subsea wellheads and bundled flow lines
requires the use of advanced remote installation mechanics. Such operations
involve a higher risk of encountering mechanical difficulties and equipment
failures which, if encountered, could result in significant cost overruns. See
"Business--Significant Properties and Exploration and Development Activities--
Gulf of Mexico Region."

EFFECTS OF CHANGES IN GAS AND OIL PRICES AND VOLATILITY OF GAS AND OIL MARKETS

The revenues generated by EEX's operations are highly dependent upon the
prices of, and demand for, gas and oil and the costs of acquiring, developing
and producing reserves. Gas and oil prices have historically been volatile and
are likely to continue to be volatile in the future. Prices for gas and oil are
subject to fluctuations in response to relatively minor changes in supply,
market uncertainty and a variety of additional factors that are beyond the
control of EEX, including economic conditions in the United States and
elsewhere, the world political situation as it affects OPEC, the Middle East
and other producing countries, the actions of OPEC, government regulation and
taxes, the level of consumer demand, the price and availability of alternative
fuels and overall economic development. EEX engages in hedging activities with
respect to some of its projected gas and oil production through a variety of
financial arrangements designed to protect against price declines, including
swaps, collars and futures agreements. To the extent EEX engages in such
activities, it may be prevented from realizing the benefits of price increases
above the levels of the hedges. Because EEX's reserve base is approximately
77.2% natural gas on an energy equivalent basis, it is more sensitive to
fluctuations in the price of natural gas than to fluctuations in the price of
oil. Revenues, operating income and net income for EEX closely follow gas and
oil prices and production volumes, and the decline in financial results for the
six months ended June 30, 1995, as compared with the prior year period is
primarily a result of lower natural gas production and prices, partially offset
by increases in oil production and prices. EEX follows the full cost method of
accounting for gas and oil properties. A decline in gas and oil prices could
cause a future write-down of capitalized costs and a non-cash charge against
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview," "--Full Cost Ceiling" and "--Liquidity and
Capital Resources--Hedging Activities."

GOVERNMENT REGULATION

EEX's business is subject to certain federal, state and local laws and
regulations relating to the drilling for and production of gas and oil, as well
as environmental and safety matters. Such laws and regulations

8
<PAGE>

have generally become more stringent in recent years, often imposing greater
liability on an increasing number of parties. Because the requirements imposed
by such laws and regulations are frequently changed, EEX is unable to predict
the effect or cost of compliance with such requirements or their effects on gas
and oil use or prices. See "Business--Government Regulation."

ENVIRONMENTAL MATTERS

EEX believes that its properties and operations are in substantial compliance
with applicable environmental laws and regulations. The construction and
operation of facilities for drilling, transporting, processing and storing gas
and oil are subject to federal, state and local environmental laws and
regulations, including those that can impose obligations to clean up hazardous
substances at facilities EEX owns or operates or to which it has sent wastes
for disposal. In most instances, the applicable regulatory requirements relate
to water and air pollution control and solid waste management measures.
Environmental regulation can increase the cost of planning, designing,
installing and operating such facilities. Expenditures for environmental
control equipment and for remediation have not been significant in relation to
the results of operations of EEX. EEX believes, however, that it is reasonably
likely that the trend in environmental legislation and regulations will
continue to be toward stricter standards. See "Business--Government
Regulation."

COMPETITION

The oil and gas industry is highly competitive in all its phases. EEX
competes in the acquisition of properties, the search for and development of
reserves, the production and sale of oil and gas, and the securing of the labor
and equipment required to conduct operations. EEX's competitors include major
oil and gas companies, other independent oil and gas concerns and individual
producers and operators. Many of these competitors have financial and other
resources that substantially exceed those available to EEX. Oil and gas
producers also compete with other industries that supply energy and fuel.

CONTROL BY ENSERCH

After the Offering, ENSERCH will own beneficially approximately 83.4% of the
outstanding Common Stock (or approximately 81.5% if the U.S. Underwriters
exercise their over-allotment option in full), enabling it to elect all
directors of EEX. Through its ability to elect all directors of EEX, ENSERCH
will retain the ability to control all matters relating to the management of
EEX, the future issuance of Common Stock and other securities of EEX and the
payment of dividends on the Common Stock. ENSERCH will also retain effective
control over the outcome of all matters upon which EEX shareholders vote.
Certain of EEX's directors and officers are also directors and/or officers of
ENSERCH or its other subsidiaries. There is no agreement between ENSERCH and
any other party, including EEX, that would prevent ENSERCH from acquiring
additional Common Stock. See "Relationship between EEX and ENSERCH."

CONFLICTS OF INTEREST

As a result of ENSERCH's control of EEX, certain conflicts of interest arise
in relations between EEX and ENSERCH and its other subsidiaries and affiliates
(collectively, the "ENSERCH Companies"), including conflicts with respect to
the issuance of Common Stock and other voting securities of EEX, the election
of directors of EEX, the payment of dividends by EEX and various transactions
between ENSERCH Companies and EEX. For example, certain ENSERCH Companies
purchase and market natural gas produced by EEX. The interests of the ENSERCH
Companies with respect to the pricing, terms of delivery and other aspects of
these transactions are not the same as those of EEX. However, EEX believes that
the terms of these transactions have been at least as favorable to EEX as could
have been obtained from unaffiliated third parties. A number of specific types
of transactions and relationships between EEX and the ENSERCH Companies are
contemplated and permitted by Article Eleven of EEX's Restated Articles of
Incorporation. For example, Article Eleven permits EEX to enter into contracts
with any entity in which ENSERCH has a direct or

9
<PAGE>

indirect interest as long as the transaction is authorized or ratified by a
majority of the Board of Directors of EEX or a Board committee. In determining
whether this majority vote has been achieved, the vote of a director of ENSERCH
who is also a director of EEX may be counted toward the authorization or
ratification. The nature of the respective businesses of EEX and the ENSERCH
Companies may also give rise to conflicts of interest. ENSERCH has advised EEX
that it does not currently intend to engage in the acquisition or development
of, or exploration for, gas and oil except through its beneficial ownership of
Common Stock of EEX. However, as part of ENSERCH's business strategy, it may
from time to time acquire businesses primarily engaged in other activities that
also include gas and oil operations. In addition, consistent with Article
Eleven, an ENSERCH Company may engage in direct competition with EEX without
first being obligated to offer the transaction or other opportunity to EEX. See
"Relationship Between EEX and ENSERCH--Conflicts of Interest" and "Certain
Transactions."

SHARES ELIGIBLE FOR FUTURE SALE

EEX is authorized to issue additional equity and debt securities, including
shares of preferred stock. Under the current rules of the NYSE, EEX may not
issue shares of Common Stock equal to 20% or more of the then outstanding
shares in connection with any single future transaction, other than a public
sale for cash, without shareholder approval. The future sale of a substantial
number of shares of Common Stock or preferred stock in the public market could
adversely affect the shareholders' equity interest in EEX and the market price
of the Common Stock, and their interests in the assets, liabilities, results of
operations and cash flows of EEX represented by the issued and outstanding
shares of Common Stock may be diluted. The shares of Common Stock sold in the
Offering will be eligible for immediate resale in the public market without
restriction, except to the extent shares are acquired by an affiliate of EEX.
All of the shares of Common Stock owned by the ENSERCH Companies are subject to
the resale limitations of Rule 144 adopted under the Securities Act. In
general, under Rule 144 as currently in effect, a person who is an "affiliate,"
as that term is defined under the Securities Act (which term would include the
ENSERCH Companies), is entitled to sell, within any three-month period, a
number of "restricted" shares that does not exceed the greater of 1% of the
then outstanding shares of Common Stock of EEX (approximately 1,260,000 shares
immediately after this Offering) or the average weekly trading volume during
the four calendar weeks preceding such sale. If EEX or the ENSERCH Companies
should sell a substantial amount of Common Stock after the Offering, the
prevailing market price of the Common Stock could be adversely affected. The
ENSERCH Companies that hold Common Stock have agreed not to sell Common Stock
for 180 days after the date of this Prospectus, subject to certain limited
exceptions. See "Underwriters" and "Security Ownership of Certain Beneficial
Owners and Management."

LIMITED TRADING MARKET

Prior to the Offering, there has been a limited trading market for the Common
Stock. See "Underwriters--Pricing of the Offering." Although the Common Stock
is listed on the NYSE, there can be no assurance that an active trading market
for the Common Stock will develop subsequent to the Offering. After the
completion of the Offering, the market price of the Common Stock may be
influenced by many factors, including the depth and liquidity of the market for
the Common Stock, investor perceptions of EEX and general economic and other
conditions.

USE OF PROCEEDS

The net proceeds to EEX are estimated to be approximately $208 million ($239
million if the U.S. Underwriters' over-allotment option is exercised in full)
after deducting underwriting discounts and commissions and estimated offering
expenses. The net proceeds will be used to reduce debt incurred in connection
with the DALEN Acquisition. For a description of the terms of the debt to be
repaid see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Cash Flows."

10
<PAGE>

MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock began trading on the NYSE on January 3, 1995, under the
symbol "EEX." There were no trades in the Common Stock in any market prior to
that date. The following table sets forth for the periods indicated the high
and low sales prices of the Common Stock as reported on the NYSE Composite
Tape.

<TABLE>
<CAPTION>
MONTH OF 1995 HIGH LOW
------------- ------- -------
<S> <C> <C>
January................................. $11 1/8 $ 9 3/4
February................................ 10 1/4 9 3/8
March................................... 10 1/2 9 5/8
April................................... 13 3/4 10 1/8
May..................................... 14 3/8 13 1/2
June.................................... 14 7/8 13 1/4
July.................................... 14 3/4 13 1/2
August.................................. 14 13 3/8
September (through September 20)........ 14 11 7/8
</TABLE>

A recent reported last sale price per share for the Common Stock on the NYSE
is set forth on the cover page of this Prospectus. At September 20, 1995, there
were approximately 1,450 holders of record of the Common Stock.

Prior to the Offering, only a limited number of shares of Common Stock have
traded publicly. For a discussion of the factors considered in determining the
price of the Common Stock in the Offering, see "Underwriters--Pricing of the
Offering."

No dividends have been paid on the Common Stock and EEX does not anticipate
paying any cash dividends in the foreseeable future. EEX instead intends to
retain its earnings to support the growth of EEX's business. For example, EEX
is engaged in several offshore development projects that will require
significant capital investment over the next several years. Future cash
dividends will depend on EEX's earnings, capital requirements, financial
condition and other factors deemed relevant by the Board of Directors.

Certain provisions of EEX's Restated Articles of Incorporation and revolving
credit agreement could affect the payment of dividends on the Common Stock. The
Restated Articles of Incorporation provide that no dividend (other than a
dividend payable in the Common Stock of EEX) may be paid upon or declared or
set apart for the Common Stock unless all past or current dividends due on the
Adjustable Rate Cumulative Preferred Stock, Series A ("Preferred Stock, Series
A"), of EEX shall have been paid or declared and set apart. The revolving
credit agreement provides that EEX (a) may not permit the ratio, expressed as a
percentage of (i) the debt of EEX and its consolidated subsidiaries on a
consolidated basis ("consolidated debt") to (ii) the sum of such consolidated
debt plus net worth to exceed 60% at any time, and (b) may not declare or pay
any dividend during the continuation of an Event of Default, as defined
(including a default in the payment of interest or principal, when due, various
proceedings relating to insolvency, liquidation and bankruptcy, continuing
defaults or unpaid judgments in excess of $25 million, and any time ENSERCH
ceases to own, directly or indirectly, at least 50% of the outstanding voting
stock of EEX). See "Description of the Capital Stock--Common Stock" and "--
Preferred Stock."

11
<PAGE>

CAPITALIZATION

The following table sets forth the short-term debt and capitalization of EEX
as of June 30, 1995, (a) on an historical basis and (b) on a pro forma basis to
reflect the completion of the Garden Banks and Green Canyon Transactions and to
give effect to the Offering (at an assumed price per share as set forth on the
cover of this Prospectus) and the application of the estimated $208 million of
net proceeds therefrom (assuming no exercise of the U.S. Underwriters' over-
allotment option). The table below should be read in conjunction with
"Business--Recent Developments," "Pro Forma Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "The Reorganization" and EEX's financial statements and notes
thereto included in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1995
----------------------
PRO FORMA
EEX AS
HISTORICAL ADJUSTED
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt--temporary advances from ENSERCH....... $ 39,136 $ 39,136
========== ==========
Long-term debt:
Capital lease obligations (1)........................ $ 153,858 $ 99,858
Bank revolving credit agreement (2).................. 350,000 142,250
---------- ----------
Total long-term debt............................... 503,858 242,108
---------- ----------
Bridge loan (3)........................................ 150,000 150,000
---------- ----------
Preferred stock--authorized 2,000,000 shares, issued to
subsidiary 15 shares--eliminated in consolidation (3). -- --
---------- ----------
Common shareholders' equity:
Common stock--$1.00 par value, authorized 200,000,000
shares, issued and outstanding 105,722,787 shares,
125,849,242 shares as adjusted(4)................... 105,723 125,849
Paid in capital...................................... 630,494 818,118
Retained earnings (deficit).......................... (4,538) (4,538)
Unamortized restricted stock compensation............ (346) (346)
---------- ----------
Total common shareholders' equity.................. 731,333 939,083
---------- ----------
Total capitalization............................. $1,385,191 $1,331,191
========== ==========
</TABLE>
--------
(1) Includes current portion of $4.8 million; $54.0 million was repaid on
August 9, 1995, in conjunction with the completion of the Garden Banks
Transaction. See note (a) to the Unaudited Condensed Pro Forma Financial
Statements and "Business--Significant Properties and Exploration and
Development Activities--Gulf of Mexico."
(2) Includes current portion of $300 million estimated at June 30, 1995, to be
repaid with net proceeds from the Offering.
(3) On August 4, 1995, a subsidiary, whose common equity interests are wholly-
owned by another subsidiary of EEX, completed the private placement of $150
million of adjustable rate redeemable preferred stock that is expected to
be redeemed by August 4, 2000. The subsidiary loaned the proceeds to its
parent, a wholly-owned subsidiary of EEX, which used the proceeds to
purchase $150 million of EEX Adjustable Rate Preferred Stock, Series A. EEX
repaid the $150 million bridge loan obtained for the DALEN Acquisition
which was used to repay DALEN's bank debt and reduce advances from ENSERCH.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Cash Flows" and
Note 3 of Notes to the June 30, 1995, Condensed Consolidated Financial
Statements of EEX. The EEX preferred stock will be eliminated in EEX's
consolidated financial statements, and the subsidiary preferred stock will
be reflected on the balance sheet as "Company-obligated mandatorily
redeemable preferred securities of subsidiary."
(4) The June 30, 1995, EEX historical shares included an estimated 1,113,545
shares issuable to acquire the international gas and oil operations of
ENSERCH, which was subject to adjustment. The pro forma as adjusted shares
reflect the adjusted total of 1,240,000 shares that are issuable in that
transaction. See "Certain Transactions."

12
<PAGE>

PRO FORMA FINANCIAL INFORMATION

The following unaudited condensed pro forma financial statements give effect
to the DALEN Acquisition and related financing, the completion of the Garden
Banks and Green Canyon Transactions and the Offering (assuming no exercise of
the U.S. Underwriters' over-allotment option and including the application of
the estimated net proceeds as described under "Use of Proceeds"). See
"Business--Recent Developments" and "Use of Proceeds." The unaudited condensed
pro forma balance sheet as of June 30, 1995, is based on the historical balance
sheet of EEX, which includes the assets acquired and liabilities assumed in the
DALEN Acquisition on June 8, 1995. The unaudited condensed pro forma statements
of income for the year ended December 31, 1994, and for the six months ended
June 30, 1995, assume that the DALEN Acquisition occurred at the beginning of
each period presented. The unaudited pro forma, as adjusted, financial
information includes the adjustments made to reflect the Offering and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."

These unaudited condensed pro forma financial statements should be read in
conjunction with the financial statements of EEX and DALEN included elsewhere
in this Prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The unaudited condensed pro forma
statements of income are not necessarily indicative of the financial results
that would have occurred had the above-described events been consummated on the
indicated dates, nor are they necessarily indicative of future results.

EEX has accounted for the DALEN Acquisition as a purchase. All acquired
assets, consisting principally of gas and oil properties, and liabilities
assumed are being evaluated for purposes of assigning the purchase price. It is
anticipated that essentially all of the valuation adjustments will be assigned
to gas and oil properties. DALEN followed the successful efforts method of
accounting for gas and oil properties, whereby unsuccessful exploratory costs
are charged to expense as incurred. Costs applicable to productive wells and
development dry holes are capitalized and amortized on the units-of-production
method based on estimated proved reserve quantities. EEX follows the full-cost
method of accounting for gas and oil properties, whereby all exploratory costs,
including costs of both successful and unsuccessful exploratory wells, are
capitalized and amortized on the units-of-production method based on estimated
proved reserve quantities. For purposes of presenting the unaudited condensed
pro forma financial statements of the combined entities, DALEN's statements of
operations have been converted to the full-cost method of accounting.

Although EEX expects to reduce the general and administrative expenses for
the combined operations of EEX and DALEN with the elimination of duplicative
functions, the full amount of such reduction cannot be reasonably determined at
this time.

13
<PAGE>

ENSERCH EXPLORATION, INC.

UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
JUNE 30, 1995

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
EEX ADJUSTMENTS(A) AS ADJUSTED
---------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents..................... $ 4,125 $ 31,300 (a) $ 35,425
Accounts receivable--trade............... 34,924 34,924
Accounts receivable--affiliates.......... 18,603 18,603
Other.................................... 13,437 13,437
---------- --------- ----------
Total.................................. 71,089 31,300 102,389
---------- --------- ----------
Net property, plant and equipment.......... 1,746,210 (85,300)(a) 1,660,910
---------- --------- ----------
Other assets............................... 24,038 24,038
---------- --------- ----------
Total.................................. $1,841,337 $ (54,000) $1,787,337
========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade.................. $ 73,024 $ $ 73,024
Temporary advances--ENSERCH Companies
(net)................................... 39,136 39,136
Current portion of bank revolving credit
agreement............................... 300,000 (300,000)(b) --
Current portion of capital lease
obligations............................. 4,760 4,760
Other.................................... 16,914 16,914
---------- --------- ----------
Total.................................. 433,834 (300,000) 133,834
---------- --------- ----------
Bank revolving credit agreement............ 50,000 92,250 (b) 142,250
---------- --------- ----------
Capital lease obligations.................. 149,098 (54,000)(a) 95,098
---------- --------- ----------
Deferred income taxes...................... 289,798 289,798
---------- --------- ----------
Other liabilities.......................... 37,274 37,274
---------- --------- ----------
Bridge loan................................ 150,000 150,000
---------- --------- ----------
Common shareholders' equity................ 731,333 207,750 (b) 939,083
---------- --------- ----------
Total.................................. $1,841,337 $ (54,000) $1,787,337
========== ========= ==========
</TABLE>

(footnotes on page 17)

14
<PAGE>

ENSERCH EXPLORATION, INC.

UNAUDITED CONDENSED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994

<TABLE>
<CAPTION>
PROPERTIES
EFFECT OF DIVESTED PRO FORMA PRO OFFERING PRO FORMA
EEX REORGANIZATION(C) DALEN IN 1994(D) ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED
-------- ----------------- -------- ---------- ----------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Natural gas........... $144,550 $115,593 $(10,271) $249,872 $249,872
Oil and condensate.... 30,880 45,814 (11,677) 65,017 65,017
Natural gas liquids... 2,377 5,240 (1,408) 6,209 6,209
Other................. 1,333 2,341 (2,236) 1,438 1,438
-------- -------- -------- -------- --------
Total............... 179,140 168,988 (25,592) 322,536 322,536
-------- -------- -------- -------- --------
Costs and expenses:
Production and
operating............ 31,667 (704) 32,008 (9,558) 53,413 53,413
Exploration........... 9,136 24,886 (22) (24,864)(e) 9,136 9,136
Depreciation and
amortization......... 80,819 (511) 101,151 (14,826) (12,581)(e) 154,052 154,052
Sale of inactive
pipeline............. (7,551) (7,551) (7,551)
General,
administrative and
other................ 19,807 500 18,057 (598) 37,766 37,766
Taxes, other than
income taxes......... 13,233 11,525 (2,015) 22,743 22,743
-------- ------- -------- -------- -------- -------- --------
Total............... 147,111 (715) 187,627 (27,019) (37,445) 269,559 269,559
-------- ------- -------- -------- -------- -------- --------
Operating income (loss). 32,029 715 (18,639) 1,427 37,445 52,977 52,977
Other income
(expense)--net......... (314) 2,845 (2,280) 251 251
Interest income......... 671 6,211 3,656 (3,656)(f) 6,882 6,882
Interest expense........ (20,919) 21,276 (6,002) (25,848)(f) (31,493) 13,628(b) (17,865)
-------- ------- -------- -------- -------- -------- ------ --------
Income (loss) before
income taxes........... 11,467 28,202 (18,140) (853) 7,941 28,617 13,628 42,245
Income taxes (benefit).. (334) 14,195 (15,206) (299) 10,905(g) 9,261 4,770(g) 14,031
-------- ------- -------- -------- -------- -------- ------ --------
Net income (loss)....... $ 11,801 $14,007 $ (2,934) $ (554) $ (2,964) $ 19,356 $8,858 $ 28,214
======== ======= ======== ======== ======== ======== ====== ========
Pro forma information:
Income (loss) before
income taxes......... $ 11,467
Income taxes
(including income
taxes on partnership
operations).......... 3,990
--------
Net income............ $ 7,477
========
Net income per share.... $ .07 $ .22
======== ========
Weighted average shares
outstanding(i)......... 105,695 125,821
======== ========
</TABLE>

(footnotes on page 17)

15
<PAGE>

ENSERCH EXPLORATION, INC.

UNAUDITED CONDENSED PRO FORMA STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1995

<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
EEX DALEN(H) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------- -------- ----------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Natural gas .......... $67,008 $ 32,359 $ $ 99,367 $ $ 99,367
Oil and condensate.... 20,677 14,451 35,128 35,128
Natural gas liquids... 1,695 1,442 3,137 3,137
Other................. 268 72 340 340
------- -------- -------- --------
Total............... 89,648 48,324 137,972 137,972
------- -------- -------- --------
Costs and expenses:
Production and
operating............ 19,543 14,137 33,680 33,680
Exploration........... 5,474 4,333 (4,333)(e) 5,474 5,474
Depreciation and
amortization......... 46,547 33,494 (5,787)(e) 74,254 74,254
General,
administrative and
other................ 14,743 7,052 21,795 21,795
Taxes, other than
income............... 7,746 7,746 7,746
------- -------- -------- -------- --------
Total............... 94,053 59,016 (10,120) 142,949 142,949
------- -------- -------- -------- --------
Operating income (loss). (4,405) (10,692) 10,120 (4,977) (4,977)
Other income (expense)-
net.................... (3) 181 178 178
Interest income......... 1,026 252 (252)(f) 1,026 1,026
Interest expense........ (3,599) (3,504) (9,182)(f) (16,285) 6,814(b) (9,471)
------- -------- -------- -------- ------ --------
Income (loss) before
income taxes........... (6,981) (13,763) 686 (20,058) 6,814 (13,244)
Income taxes (benefit).. (2,443) (4,817) 2,075 (g) (5,185) 2,385(g) (2,800)
------- -------- -------- -------- ------ --------
Net income (loss)....... $(4,538) $ (8,946) $ (1,389) $(14,873) $4,429 $(10,444)
======= ======== ======== ======== ====== ========
Net income (loss) per
share.................. $ (.04) $ (.08)
======= ========
Weighted average shares
outstanding(i)......... 105,695 125,821
======= ========
</TABLE>

16
<PAGE>

NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS

(a) Adjusts the EEX balance sheet to reflect the completion of the Garden Banks
and Green Canyon Transactions.

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Adjustments to gas and oil properties:
Completion of Garden Banks and Green Canyon Transactions:
Reduction of capital lease obligations................... $(54,000)
Cash receipts............................................ (31,300)
--------
Total.................................................. $(85,300)
========
</TABLE>

Property and capital lease obligations were reduced by $54 million as of
August 9, 1995, when an affiliate of Mobil completed the acquisition of a
partial interest in the Garden Banks project. Also, as consideration for the
sale of partial interests in the Garden Banks and Green Canyon projects, EEX
expects to receive cash of $31.3 million, an interest in a gas and oil
property and future work commitments related to the projects. The cash
consideration will be recorded as a reduction of the carrying value of gas
and oil properties. The conveyance of an interest in the gas and oil
property and the future work commitments do not require recording in the
financial statements of EEX.

(b) Adjusts the EEX balance sheet to reflect the assumed sale of the Common
Stock offered hereby and use of the estimated net proceeds therefrom
(assuming no exercise of the U.S. Underwriters' over-allotment option) to
reduce debt incurred in connection with the DALEN Acquisition.

(c) Adjusts the 1994 EEX income statement for the effects of the Reorganization
(see "The Reorganization") that are expected to have a continuing impact on
operations as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Effects of changes in lease terms(1):
Operating expenses............................................ $ 704
Depreciation and amortization................................. 511
Interest expense.............................................. 357
Management cost allocation from ENSERCH(2)...................... (500)
Interest income on notes receivable--ENSERCH Companies(3)....... 6,211
Eliminate interest expense on long-term borrowings from ENSERCH
Companies(4)................................................... 20,919
-------
Income before income tax.................................... 28,202
-------
Income tax expense on (5):
Partnership operations........................................ 4,324
Income before income tax adjustments above.................... 9,871
-------
Total income taxes.......................................... 14,195
-------
Net income...................................................... $14,007
=======
</TABLE>
(1) ENSERCH Companies assumed EEX's interests in and obligations related to
certain offshore equipment and facilities leases, and EEX entered into
subleases for the equipment and facilities with ENSERCH Companies.

(2) To provide for the management cost allocation to be charged by ENSERCH
for management of certain services. EEX is charged for indirect costs
(principally general and administrative costs) applicable to gas and
oil operations. Prior to July 1, 1994, EEX was not charged for
management by ENSERCH of its operations, including supervision of
finance, accounting, tax and legal functions. EEX is charged
approximately $1 million annually to cover the cost of these functions.
See "Certain Transactions" and Note 6 of Notes to Financial Statements
of EEX included in this Prospectus.

(3) To include interest income on the notes receivable--ENSERCH Companies
at average balances at 7.5% interest per annum.

(footnotes continued on next page)

17
<PAGE>

(4) To eliminate interest expense on long-term borrowings from ENSERCH
Companies that were not assumed by EEX.

(5) To provide for income taxes on income before income tax adjustments at
the applicable statutory federal rate and to provide income taxes on
partnership operations. See Note 3 of Notes to Financial Statements of
EEX for the year ended December 31, 1994 included in this Prospectus.

(d) Eliminates revenues, expenses and a gain of $2.3 million in other income,
all as attributable to properties divested by DALEN in the third quarter of
1994.

(e) Adjusts the DALEN statements of operations from the successful efforts to
the full-cost method of accounting for gas and oil properties by
eliminating DALEN's exploratory costs from Costs and Expenses and adjusting
depreciation and amortization as follows:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1994 1995
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Eliminate successful efforts depreciation and
amortization.................................. $(86,325) $(33,494)
Add full cost amortization..................... 73,744 27,707
-------- --------
Net.......................................... $(12,581) $ (5,787)
======== ========
</TABLE>

DALEN's operations have been included in EEX's statement of income since
June 8, 1995, the date of acquisition. The adjustment for 1995 above is for
the year to date period prior to the date of acquisition.

(f) Adjusts interest income and interest expense to reflect EEX's financing of
the DALEN purchase price and refinancing of DALEN bank debt in connection
with the DALEN Acquisition.

(g) Provides income taxes on pro forma adjustments to income before income
taxes at the applicable statutory federal rate of 35%. Eliminates Section
29 tight sands gas tax credits and permanent differences recorded by DALEN
and reduces state income taxes incurred by DALEN to the rate applicable to
the ENSERCH Companies; the eliminations and reductions total $8.1 million
for the year ended December 31, 1994, and $1.8 million for the six months
ended June 30, 1995.

(h) Adjusts for DALEN's results of operations for the year to date period prior
to June 8, 1995, the date of acquisition. EEX's results include DALEN's
operations from the date of acquisition.

(i) The December 31, 1994 and June 30, 1995, EEX historical shares included an
estimated 1,113,545 shares issuable to acquire the international gas and
oil operations of ENSERCH, which was subject to adjustment. The pro forma
as adjusted shares reflect the adjusted total of 1,240,000 shares that are
issuable in that transaction. See "Certain Transactions."

18
<PAGE>

SELECTED FINANCIAL AND OPERATING DATA

The following tables set forth selected historical and pro forma as adjusted
financial data for EEX. The historical financial data for the six months ended
June 30, 1995 and 1994, are unaudited and have been derived from the
consolidated financial statements of EEX. In the opinion of Management, the
financial data for the six months ended June 30, 1995 and 1994, include all
adjustments (consisting only of normal recurring accruals) necessary to
present fairly the information set forth herein. This information is not
necessarily indicative of EEX's future performance. The following information
should be read in conjunction with the financial statements of EEX and "Pro
Forma Financial Information" included in this Prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"The Reorganization" and "Certain Transactions."

<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
---------------------
EEX
----------------------------------------------------------------------- SIX
SIX MONTHS YEAR MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30, ENDED ENDED
--------------------------------------------------- ------------------ DECEMBER 31, JUNE 30,
1990 1991 1992 1993 1994 1994 1995 1994 1995
--------- -------- -------- --------- --------- -------- -------- ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DA-
TA:
Natural gas revenues.. $142,850 $123,438 $118,639 $146,355 $144,550 $78,417 $67,008 $249,872 $ 99,367
Oil and condensate
revenues............. 64,913 54,034 45,064 36,863 30,880 15,743 20,677 65,017 35,128
Natural gas liquids
revenues............. 2,163 1,999 6,554 4,148 2,377 841 1,695 6,209 3,137
Other revenues........ 336 1,489 1,287 2,430 1,333 209 268 1,438 340
--------- -------- -------- --------- --------- -------- -------- --------- --------
Total revenues....... 210,262 180,960 171,544 189,796 179,140 95,210 89,648 322,536 137,972
--------- -------- -------- --------- --------- -------- -------- --------- --------
Production and
operating expenses... 34,706 35,080 29,560 31,404 31,667 15,612 19,543 53,413 33,680
Exploration........... 11,993 12,253 11,164 8,668 9,136 4,534 5,474 9,136 5,474
Depreciation and
amortization......... 72,711 73,679 76,742 78,418 80,819 40,930 46,547 154,052 74,254
(Sale) write-down of
inactive pipeline.... 16,500 (7,551) (7,551)
Write-down of gas and
oil properties....... 274 53,100 10,191
General,
administrative and
other................ 37,247 23,618 23,149 29,980 19,807 7,944 14,743 37,766 21,795
Taxes, other than in-
come................. 16,513 17,320 15,615 15,950 13,233 6,773 7,746 22,743 7,746
--------- -------- -------- --------- --------- -------- -------- --------- --------
Total expenses....... 173,444 215,050 172,730 174,611 147,111 75,793 94,053 269,559 142,949
--------- -------- -------- --------- --------- -------- -------- --------- --------
Operating income
(loss) .............. 36,818 (34,090) (1,186) 15,185 32,029 19,417 (4,405) 52,977 (4,977)
Other income (ex-
pense)--net.......... (87) 6,002 (6) (314) 17 (3) 251 178
Interest income....... 2,899 3,220 3,692 2,041 671 188 1,026 6,882 1,026
Interest expense...... (10,659) (19,981) (20,675) (30,584) (20,919) (9,885) (3,599) (17,865) (9,471)
--------- -------- -------- --------- --------- -------- -------- --------- --------
Income (loss) before
income taxes......... 28,971 (44,849) (18,175) (13,358) 11,467 9,737 (6,981) 42,245 (13,244)
Income taxes (bene-
fit)................. 904 (45) 448 (3,398) (334) (198) (2,443) 14,031 (2,800)
--------- -------- -------- --------- --------- -------- -------- --------- --------
Net income (loss)..... $ 28,067 $(44,804) $(18,623) $ (9,960) $ 11,801 $ 9,935 $ (4,538) $ 28,214 $(10,444)
========= ======== ======== ========= ========= ======== ======== ========= ========
Pro Forma Information:
Income (loss) before
income taxes......... $ 28,971 $(44,849) $(18,175) $ (13,358) $ 11,467 $ 9,737
Income taxes (benefit)
(including pro forma
income taxes on
partnership
operations).......... 9,851 (17,015) (6,421) (4,666) 3,990 3,419
--------- -------- -------- --------- --------- --------
Net income (loss)..... $ 19,120 $(27,834) $(11,754) $ (8,692) $ 7,477 $ 6,318
========= ======== ======== ========= ========= ========
Net income (loss) per
share (pro forma for
periods prior to
1995)................ $ .18 $ (.26) $ (.11) $ (.08) $ .07 $ .06 $ (.04) $ .22 $ (.08)
========= ======== ======== ========= ========= ======== ======== ========= ========
Weighted average
shares outstanding... 105,695 105,695 105,695 105,695 105,695 105,695 105,695 125,821 125,821
========= ======== ======== ========= ========= ======== ======== ========= ========
CASH FLOW DATA:
Net cash provided by
operating activities. $ 84,918 $ 68,253 $ 85,246 $ 79,523 $ 61,682 $ 43,522 $ 37,827 $ 169,215 $ 58,121
Net cash used in
investing activities
(1).................. (120,600) (97,657) (58,702) (129,083) (108,784) (64,966) (350,606) (185,589) (11,358)
Net cash provided by
(used in) financing
activities (1)....... 35,794 29,244 (25,683) 48,932 46,993 21,614 316,670 28,504 (8,891)
EBITDA (2)............ 109,716 98,691 92,050 103,794 104,983 60,364 42,139 199,729 69,455
</TABLE>

(table continued on next page)

19
<PAGE>

<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
---------------------
EEX
------------------------------------------------------------ SIX
SIX MONTHS YEAR MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30, ENDED ENDED
-------------------------------------------- --------------- DECEMBER 31, JUNE 30,
1990 1991 1992 1993 1994 1994 1995 1994 1995
-------- -------- -------- -------- -------- ------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales volumes:
Natural gas (Bcf)...... 76.8 70.0 65.2 70.0 67.1 35.4 34.5 121.5 54.9
Oil and condensate
(MMBbls).............. 2.9 2.7 2.3 2.1 2.0 1.0 1.2 4.1 2.0
Natural gas liquids
(MMBbls).............. .1 .1 .5 .3 .2 .1 .2 .7 .3
Total (Bcfe).......... 95.0 86.7 82.2 84.9 80.5 42.1 42.7 150.2 69.2
Average sales prices:
Natural gas (per Mcf)
(3)................... $ 1.86 $ 1.76 $ 1.82 $ 2.09 $ 2.15 $ 2.21 $ 1.94 $ 2.06 $ 1.81
Oil and condensate (per
Bbl).................. 22.36 20.35 19.20 17.24 15.38 15.20 16.98 15.80 17.19
Natural gas liquids
(per Bbl)............. 16.26 17.54 13.38 12.09 10.85 10.01 11.01 9.28 9.34
Total (per Mcfe)...... 2.21 2.07 2.07 2.21 2.21 2.26 2.09 2.14 1.99
Costs and expenses (per
Mcfe):
Production and
operating (4)......... $ .37 $ .40 $ .36 $ .37 $ .39 $ .37 $ .46 $ .36 $ .49
Exploration............ .13 .14 .14 .10 .11 .11 .13 .06 .08
Depreciation and
amortization.......... .77 .85 .93 .92 1.00 .97 1.09 1.03 1.07
General, administrative
and other............. .39 .27 .28 .35 .25 .19 .35 .25 .32
Taxes, other than
income................ .17 .20 .19 .19 .16 .16 .18 .15 .11
GAS AND OIL PROVED
RESERVE DATA
(AT PERIOD END):
Gas (Bcf).............. 1,224.1 1,168.1 1,101.4 1,086.5 1,041.7 1,365.7
Oil (MMBbls)........... 31.1 40.0 39.2 39.3 50.6 67.1
Total (Bcfe).......... 1,410.7 1,408.1 1,336.6 1,322.3 1,345.3 1,768.2
BALANCE SHEET DATA (AT
PERIOD END,
IN MILLIONS EXCEPT PER
SHARE DATA):
Property, plant and
equipment--net........ $1,085.1 $1,056.2 $1,018.4 $1,046.4 $1,254.0 $1,746.2 $1,660.9
Total assets........... 1,156.7 1,126.7 1,068.8 1,111.5 1,381.2 1,841.3 1,787.3
Capital lease
obligations (5)....... 155.9 153.9 99.9
Long-term debt (5)..... 202.0 234.0 266.0 298.0 350.0 142.2
Owners' equity......... 797.3 721.4 671.7 630.7 736.0 731.3 939.1
Owners' equity per
share................. 6.96 6.92 7.46
</TABLE>
--------
(1) Pro forma cash flow amounts exclude the $332.9 million acquisition of
DALEN and the refinancing of its $115 million of bank debt. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources--Cash Flows."
(2) EBITDA is earnings before interest, income taxes, depreciation and
amortization, (sale) writedown of inactive pipeline and write-off of gas
and oil assets. EBITDA is presented here to provide additional information
about EEX's ability to meet its future requirements for debt service,
capital expenditures and working capital. EBITDA should not be considered
as an alternative to net income as an indicator of operating performance
or as an alternative to cash flows as a measure of liquidity.
(3) Approximately 20% of EEX's natural gas sales are under long-term fixed
price contracts which generally exceed short-term spot market prices. A
significant portion of deliveries under these long-term fixed price
contracts are made during the winter heating season. EEX also realized
gains from hedging transactions equivalent to $.07 and $.12 per Mcf for
the year ended December 31, 1994 and the six months ended June 30, 1995,
respectively. Sales from DALEN properties are predominantly in the short-
term spot market. DALEN did not hedge its natural gas sales during these
periods. As a result, the pro forma average natural gas sales prices for
the year ended December 31, 1994 and the six months ended June 30, 1995
were 4% and 7%, respectively, below EEX's historical prices.
(4) Excludes production, severance and ad valorem taxes.
(5) Including current portion.

20
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

EEX has been engaged in the exploration for and the development, production
and sale of natural gas and crude oil since 1918. On December 30, 1994, EEX
succeeded to the gas and oil business of EP through the Reorganization. All
references to 1994 and prior periods in this discussion reflect the results of
EEX, after giving effect to the Reorganization. See "The Reorganization",
"Certain Transactions" and the financial statements of EEX in this Prospectus.
The pro forma as adjusted financial information gives effect to the completion
of the Garden Banks and Green Canyon Transactions, and the Offering. See "Pro
Forma Financial Information."

As an independent gas and oil producer, EEX'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 gas and oil. Revenue, operating
profit and earnings for EEX closely follow fluctuations in gas and oil prices
and production volumes. On an energy equivalent basis, gas production has
accounted for approximately 80% of EEX's total production over the five years
and six months ended June 30, 1995, and gas reserves at June 30, 1995,
constituted 77.2% of total reserves. Accordingly, variations in gas prices have
a more significant impact on EEX's results of operations than variations in oil
prices. As EEX's production of oil increases, as is expected, from the
development of its Gulf of Mexico properties and from production from certain
DALEN properties, Management expects gas production to decrease as a percentage
of total production. EEX manages a portion of the risk associated with
fluctuations in the price of natural gas and oil through the use of hedging
techniques such as gas and oil swaps, collars and futures agreements. Normally,
30% to 70% of anticipated gas and oil production is hedged.

EEX's production has fluctuated over the last three years, increasing from
82.2 Bcfe in 1992 to 84.9 Bcfe in 1993 and declining to 80.5 Bcfe in 1994.
Production varies with the timing of development of proved reserves, the
completion of major development projects and the success of the exploration
program. These factors may offset or exceed the natural decline in production
from mature fields. Primarily as a result of the start up of production from
the Mississippi Canyon project, 1993 production increased over the prior year.
In 1994, as a result of a relatively unfavorable natural gas price environment,
EEX reduced capital expenditures related to the development of certain gas
properties, resulting in lower total production.

Operating results for 1995 are expected to be affected by the commencement of
production from the Garden Banks project in September or October of 1995.
Revenues from the initial production of the two existing wells may not be
sufficient to cover operating costs, amortization and the equipment lease costs
on the floating production platform and related facilities. Some operating
costs and amortization vary with production, but other costs and the equipment
lease costs are essentially fixed and decline on a per unit basis only as
production increases. Management believes operating results will improve in
1996 as production begins from several additional development wells in the
Garden Banks project, and as the related equipment lease and other fixed costs
are spread over greater production.

EEX owned a 100% interest in both the Garden Banks and Green Canyon projects
located in deepwater offshore Louisiana in the Gulf of Mexico. Although proved
reserves have been assigned to both projects, substantial risks continue to be
associated with these projects. To reduce its risk, EEX elected to sell a
portion of its interest in each project and thus limit its working interest
participation.

Production from the Garden Banks project is expected to commence in September
or October of 1995. A project development plan is being developed for the Green
Canyon project. Since there has been no production from these projects, EEX's
historical results of operations would not have been affected by the Garden
Banks and Green Canyon transactions. Future results of operations will be
affected by the reduction in ownership in these projects because only EEX's
retained working interest percentage in the projects will be included in EEX's
results of operations.

21
<PAGE>

FULL COST CEILING

EEX follows the full cost method of accounting for gas and oil properties. At
June 30, 1995, based on a preliminary allocation of the DALEN purchase price,
EEX's full cost ceiling amount attributable to the properties acquired was
approximately $42 million ($27 million after-tax) less than the unamortized
cost of producing properties acquired. However, the margin deficiency
associated with the DALEN properties was approximately offset by the full cost
ceiling surplus on EEX's other properties at June 30, 1995. EEX believes the
DALEN properties have significant exploration and development potential. EEX
expects to be able to utilize its expertise, particularly with respect to tight
sands reservoirs, to enhance production and cash flows from these properties
because of the geologic similarity and proximity of DALEN's major producing
properties to EEX's properties. EEX believes that the unamortized cost of the
gas and oil properties acquired in the DALEN Acquisition is recoverable from
future production and was not in fact impaired at June 30, 1995. Accordingly,
EEX did not recognize a charge to earnings at June 30, 1995; however, if an
excess exists after a year of operation, a write-off may be required. In
addition, since gas and oil prices are subject to seasonal and other
fluctuations, a decline in prices from June 1995 levels or other factors,
without mitigating circumstances, could cause a future write-down of
capitalized costs and a non-cash charge against income.

EFFECTS OF REORGANIZATION

The ENSERCH Companies assumed $395 million of EP's debt in connection with
the Reorganization. EEX's consolidated financial statements for periods prior
to December 31, 1994, include interest expense on this debt. The following
presents net income of EEX for the three years ended December 31, 1994, and the
six months ended June 30, 1994 and 1995, adjusted for interest on the debt
assumed by ENSERCH Companies and related income tax expense and income tax
expense on partnership operations.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- ----------------
1992 1993 1994 1994 1995
-------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss) as shown on
EEX's statements of
consolidated income............ $(18,623) $(9,960) $11,801 $ 9,935 $(4,538)
Interest expense included in
statements of consolidated
income on debt assumed by
ENSERCH Companies.............. 20,650 24,825 20,919 9,885 --
Income tax benefit (expense) on:
Partnership operations........ 6,869 1,268 (4,324) (3,617) --
Interest expense on debt
assumed by ENSERCH Companies. (7,021) (8,689) (7,322) (3,460) --
-------- ------- ------- ------- -------
Net income (loss), as adjusted.. $ 1,875 $ 7,444 $21,074 $12,743 $(4,538)
======== ======= ======= ======= =======
</TABLE>

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1995 TO SIX MONTHS ENDED JUNE 30, 1994

OPERATING RESULTS

EEX had a net loss of $4.5 million ($.04 per share) for the first six months
of 1995, compared with net income in the 1994 period of $6.3 million ($.06 per
share) after adjustment for income taxes on partnership operations. For the
first half of 1995, EEX had an operating loss of $4.4 million versus income of
$19.4 million for the same period a year-ago. DALEN operations, which have been
included from June 8, 1995, the date of acquisition, added operating income of
$.1 million, after a $1.0 million charge for severance costs related to the
acquisition.

22
<PAGE>

REVENUES

Total revenues for the first half of 1995 of $89.6 million were $5.6
million, or 5.8%, less than the $95.2 million for the same period of 1994,
primarily as a result of lower natural gas production and prices, partially
offset by increases in oil production and prices. Natural gas revenue
decreased $11.4 million, or 14.5%, from the 1994 period, with natural gas
sales volumes, which include DALEN production of 4.6 Bcf, declining to 34.5
Bcf, a decrease of 2.7%, from the 1994 level of 35.4 Bcf. The reduction,
exclusive of the DALEN volumes, reflects lower output from Gulf of Mexico
properties, partially due to maintenance work; lower sales volumes recognized
from East Texas fields, primarily due to timing differences on annual delivery
requirements on reserves sold in 1988; and reduced development expenditures
for replacing gas production due to the relatively low gas price environment.
Natural gas prices declined 12% from an average of $2.21 per Mcf to $1.94 per
Mcf, including the effects of hedging transactions. As a result of gas price
hedging activities, EEX realized revenue of $4.1 million, or $.12 per Mcf, in
the first half of 1995, compared with $.5 million, or $.01 per Mcf, in the
1994 period. Oil revenue for the first half of 1995 increased 31%, as prices
increased from an average of $15.20 per Bbl in 1994 to $16.98 per Bbl in 1995
and production increased 17.6% to 1.2 MMBbls, principally due to volumes
contributed by DALEN. Oil price hedging activity reduced year-to-date 1995
revenue by $.6 million, or $.46 per Bbl, and added $.3 million, or $.26 per
Bbl, in the same period of 1994.

EXPENSES

Excluding a $6.0 million increase associated with DALEN, depreciation and
amortization ("D&A") for the first half of 1995 was $.4 million below the
year-ago period, with the effects of a lower level of production for the most
part offset by a higher per unit amortization of capitalized costs related to
the conversion of operating leases to capital leases. On a per unit basis, D&A
increased from $.97 per Mcfe to $1.09 per Mcfe.

Production and operating costs increased $3.9 million from the 1994 period,
primarily due to DALEN expenses of $1.6 million and higher maintenance costs.
On a unit of production basis, production and operating costs increased from
$.37 per Mcfe to $.46 per Mcfe. Exclusive of the DALEN production and related
expenses, the per Mcfe cost increase reflects the impact of fixed costs and
higher maintenance costs on a lower level of production.

Exploration expense increased $.9 million, or 20.7%, to $5.5 million as a
result of increased international exploration activity.

General, administrative and other expenses ("G&A") for the first half of
1995 reflect a $1.2 million provision for injuries and damages claims and
DALEN expenses of $1.9 million, while the 1994 period benefited from non-
recurring credits of $2.0 million associated with litigation accruals.
Exclusive of these items, G&A costs increased from $9.9 million, or $.24 per
Mcfe, in 1994 to $11.6 million, or $.27 per Mcfe, in 1995.

Taxes, other than income increased $1.0 million from the 1994 period, with
the increase primarily associated with DALEN.

Interest income increased from $.2 million in the 1994 period to $1.0
million in the 1995 period due to interest on an intercompany note receivable
from an ENSERCH Company. The note was repaid in February 1995. Interest
expense decreased from $9.9 million to $3.6 million, principally due to the
assumption by ENSERCH Companies of EP's indebtedness in conjunction with the
Reorganization, partially offset by interest of $2.1 million on temporary
borrowings associated with the DALEN Acquisition.

23
<PAGE>

COMPARISON OF FISCAL YEAR 1994 TO FISCAL YEAR 1993

OPERATING RESULTS

After adjusting for income taxes on partnership operations, EEX had 1994 net
income of $7.5 million, or $.07 per share, versus a 1993 net loss of $8.7
million, or $.08 per share. Operating income increased from $15.2 million to
$32.0 million in 1994, or 110.9%, over the same period of 1993. Results for
1994 included a $4.9 million after-tax ($7.6 million pre-tax) gain from the
sale of an inactive offshore pipeline that was written-down by $10.9 million
after-tax ($16.5 million pre-tax) in 1992 and a $1.3 million after-tax ($2.0
million pre-tax) credit associated with litigation accruals. Results for 1993
included a $6.6 million after-tax ($10.2 million pre-tax) write-off of
unsuccessful foreign exploration costs and a $4.6 million after-tax ($7.1
million pre-tax) charge relating to litigation. Excluding these unusual items,
net income decreased from $2.6 million in 1993 to $1.3 million in 1994, and
operating income decreased from $32.5 million in 1993 to $22.5 million in 1994,
or 30.9%.

REVENUES

Total revenues declined from $189.8 million in 1993 to $179.1 million in
1994, or 5.6%, primarily as a result of lower natural gas and oil production
and lower oil prices, partially offset by higher natural gas prices. Natural
gas revenue decreased $1.8 million as production decreased 4.2% to 67.1 Bcf in
1994, principally due to reduced production from two fields in South Texas.
Natural gas prices increased from $2.09 per Mcf in 1993 to $2.15 per Mcf in
1994, as gas price hedging activities added $5.0 million, or $.07 per Mcf, to
1994 revenue, compared with a net decrease in revenue of $4.1 million, or $.06
per Mcf, from hedging activities in 1993. Oil revenue decreased $6.0 million as
production decreased 6.1% to 2.0 MMBbls, primarily due to the natural decline
in production. Oil prices declined from $17.24 per Bbl to $15.38 per Bbl, or
10.8%, from 1993 to 1994. Oil price hedging activities decreased 1994 revenue
by $.7 million, $.34 per Bbl, and increased 1993 revenue by $.4 million, $.18
per Bbl.

EXPENSES

D&A expense increased slightly from $78.4 million in 1993 to $80.8 million in
1994, or 3.1%, due to higher per unit amortization of capitalized costs related
to the conversion of the Mississippi Canyon project from an operating to a
capital lease and higher onshore exploration expenditures, partially offset by
the effects of lower production. On a per unit of production basis, D&A expense
increased from $.92 per Mcfe to $1.00 per Mcfe.

Production and operating costs for 1994 were slightly higher than in the 1993
period. However, on a unit of production basis, production and operating costs
increased from $.37 per Mcfe to $.39 per Mcfe, reflecting the impact of fixed
costs on a lower level of production.

Exploration expenses increased $.5 million, or 5.4%, to $9.1 million.

Expenses in 1993 were impacted by a $10.2 million write-off of unsuccessful
exploration costs associated with international operations.

G&A costs decreased from $30.0 million to $19.8 million, or 33.9%. Excluding
amounts associated with litigation, G&A costs decreased from $22.9 million to
$21.8 million, or 4.8%, as a result of a corporate reorganization and the
consolidation of job functions, resulting in G&A costs on a per unit basis, of
$.27 per Mcfe for both periods.

Taxes, other than income, decreased $2.7 million, or 17.0%, to $13.2 million
as a result of a decline in gas and oil production.

Interest income decreased $1.4 million to $.7 million in 1994. Interest
expense was $20.9 million in 1994, compared with $30.6 million in 1993.
Interest expense in 1993 included a provision of $6.0 million for interest due
royalty owners.

24
<PAGE>

COMPARISON OF FISCAL YEAR 1993 TO FISCAL YEAR 1992

OPERATING RESULTS

After adjusting for income taxes on partnership operations, EEX had a 1993
net loss of $8.7 million, or $.08 per share, compared with a 1992 net loss of
$11.8 million, or $.11 per share. Operating results improved from a loss of
$1.2 million to income of $15.2 million over the same period. Results for 1993
included a $6.6 million after-tax ($10.2 million pre-tax) write-off of
unsuccessful foreign exploration costs and a $4.6 million after-tax ($7.1
million pre-tax) charge relating to litigation. Results in 1992 included a
$10.9 million after-tax ($16.5 million pre-tax) writedown of an inactive
pipeline. Excluding these unusual items, EEX had net income of $2.6 million in
1993 versus a net loss of $.9 million in 1992. As a result, operating income
increased from $15.3 million in 1992 to $32.5 million in 1993.

REVENUES

Total revenues increased from $171.5 million in 1992 to $189.8 million in
1993, or 10.6%, primarily from increased volumes and prices of natural gas,
partially offset by lower oil volumes and prices. Natural gas revenue increased
$27.7 million as production increased 7.4% to 70.0 Bcf as a result of the
start-up of production from the Mississippi Canyon project. Natural gas prices
increased from $1.82 per Mcf in 1992 to $2.09 per Mcf in 1993. As a result of
gas price hedging activities, EEX incurred a decrease in revenue of $4.1
million, or $.06 per Mcf, in 1993 and a decrease of $.7 million, or $.01 per
Mcf, in 1992. Oil revenue decreased $8.2 million as production decreased 8.9%
to 2.1 MMBbls, primarily due to decreased production in the North Texas area.
Oil prices declined 10.2%, from $19.20 per Bbl to $17.24 per Bbl. Oil price
hedging activities increased 1993 revenue by $.4 million, or $.18 per Bbl; no
hedging activities applied to oil production in 1992.

EXPENSES

D&A expense increased from $76.7 million in 1993 to $78.4 million, or 2.2%,
due to an increase in production. On a unit of production basis, D&A decreased
from $.93 per Mcfe to $.92 per Mcfe.

Production and operating expenses increased $1.8 million, or 6.2%, to $31.4
million in 1993. However, on a unit of production basis, production and
operating costs increased slightly from $.36 per Mcfe in 1992 to $.37 per Mcfe
in 1993 due to a higher level of production.

Exploration expenses decreased by $2.5 million, or 22.4%, to $8.7 million in
1993. This decrease resulted from a cost control and reduction program
implemented in 1993. On a unit of production basis, exploration expenses were
reduced from $.14 per Mcfe in 1992 to $.10 per Mcfe in 1993.

G&A costs increased from $23.1 million in 1992 to $30.0 million in 1993, or
29.5%. Excluding the charge for litigation in 1993, G&A costs were slightly
lower than in 1992, and on a unit of production basis, G&A costs decreased from
$.28 per Mcfe in 1992 to $.27 per Mcfe in 1993.

Taxes, other than income, increased slightly from $15.6 million in 1992 to
$16.0 million in 1993 as onshore revenue increased.

Interest income decreased from $3.7 million in 1992 to $2.0 million in 1993.
Interest expense in 1993 was $30.6 million, compared with $20.7 million in
1992. Interest expense in 1993 included a provision of $6.0 million for
interest due royalty owners.

LIQUIDITY AND CAPITAL RESOURCES

EEX has funded its activities through cash provided from operations,
borrowings from bank credit facilities and ENSERCH, and both operating and
capital lease arrangements with an ENSERCH Company.

25
<PAGE>

CASH FLOWS

For the first six months of 1995, operating activities provided net cash
flows of $37.8 million, a $5.7 million decrease from the $43.5 million
provided in the first half of 1994. There was a $3.3 million reduction in
income before D&A and deferred income taxes and a $7.2 million greater
requirement related to changes in other assets and liabilities, including a
$12.9 million increase in operating lease payments on the Garden Banks project
that are being deferred until production commences. However, changes in
current operating assets and liabilities resulted in a $4.8 million year-to-
year improvement in cash flows. Investing activities required net cash flows
of $350.6 million, including $332.9 million required for the DALEN Acquisition
and $86.1 million provided by the collection of a note receivable from an
ENSERCH Company, compared with $65.0 million in the year-ago period. Capital
expenditures increased 54.6% from the year-earlier level to $90.1 million.

Net cash flows from operating activities for the year ended December 31,
1994, were $61.7 million, $17.8 million less than the $79.5 million in 1993,
principally due to an increase in operating assets and liabilities. Investing
activities in 1994 required net cash flows of $108.8 million versus $129.1
million in 1993, with a higher level of capital spending more than offset by
an increase in cash provided from the sale of properties and other investing
activities. In addition, disbursements in 1994 for the construction of the
Garden Banks facilities exceeded advances under leasing arrangements by $32.8
million. In 1994, $87.3 million was provided by advances from ENSERCH
Companies.

For the year ended December 31, 1993, net cash flows from operating
activities were $79.5 million versus $85.2 million in 1992. Investing
activities in 1993 were $129.1 million, compared with $58.7 million in 1992,
with property additions $53.9 million higher than in 1992. The net financing
requirement in 1993 of $48.9 million was provided by advances from ENSERCH
Companies and advances under leasing arrangements that temporarily exceeded
disbursements for facilities under construction.

On June 8, 1995, EEX borrowed $350 million under a four-year revolving
credit agreement and $150 million under a bridge loan to pay the purchase
price of $340 million for the capital stock of DALEN, repay DALEN's bank debt
of $115 million and reduce advances from ENSERCH by $45 million. The four-year
revolving credit agreement with a group of banks matures May 1, 1999. The
agreement limits, at all times, total debt, as defined, to the lesser of 60%
of capitalization, as defined, or $750 million, and prohibits liens on
property except under certain circumstances. Interest is charged at variable
rates depending upon the consolidated capitalization ratio, as defined. The
LIBOR-based rate to be paid ranges from LIBOR plus .35% to LIBOR plus .75% per
annum, plus a facility fee ranging from .15% to .25% per annum. The net
proceeds from the sale of the Common Stock in the Offering will be used to
reduce the borrowing under the revolving credit agreement and for other
corporate purposes. Accordingly, in preparing the June 30, 1995, balance
sheet, $300 million was estimated to be repaid with the net proceeds from the
Offering and was classified as a current liability.

The bridge loan was repaid on August 4, 1995, with the proceeds from a $150
million adjustable rate redeemable preferred stock offering by a subsidiary of
EEX. See Note 3 to EEX's financial statements for the six months ended June
30, 1995, included in this Prospectus. The dividend rate on the subsidiary
preferred stock, which is adjusted quarterly, approximates LIBOR plus .625%.
The subsidiary preferred stock will be reflected as "Company-obligated
mandatorily redeemable preferred securities of subsidiary" on the balance
sheet.

EEX intends to utilize substantially all of its internally generated cash
flows for growth of the business. Internally generated cash flows may be
supplemented by borrowings to fund temporary cash deficiencies. In addition to
the revolving credit agreement, EEX has a $100 million borrowing arrangement
with ENSERCH to meet short-term cash needs, of which $39 million was
outstanding at June 30, 1995. This borrowing arrangement was formalized by a
letter agreement between EEX and ENSERCH effective as of January 1, 1995. See
"Certain Transactions" and "Capitalization". The limit of the borrowing
arrangement with ENSERCH is expected to be reduced from $100 million to $50
million upon the conclusion of the Offering. EEX does not anticipate paying
any cash dividends in the foreseeable future.

26
<PAGE>

LEASES

The equipment and facilities used in developing and producing reserves in the
Mississippi Canyon and Garden Banks projects were financed by a predecessor
company under lease arrangements with financial institutions guaranteed by
ENSERCH. In connection with the Reorganization, the leases were assigned to and
assumed by Enserch Exploration Holdings, Inc. ("EEH"), a wholly-owned
subsidiary of ENSERCH. EEX then entered into three sublease arrangements with
EEH for the offshore facilities. For accounting purposes, one of the leases is
an operating lease, and two are capital leases. The operating lease is for
twelve years, with an option to purchase the equipment under lease at the end
of the lease term at a fixed price equal to its estimated fair value. See "The
Reorganization" and Note 7 to EEX's financial statements in this Prospectus.

Costs for the Garden Banks facilities and equipment, including costs related
to the recent discovery on Block 387, are expected to be approximately $350
million. EEX's lease arrangements with EEH, which also include $20 million of
financing costs incurred by ENSERCH Companies prior to the sublease to EEX, are
being modified to cover the additional costs of the facilities and equipment.

Together, the Garden Banks and Green Canyon Transactions are expected to
provide cash of approximately $31 million in 1995. EEX also expects to receive
an interest in a gas and oil property and future work commitments on the Garden
Banks and Green Canyon projects. At the closing of the Garden Banks Transaction
on August 9, 1995, EEX was relieved of capital and operating lease obligations
of approximately $140 million. In addition, EEX will be relieved of a portion
of future capital expenditure requirements on the Garden Banks and Green Canyon
projects. See "Business--Significant Properties and Exploration and Development
Activities--Gulf of Mexico Region."

CAPITAL BUDGET

EEX currently expects capital expenditures for 1995 to be approximately $175
million. Capital expenditures excluding DALEN are expected to be $121 million,
compared with expenditures of $133 million in 1994 and $119 million in 1993.
Planned EEX expenditures for 1995 have been reduced $39 million from the
originally planned level of $160 million because of low natural gas prices.
Capital expenditures for 1995 exploration and development of the DALEN
properties after the acquisition are estimated to be $54 million. The
expenditures exclude costs of the floating production platform and related
facilities for the Garden Banks project, which are being provided through lease
arrangements with EEH.

HEDGING ACTIVITIES

At June 30, 1995, EEX had outstanding swaps, collars and futures agreements
extending through June 1996 to exchange payments on approximately 11.6 Bcf of
gas and 1.0 MMBbls of oil, on which EEX had $4.6 million of net unrealized
gains. At June 30, 1995, realized gains on hedging activities of $.6 million
were deferred. At December 31, 1994, EEX had outstanding swaps, collars and
futures agreements extending through December 1995 to exchange payments on
approximately 17.8 Bcf of gas and 1.2 MMBbls of oil, on which EEX had $4.1
million of net unrealized gains. At December 31, 1994, realized gains on
hedging activities of $.9 million were deferred.

27
<PAGE>

BUSINESS

GENERAL

EEX's operations represent the gas and oil exploration and production
business of ENSERCH. EEX has been engaged in the exploration for and the
development, production and sale of natural gas and crude oil since 1918, with
an original focus on augmenting the natural gas supply for ENSERCH's natural
gas distribution operations. Exploration activities gradually expanded to a
wide geographic area, including limited international activity. In 1985,
substantially all of ENSERCH's domestic gas and oil exploration and production
business was transferred to EP, a publicly traded limited partnership. Pursuant
to the Reorganization, on December 30, 1994, EEX acquired all of the operating
properties of EP in exchange for Common Stock, EP was dissolved and the Common
Stock held by EP was distributed to EP's limited and general partners in
accordance with their partnership interests. Trading of EEX shares began on the
New York Stock Exchange on January 3, 1995. See "The Reorganization."

EEX's domestic activities are focused in four regions: the Gulf of Mexico;
East Texas; North Central Texas; and the Gulf Coast Region of Texas, Louisiana,
Mississippi and Alabama. EEX's operations have been oriented primarily toward
natural gas. EEX had total proved reserves of approximately 1.8 Tcfe as of June
30, 1995, with gas reserves, on an energy equivalent basis, constituting 77.2%
of total reserves.

Unless otherwise indicated, references in this Prospectus to reserves,
acreage, production, drilling activity and other operating data reflect the
combined data of (i) EEX following completion of the Reorganization, and the
Garden Banks and Green Canyon Transactions and (ii) DALEN .

The principal offices of EEX are located at 4849 Greenville Avenue, Suite
1200, Dallas, Texas 75206, and its telephone number is (214) 369-7893.

STRATEGY

. Pursue balanced growth through a combination of low risk development
projects, high potential exploration activities and strategic
acquisitions.

. Apply technology to development and exploration projects to reduce risks
and efficiently produce reserves.

. Emphasize efficient exploitation of producing properties through low cost
operations.

. Utilize tight sands and subsea operating experience to expand operations
both domestically and internationally.

. Maintain a strong balance sheet to provide flexibility to pursue future
growth.

28
<PAGE>

EXPLORATION

EEX plans to concentrate its exploration activities primarily in areas in
which Management believes EEX has a competitive advantage. This advantage may
be derived from operating experience, technological expertise, geological or
geophysical knowledge, and/or an acreage position. EEX's current exploration
program is focused primarily in areas of current operations including: the Gulf
of Mexico; the North Central Texas Region, including the Hardeman Basin and
Bend Arch, the Delaware Basin in Southeast New Mexico and the Anadarko Basin in
Oklahoma; and the Gulf Coast Region, concentrating on the tertiary plays and
the Smackover Trend in Alabama. EEX plans to pursue growth through a balanced
mix of prospects that include high risk, high reserve potential prospects, as
well as prospects with lower risks and more modest reserve potential. EEX
intends to manage its risk by generally limiting its participation in high risk
ventures to a 50% or less working interest. EEX plans to deviate from this
strategy only when Management believes the potential rewards are commensurate
with the risks.

EEX plans to make substantial use of 3-D seismic technology in its
exploration activities. EEX has successfully used this technology to discover
and develop reserves both onshore and offshore.

DEVELOPMENT

EEX's portfolio of properties includes a range of fields in various stages of
development. Many of these fields are mature properties facing natural declines
in production. EEX has developed expertise in the management of these mature
fields and through active reservoir management and application of technology
has reversed or slowed their natural decline. EEX continually monitors its
producing fields in an attempt to maximize present value.

A critical component of exploiting these fields fully is cost control. EEX's
strategy is to maintain low operating costs while minimizing capital costs.
EEX's integrated approach to exploiting these fields enables it to apply
techniques and technology developed in its other operations to its mature
fields, thereby improving operating efficiency and lowering costs. The constant
monitoring of a field's response to the application of production enhancement
techniques allows EEX to design the proper combination of infill drilling,
reworking of existing wells, recompletions and enhanced recovery techniques
that is expected to improve the production of its existing fields.

EEX recently entered into a joint program with the Los Alamos National
Laboratory to study the impact of hydraulic fracturing in the Opelika Field
located in EEX's East Texas Region. This exemplifies EEX's willingness to apply
the latest technology toward enhancing field production. A successful program
at Opelika could enable EEX to apply similar technology at its other fields.

ACQUISITIONS AND DIVESTITURES

EEX plans to continuously upgrade its portfolio of properties through a
combination of acquisitions and divestitures. EEX will pursue selective
acquisitions of reserves that complement existing operations and provide an
opportunity to apply its operating and technological experience to enhance the
value of the acquired properties. Acquisitions may consist of both large
strategic acquisitions, such as the DALEN Acquisition, and smaller acquisitions
that increase EEX's ownership in core properties. Following the DALEN
Acquisition, EEX has a concentrated portfolio of reserves, with its 30 largest
onshore fields accounting for 72% of EEX's reserves. Of these 30 onshore
fields, 25 are operated by EEX.

At the same time, EEX will continuously review its portfolio of properties to
identify marginal, remote and non-strategic fields. These fields will be
targeted for disposition. At the time of the DALEN Acquisition, EEX had reduced
its number of fields from 400 in 1988 to 270. This process allows EEX to focus
in areas where it has existing infrastructure and control of operations, and
can achieve the lowest operating costs.

29
<PAGE>

RECENT DEVELOPMENTS

DALEN ACQUISITION

On June 8, 1995, EEX acquired all the capital stock of DALEN, an independent
gas and oil company engaged in the exploration for and the development and
production of natural gas and crude oil. Through the DALEN Acquisition, EEX
acquired proved reserves totaling 396.8 Bcfe at June 30, 1995, and other assets
for a purchase price of $340 million and refinanced DALEN's $115 million of
bank debt. The DALEN Acquisition was funded through EEX's $350 million
revolving credit facility and a $150 million bridge financing facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." DALEN's activities have been
oriented primarily toward natural gas and are concentrated in selected major
production regions, including the Gulf Coast, the Gulf of Mexico and the Mid-
Continent. DALEN was an attractive acquisition for EEX because several of
DALEN's operations are located in fields that are either near or producing from
formations from which EEX is also producing. EEX believes that DALEN's property
base has significant exploitation and development potential. The DALEN
Acquisition is a key step in EEX's growth plan from which EEX expects to
realize near term benefits. The geologic similarity and proximity of DALEN's
major producing properties to EEX's properties permit EEX to apply its
expertise, particularly with respect to tight sands reservoirs, to these
properties, from which EEX expects enhanced production and cash flows. The
enhanced production capabilities which EEX expects to apply to DALEN's property
base have been reflected in an approximately 20 Bcfe increase in proved
reserves from the DALEN properties since year-end 1994 estimates. Such increase
is based on estimates as of July 1, 1995, by D&M. In addition, production from
the DALEN properties was 32 Bcfe during the six months ended June 30, 1995. EEX
also expects to realize cost savings through the integration of the companies'
operations. Synergistic opportunities for operating efficiencies and cost
reductions are expected to result in improved financial results for the
combined companies.

GREEN CANYON PROJECT

On April 25, 1995, EEX and an affiliate of Mobil entered into a letter of
intent for Mobil to purchase a 40% interest in EEX's Green Canyon project. An
affiliate of Reading & Bates Corp. had previously signed a letter of intent to
purchase a 20% interest in the project. Upon the completion of the Green Canyon
Transaction, EEX will own a 40% working interest in the Green Canyon project
and remain the operator of the project. D&M has as of March 1, 1995, initially
estimated gross reserves, including royalty interests, at the Green Canyon
project to be 85.5 MMBbls of oil and 149.5 Bcf of natural gas, of which 49.2
MMBbls of oil and 102.2 Bcf of natural gas are in the proved category. EEX's
initial interest in the Green Canyon project proved reserves, excluding royalty
interests, amounted to 42.2 MMBbls of oil and 87.8 Bcf of natural gas, for a
total of 341.2 Bcfe; after completion of the Green Canyon Transaction, EEX's
interest in the Green Canyon project reserves will be 136.5 Bcfe. Based upon
its experience and results to date in the Green Canyon project, EEX intends to
expand its holdings in this area. On May 10, 1995, EEX, on behalf of its Green
Canyon co-venturers, submitted the highest bids on six blocks within ten miles
of the proposed location of the Green Canyon production facility and to date
has been awarded exploration and development rights on five of them. EEX
believes it is advantageously positioned to fully develop its Green Canyon
holdings with the backing of its partners, each of which has considerable
offshore experience.

GARDEN BANKS PROJECT

In April 1995, after evaluating EEX's development plans for Garden Banks
Block 388, another affiliate of Mobil exercised its option to acquire a 40%
interest in the Garden Banks project. The transaction was closed on August 9,
1995. EEX's remaining interest in the Garden Banks reserves, excluding royalty
interests, is 20.5 Bcf of proved natural gas reserves and 16.9 MMBbls of proved
oil and gas liquids reserves. Both the Garden Banks and Green Canyon
Transactions illustrate EEX's strategy of reducing its risk by limiting its
working interest participation in high-risk ventures. These arrangements also
enable EEX to reduce its capital commitments with respect to these projects
while still participating in the potential rewards from bringing these
properties to production.

30
<PAGE>

INTERNATIONAL OPERATIONS

EFFECT ON GAS AND OIL RESERVES

A major effect of the above-described recent developments has been to
increase EEX's net proved reserves. The following table sets forth EEX's net
proved reserves as of June 30, 1995, including the effect of the recent
developments described above.

<TABLE>
<CAPTION>
NATURAL OIL AND
GAS GAS LIQUIDS TOTAL
(BCF) (MMBBLS) (BCFE)
------- ----------- -------
<S> <C> <C> <C>
EEX proved reserves at December 31, 1994:(1)
As originally reported....................... 1,041.7 46.1 1,318.6
Acquisition of ENSERCH's international and
SACROC
reserves(2)................................. -- 4.5 26.7
January through June 1995:
Additions to reserves:
Green Canyon project(3)..................... 87.8 42.2 341.2
Other(1).................................... 1.8 1.0 7.7
Production................................... (29.9) (1.2) (36.9)
Sales of reserves:
60% interest in Green Canyon project(4)...... (52.7) (25.3) (204.7)
40% interest in Garden Banks project(4)...... (13.6) (11.2) (81.2)
------- ----- -------
Total EEX proved reserves at June 30, 1995
before DALEN Acquisition.................. 1,035.1 56.1 1,371.4
DALEN proved reserves at June 30, 1995(1)(5)... 330.6 11.0 396.8
------- ----- -------
Total EEX proved reserves at June 30, 1995. 1,365.7 67.1 1,768.2
======= ===== =======
</TABLE>
--------
(1)As estimated by D&M.
(2) See "The Reorganization".
(3) Net of royalty interests. Based on D&M's report at March 1, 1995, of gross
proved reserves of 102.2 Bcf of gas and 49.2 MMBbls of oil.
(4)See "Business--Recent Developments".
(5)After production from date of acquisition of 4.6 Bcf of gas and .2 MMBbls of
oil and gas liquids.

31
<PAGE>

SIGNIFICANT PROPERTIES AND EXPLORATION AND DEVELOPMENT ACTIVITIES

<TABLE>
<CAPTION>
NATURAL OIL AND % OF TOTAL
GAS GAS LIQUIDS TOTAL PROVED
REGION (BCF) (MMBBLS) (BCFE) RESERVES
------ ------- ----------- ------- ----------
<S> <C> <C> <C> <C>
Gulf of Mexico........................ 118.0 34.8 326.5 18.5%
East Texas............................ 860.0 7.9 907.7 51.3
North Central Texas and Other......... 243.4 16.3 341.0 19.3
Gulf Coast............................ 144.3 4.0 168.4 9.5
------- ---- ------- -----
Total domestic...................... 1,365.7 63.0 1,743.6 98.6
International......................... -- 4.1 24.6 1.4
------- ---- ------- -----
Total............................... 1,365.7 67.1 1,768.2 100.0%
======= ==== ======= =====
</TABLE>

GULF OF MEXICO REGION

The Gulf of Mexico Region conducts exploration and development activities
offshore in the Gulf of Mexico. Much of EEX's recent activity has been in the
deep water (greater than 600 feet) areas of the Gulf of Mexico, which
represented 85.7% of total proved reserves in this region at June 30, 1995, and
35.8% of 1994 production. Management believes EEX is one of the few independent
exploration and development companies with the expertise to develop fields in
deep water. The Gulf of Mexico properties typically are characterized by high
initial production rates and high capital costs.

Total proved reserves in the Gulf of Mexico Region at June 30, 1995, are
326.5 Bcfe, which represents 18.5% of EEX's total proved reserves. The DALEN
Acquisition added 23.4 Bcfe of total proved reserves in this region.

<TABLE>
<CAPTION>
PROVED 1994
RESERVES PRODUCTION
(BCFE) (BCFE)
-------- ----------
<S> <C> <C>
EEX:
Proved reserves at December 31, 1994 and production for
1994:
Garden Banks project.................................. 203.0
Mississippi Canyon project............................ 23.9 8.2
Other................................................. 27.6 8.8
January through June 1995:
Additions to reserves--
Green Canyon project (1)............................ 341.2
Production............................................ (6.7)
Sales of reserves:
60% interest in Green Canyon project.................. (204.7)
40% interest in Garden Banks project.................. (81.2)
------ ----
Total EEX proved reserves at June 30, 1995 and
production for 1994................................. 303.1 17.0
------ ----
DALEN proved reserves at June 30, 1995 and
production for 1994.................................... 23.4 5.9
------ ----
Total................................................ 326.5 22.9
====== ====
</TABLE>
--------
(1) Net of royalty interests. Based on D&M's report at March 1, 1995, of gross
proved reserves of 102.2 Bcf of gas and 49.2 MMBbls of oil.

Mississippi Canyon Project. Mississippi Canyon, the first deep water
development project in the federal waters of the Gulf of Mexico that EEX has
operated, reflects EEX's use of technology, including specialized

32
<PAGE>

3-D seismic processing and remote completion and production techniques. EEX
operates and owns a 37.5% working interest in this two-block unit (Blocks 441
and 485) located approximately 50 miles south of Grand Isle, Louisiana. The
field is located in 1,410 to 1,520 feet of water just off the Outer Continental
Shelf. A shipping fairway, the Louisiana Offshore Oil Port (or LOOP), covers
the eastern three-fourths of the unit. Therefore, the field was developed
utilizing clustered high angle subsea wells that flow to a remote platform
located outside the shipping fairway in 380 feet of water. The field was placed
on production in early 1993 and is currently producing from four wells. This
project has been fully developed and although there may be deeper exploratory
potential, no additional drilling is currently planned.

Exploration activities in the Mississippi Canyon project were undertaken
based on a 3-D seismic program conducted prior to field development. The
program confirmed that the majority of the reservoir lies beneath the shipping
fairway. A production program was developed that involved drilling highly
deviated wells under the shipping fairway, subsea completing the wells and
tying them back to a conventional shallow water production platform using
bundled flowlines. The development program was completed as planned and, after
two years of production, the field has been essentially maintenance free.
Production from the field, which declined from initial levels due to
anticipated water encroachment, has stabilized at approximately 35 MMcf of
natural gas and 150 Bbls of gas liquids per day. The 3-D seismic data on
Mississippi Canyon Block 441 is being reprocessed, using depth migration and
other advanced techniques, to aid in the identification of deeper exploratory
targets, which, if successfully drilled, could add to the field reserves.

Garden Banks Project. EEX is the operator and owns a 60% working interest in
the Garden Banks project, a six-block unit (Blocks 344, 345, 386, 387, 388 and
389) located 200 miles southwest of New Orleans, Louisiana in 2,200 feet of
water. Final facility installation is currently underway. Two wells have been
completed and first production is slated for September or October of 1995. A
total of 17 wells comprise the current development plan.

Field development plans for the Garden Banks project incorporate subsea well
completions producing to a floating production facility ("FPF") tied back to a
traditional production facility in shallow water. Throughout 1994, EEX worked
on the conversion of a semi-submersible drilling rig to a floating drilling and
production facility for the development of the Garden Banks project. The
modification work has been completed and the facility has been moored on
location. A 24-slot subsea template has been installed, and two 12-inch gas and
oil gathering lines have been installed and tied back to the shallow water
production facility located 54 miles away. Completion operations on the two
existing wells on Garden Banks Block 388 commenced in early 1995 and these
wells will be brought on-stream after the production riser is installed. The
initial well was completed in mid-March and tested at rates that indicate the
well will likely flow at an initial daily rate of 6,000 Bbls of oil equivalent.
The second well has been completed with initial daily production rates
anticipated to be between 2,500 and 3,000 Bbls of oil equivalent. Proved
reserves on Garden Banks Block 387 established by an exploratory well drilled
last year will be developed utilizing a three-slot template connected to the
main template by bundled flowlines. First production from this template is
scheduled for the second quarter of 1996.

An affiliate of Mobil exercised its option to acquire a 40% working interest
in the Garden Banks project. The option was earned as a result of an agreement
by an affiliate of Mobil to: (i) pay a disproportionately larger share of the
cost of drilling an exploratory well in EEX's Garden Banks unit on Block 387;
(ii) conduct a long cable 3-D seismic survey over the unit to further assess
the deeper horizon correlative to the nearby Auger field discovery; and (iii)
perform certain future work on the project primarily at its risk and expense.
EEX consummated this transaction, on August 9, 1995.

EEX's Garden Banks project has attracted a great deal of industry attention
because concepts successfully used in the Mississippi Canyon project are being
further expanded to apply to a floating drilling and production environment.
EEX generated the Garden Banks Block 388 prospect and successfully acquired
interests in Blocks 387 and 388 in the 1984 Western Gulf federal lease sale.
EEX originally held a 25% working interest and through subsequent transactions
acquired a 100% working interest in 1991. At that

33
<PAGE>

point, five wells and one sidetrack had been drilled, with four of the wells
commercially successful. EEX then drilled the Garden Banks 388 No. 4 well,
formed a four-block unit, and submitted a development plan for approval. The
unit has been enlarged recently to six blocks by the addition of Garden Banks
Blocks 345 and 389 through a farm-in from Shell Oil Company ("Shell"). Those
blocks have the potential of stratigraphically trapped reservoirs based on
amplitude anomalies.

To date, eight sands have been penetrated on the Garden Banks Block 388
prospect, all of which are hydrocarbon bearing. There are two separate salt
structures that form traps on the unit. One is the salt dome centered on Block
388 and the other is the salt wall located in Block 387. D&M estimates gross
reserves for these eight sands to be 47 MMBbls of oil and 62 Bcf of natural
gas, of which 33 MMBbls of oil and 40 Bcf of natural gas are proved reserves.

EEX believes there is potential for reserve addition on the Garden Banks
prospect. First, deeper objectives, geographically correlative to the main pay
zones in Shell's Auger field, have yet to be penetrated by EEX. Based on
current 3-D seismic interpretation, EEX believes it has at least two potential
areas where significant reserves may be identified. Second, reserves may be
identified by drilling through sands that do not exhibit an amplitude response
using current seismic data. To date, 40% to 50% of the productive sands
encountered did not exhibit a corresponding seismic amplitude. Third, prospects
identified by 3-D seismic in the 13,100 foot and 14,200 foot sands have yet to
be drilled and could potentially contain productive zones. Lastly, objectives
identified by 3-D seismic are located east of a salt dome and could contain
sands trapped stratigraphically. EEX cannot predict whether or to what extent
it will be successful in identifying commercial reserves from these sources.

Green Canyon Project. EEX is the operator and after completion of the Green
Canyon Transaction will own a 40% working interest in the Green Canyon project,
which is located approximately 150 miles south of New Orleans, Louisiana
(Blocks 253, 254, 297 and 298). The field is in water depths of 2,200 to 3,400
feet. Two wells and one sidetrack have been drilled to date on this project,
and another confirmation well is currently being drilled. Provided that EEX's
expectations as to the presence of commercial reserves is confirmed, production
is expected to commence in the next three to four years. Proposed field
development incorporates clusters of subsea wells, which would flow through
bundled flowlines to a remote FPF. Full-well stream production would be
processed onboard the FPF to sales specifications, and export gas and oil lines
would carry these products to market. Currently, a nine well development plan
is anticipated.

Between 1991 and early 1995, EEX, through a series of transactions, increased
its working interest in the Green Canyon project from 25% to approximately
100%. EEX began with a 25% working interest in the project and assumed a 100%
working interest in the Green Canyon 254 well No. 4 sidetrack in 1994. The
sidetrack well was an appraisal well to a discovery well drilled in 1991 that
encountered multiple pay sands with a combined thickness of more than 300 feet
of net pay. The sidetrack operation, which was undertaken by EEX on a "sole-
risk" basis at a 100% working interest, encountered more than 400 feet of net
pay.

After the sidetrack operation, EEX acquired for cash the remaining working
interests in the project, which were subject to substantial penalties to the
partners as a result of the "sole-risk" provisions governing sidetrack
operations. In the Green Canyon Transaction, EEX entered into letters of intent
with an affiliate of Mobil and an affiliate of Reading & Bates Corp. to sell a
40% working interest and a 20% working interest, respectively, in the project.
These transactions are expected to be completed in the third or fourth quarter
of 1995.

During the first quarter of 1995, EEX completed its research on production
schemes for this development and submitted that information, along with the
well data, to D&M for reserve evaluation. D&M has estimated gross reserves at
the Green Canyon project to be 85.5 MMBbls of oil and 149.5 Bcf of natural gas,
of which 49.2 MMBbls of oil and 102.2 Bcf of natural gas are in the proved
category, including royalty interests.

Based on preliminary 3-D seismic analysis, EEX believes there are several
other prospects in the Green Canyon area. Based on this analysis, EEX, on
behalf of its Green Canyon Block 254 partners, submitted the

34
<PAGE>

highest bids on six additional blocks located within 10 miles of the proposed
location of the Green Canyon FPF. To date, EEX has been awarded five of the
six blocks. Because EEX believes it has already identified sufficient reserves
to justify installation of a FPF, EEX may be able to develop satellite fields
that would be uneconomic otherwise.

Additional Exploration in the Gulf of Mexico. Other recent discoveries in
the Gulf of Mexico have been made at Vermilion Block 273, South Timbalier
Block 252 and East Cameron Block 356. EEX believes that these discoveries
merit development and anticipates pursuing development drilling and/or the
installation of production equipment to facilitate the project development.

Exploration in the Gulf of Mexico is an important part of EEX's exploratory
program. A total of over 200 leases (over 790,000 gross acres and 390,000 net
acres) are currently held in the Gulf of Mexico. Typically, successful wells
in the Gulf produce at high rates compared with onshore wells, which is
important in increasing cash flow and improving the ratio of production to
reserves. State-of-the-art technology, including specialized 3-D seismic
processing and innovative production techniques, is being utilized to help
achieve these objectives.

EEX plans further drilling on undeveloped acreage but at this time cannot
specify the extent of the drilling or predict how successful it will be in
establishing commercial reserves sufficient to justify retention of the
acreage. The primary terms, under which the undeveloped acreage can be
retained by the payment of delay rentals without the establishment of gas and
oil reserves, expire as follows:

<TABLE>
<CAPTION>
GULF OF MEXICO
TOTAL LEASEHOLD
ACRES EXPIRING
---------------
GROSS NET
------- -------
<S> <C> <C>
1995....................................................... 43,260 17,313
1996....................................................... 62,106 29,438
1997....................................................... 51,700 24,598
1998....................................................... 19,651 14,892
1999 and later (1)......................................... 612,283 303,759
</TABLE>
--------
(1)Includes acreage held by production.

A portion of the undeveloped acreage may be allowed to expire prior to the
expiration of primary terms specified in this schedule by nonpayment of delay
rentals.

EAST TEXAS REGION

The East Texas Region conducts exploration and development in East Texas and
Northern Louisiana. The Management of EEX believes that it has proprietary
knowledge based on its experience in tight reservoirs in East Texas which
gives EEX a competitive advantage relative to its peers. EEX operates
approximately 550 wells and controls approximately 65,000 acres by virtue of
its Travis Peak, Hosston and Cotton Valley production in the region.

Historically, EEX's activities have been focused on six major fields. Since
discovery, the six fields have produced a total of 1.8 Tcf of natural gas and
40 MMBbls of oil and gas liquids. The East Texas fields are characterized by
reservoirs with large sections of interbedded, low porosity sands and shales.
EEX has combined its experience with workovers, recompletions and development
drilling in these fields with the latest hydraulic fracturing and computer
technology to offset the natural declines in these fields. The profitability
of performing these operations is sensitive to product prices. EEX is
currently conducting a joint program with Los Alamos National Laboratory to
determine more efficient methods to fracture the reservoir and potentially
enhance gas production. In East Texas, EEX's objective is to accelerate
production while preserving or increasing reserves and net present value of
the fields.

The DALEN Acquisition added 81.3 Bcfe of total proved reserves to this
region. The East Texas properties acquired in the DALEN Acquisition exhibit
similar reservoir characteristics to EEX's existing

35
<PAGE>

properties. EEX management believes that pursuing a similar exploitation
strategy on the DALEN properties will enhance the production from those fields.

Total proved reserves in the East Texas Region at June 30, 1995, are 907.7
Bcfe, which represents 51.3% of EEX's total proved reserves. Within the region,
reserves are concentrated in EEX's top eight fields, which represent
approximately 98.1% of EEX's total proved reserves in the region.

<TABLE>
<CAPTION>
PROVED 1994
RESERVES PRODUCTION
(BCFE) (BCFE)
-------- ----------
<S> <C> <C>
EEX:
Proved reserves at December 31, 1994 and production for
1994:
Opelika............................................... 241.7 6.6
Whelan................................................ 222.7 5.1
Tri-Cities............................................ 174.2 4.3
North Lansing......................................... 80.6 2.8
Freestone............................................. 58.4 3.3
Willow Springs........................................ 52.1 1.8
Other................................................. 8.0 1.2
January through June 1995--
Production............................................ (11.3)
----- ----
Total EEX proved reserves at June 30, 1995 and
production for 1994................................. 826.4 25.1
----- ----
DALEN proved reserves at June 30, 1995 and production
for 1994:
Logansport............................................ 59.7 2.0
Bald Prairie.......................................... 12.1 2.7
Other................................................. 9.5 3.1
----- ----
Total DALEN proved reserves at June 30, 1995 and
production for 1994................................. 81.3 7.8
----- ----
Total................................................ 907.7 32.9
===== ====
</TABLE>

Opelika. This field, located near Athens in Henderson County, Texas, was
discovered in 1935. EEX controls approximately 15,000 acres and operates 230
wells in this field with a 100% working interest. EEX has actively developed
this field over the past ten years. Since 1984, EEX has drilled and completed
approximately 100 wells to further develop the field. The field produces from
multiple pay zones, including the Rodessa, James Lime, Pettit, Travis Peak and
Cotton Valley formations which occur over a 4,000 foot interval. Many pay zones
remain behind pipe and will be completed at later dates. In a joint program
with the Los Alamos National Laboratory, EEX has been performing tests to
determine the induced fracture orientation within the field. This data could
allow EEX to more efficiently produce the reserves within this and other
fields.

Whelan. Located 20 miles northeast of Longview, Texas, Whelan is a long-lived
gas field producing from the Travis Peak and Pettit formations. This field was
discovered in 1949 and purchased by EEX in 1967. EEX is the operator and has a
100% working interest in 73 wells covering an area of 14,000 acres. Development
plans for 1995 include reworking eight wells and drilling four development
wells.

Tri-Cities. In this field, located near Athens in Henderson County, Texas,
EEX controls in excess of 5,000 acres and operates 80 wells currently producing
with a 100% working interest. In 1990, EEX successfully explored and developed
the deeper Cotton Valley formation. With the successful completion of the
Cotton Valley sands, the field produces from multiple pay zones that occur over
a 2,500 foot interval. EEX currently operates eight Cotton Valley wells (four
net) with a 50% working interest and is negotiating to acquire the remaining
interests in these wells. All other wells are completed in the Travis Peak and
Pettit formations. EEX currently plans to drill an additional Cotton Valley
well and may drill an additional Travis Peak well during 1995.

36
<PAGE>

North Lansing. In this field located near Longview, Texas, EEX controls
approximately 8,000 acres. EEX operates 39 gas wells with a 97% working
interest, which are producing mainly from the Travis Peak, Cotton Valley and
Pettit formations. Development plans for 1995 include drilling two wells and
reworking six existing wellbores.

Freestone. In this field, located near Freestone, in Freestone County, Texas,
EEX controls approximately 3,500 acres, and operates 32 gas wells with a 75%
average working interest, which are currently producing from the Travis Peak,
Pettit, Cotton Valley Lime and Bossier formations. Over the past three years,
EEX has successfully reworked six wells and drilled 22 others, with four wells
remaining to be drilled in 1995. EEX's share of the gas produced from this
field is dedicated until 2001 to a long-term gas contract at above market
prices. EEX recently began testing the deeper potential in this field and has
established commercial production in the Cotton Valley Sand, Bossier and the
Cotton Valley Lime. Full development in these three horizons is currently being
deferred.

Willow Springs. Located partially under the townsite of Longview, Texas, this
field encompasses over 15,000 acres. EEX operates 40 wells in the field, with
production predominately from the Travis Peak formation. EEX has a 5,000 acre
position, with a working interest of 50%. In 1995, EEX plans to drill three
additional wells and rework three existing wells.

Logansport. This northern Louisiana property is considered by EEX to have
significant remaining multiple pay zone development potential. EEX controls
4,500 acres in this field and operates 14 gas wells with a 95% average working
interest. Based on a successful recompletion in 1993, three wells were
recompleted and five wells were drilled in 1994, all with successful results.
Subsequently, an aggressive acquisition plan was undertaken and additional
working interests in the field were added. As a result of the expanded position
in the field, EEX anticipates drilling nine gas development wells in 1995.

Bald Prairie. EEX controls 4,500 acres in this East Texas field and operates
27 gas wells with a 60% average working interest. An active drilling program
was successfully conducted in 1991 and 1992 to qualify wells for the federal
income tax credits available for gas from tight sands. Based on experience and
log characteristics, EEX believes that substantial upside potential may exist
in this field. If preliminary work is validated, a substantial development
program will be undertaken. Gas produced from this property is dedicated
through 1998 under a contract at fixed prices above current market levels.

NORTH CENTRAL TEXAS AND OTHER REGION

The North Central Texas and Other Region conducts exploration and development
activities in North Central Texas, West Texas, Oklahoma, New Mexico and in the
Rocky Mountain Area, primarily Southwest Wyoming and Northeast Utah. EEX has a
total of 262 fields and operates properties containing approximately 74% of its
reserves in this region.

The fields in this region consist primarily of more mature fields which,
similar to other EEX fields, respond well to active reservoir management,
ongoing development drilling and workovers, and enhanced recovery techniques.
EEX is actively using 3-D seismic to pursue an exploration program in this
region designed to yield more modest oil reserve additions with lower risk and
cost than its offshore exploration program.

DALEN's total proved reserves of 215.7 Bcfe in this region accounted for
54.4% of the DALEN Acquisition's total proved reserves and are located
primarily in the Rocky Mountain area. EEX plans to conduct a thorough
engineering evaluation of these reserves and use its experience with similar
reservoirs to enhance the production from these fields.

37
<PAGE>

Total proved reserves in the North Central Texas and Other Region at June 30,
1995, are 341.0 Bcfe, which represents 19.3% of EEX's total proved reserves.

<TABLE>
<CAPTION>
PROVED 1994
RESERVES PRODUCTION
(BCFE) (BCFE)
-------- ----------
<S> <C> <C>
EEX:
Proved reserves at December 31, 1994 and production for
1994:
Boonsville............................................ 52.6 5.3
Hardeman County Area.................................. 11.4 1.6
S. E. Luther.......................................... 7.0 .5
Other................................................. 56.3 11.4
January through June 1995:
Additions to reserves................................. 7.7
Production............................................ (9.7)
----- ----
Total EEX proved reserves at June 30, 1995 and
production for 1994................................. 125.3 18.8
----- ----
DALEN proved reserves at June 30, 1995 and production
for 1994:
Wamsutter............................................. 56.9 6.3
Fontenelle............................................ 56.3 4.0
River Bend............................................ 21.2 4.7
Townsend Deep......................................... 11.2 1.2
West Cheyenne......................................... 9.6 2.8
Pleasant Valley....................................... 7.1 .8
Katz.................................................. 5.5 2.1
Other................................................. 47.9 10.9
----- ----
Total DALEN proved reserves at June 30, 1995 and
production for 1994................................. 215.7 32.8
----- ----
Total................................................ 341.0 51.6
===== ====
</TABLE>

Boonsville. EEX currently operates 260 wells with an avererage working
interest of approximately 93% and currently controls 40,000 acres in this field
located in North Central Texas. EEX has been actively developing this field
over the past 15 years. Recent activity has proven the economic viability of
down spacing the field to 80 acre spacing. Also, EEX, in partnership with the
Bureau of Economic Geology, is using 3-D seismic data to more accurately map
the Bend and Caddo conglomerates. EEX plans to continue development drilling
and has an inventory of approximately 80 locations.

Hardeman County Area. EEX currently operates 23 of the 45 wells in which it
has an interest in this area located in Central Texas. Production in Hardeman
County is primarily from the Chapel Dolomite, with secondary production found
in the Mississippian Limestone and stray conglomerates. The Chapel Dolomite's
high permeability and extremely active water drive allows wells to flow at the
maximum allowable rate per day. EEX is successfully utilizing 3-D seismic data
to increase its drilling success rate in the area. EEX drilled seven successful
wells in 1994 and has drilled six successful wells in 1995. EEX has plans for
an additional eight wells by year end. EEX's interest in wells in this area
varies from 50% to 100%.

S. E. Luther. This field, located in West Texas, was discovered in 1952. EEX
is the operator with a 30% working interest. Production is from the Fusselman
Dolomite at a depth of 9,800 feet. Waterflood operations were initiated in
1969. There are 26 active wells, 17 producers and nine injectors, in the field.
Opportunity is believed to exist to obtain additional oil by horizontal
drilling and production optimization.

Wamsutter. Three development wells were drilled in this field located in
southwest Wyoming in 1994, following a ten-well drilling program that commenced
in late 1992. No drilling is planned for 1995. EEX operates 27 wells with a 90%
average working interest and currently owns 9,000 acres in this field.

38
<PAGE>

Fontenelle. This long-lived gas field, located in Wyoming, is largely
developed on 160-acre spacing. Offset operators have developed portions of
their productive area at 80 acres indicating the potential for future
downspacing on EEX acreage. In 1994, eight development wells were drilled. EEX
operates 104 wells with a 75% average working interest and currently owns
16,000 acres in this field.

River Bend. In 1994, one development well was drilled on this non-operated
Utah field, bringing the total to 169 wells. Future development is also being
evaluated for the Green River formation above the currently producing Wasatch
formation. EEX has a 37.5% average working interest in 16,000 acres in this
field.

Townsend Deep. EEX has a 46% working interest in ten oil wells in this
southeast New Mexico field. This field is currently being unitized for gas
reinjection to maximize oil recovery. EEX has recently completed two
exploratory oil discoveries in the area. Further drilling is awaiting the
acquisition of 3-D seismic data.

West Cheyenne. EEX controls 5,383 acres in this Oklahoma field and has
interests in 22 wells of which it operates nine with an average working
interest of 78%. In 1993, one well was drilled to the Red Fork formation that
qualified for the federal income tax credits available for gas from tight
sands. An additional drilling location has been identified; however, no wells
are planned for 1995.

Pleasant Valley. EEX controls approximately 25,000 acres and operates 49
wells with an 85% average working interest in this Utah field. In 1994, eight
wells were completed and one well was a dry hole. Five development wells are
planned for 1995. An agreement has been made with another operator to drill
ten wells on EEX acreage, which will allow the operator to earn one-half of
EEX's interest in those ten sections. Regulatory approval has been received
for the Wells Draw water flood unit for the Green River formation and
injection was begun in January 1995. A significant increase in oil recovery is
anticipated from this waterflood unit. EEX is also negotiating with another
operator to participate in one additional waterflood unit and is evaluating
other opportunities.

Katz. EEX has an interest in three producing Strawn waterflood units. Two
units are operated by EEX, consisting of 73 wells with an average working
interest of 55.2%. In 1993, EEX initiated a polymer flood in the Southwest
River unit and is studying expansion to adjacent units. In 1994, a fracture
stimulation program was undertaken to increase productivity from the middle
lobe of the Strawn sand. Based on the success of that program, an additional
12 stimulation candidates have been identified. EEX controls 6,627 acres in
this field.

Exploration in the North Central Texas and Other Region. EEX's exploration
program in the North Central Texas and Other Region is focused primarily on
Mississippian age reefs in the Hardeman Basin and Bend Arch Area, both in
Texas. EEX has extensive exploration and production experience and maintains a
production base and infrastructure in these areas.

EEX is using 3-D seismic technology to delineate smaller Mississippian age
reefs that were bypassed by earlier exploration efforts in this part of Texas,
which has long been dominated by small independents. While the reserves
targeted are relatively small (100 to 500 MBbls of oil equivalent), the
drilling success rate to date, the relatively low drilling costs and the
multiple prospects identified, justify expenditures on large 3-D seismic
projects used to delineate the numerous, but relatively smaller features.

The use of 3-D seismic has significantly improved the drilling success rate
in both the Hardeman Basin and the Bend Arch Area. Using 2-D seismic to
identify prospects, EEX drilled approximately 120 wells between 1975 and the
late 1980's in these areas with a drilling success rate of approximately 28%.
The use of 3-D seismic has improved the drilling success rate in the Hardeman
Basin to 48% and in the Bend Arch Area to 93%.

In the Hardeman Basin, for the balance of 1995, EEX plans to drill ten
additional wells and add additional prospects to its inventory. Since 1992,
EEX has acquired over 160 square miles of 3-D seismic data in the area, a
large portion of which remains to be evaluated by drilling. EEX plans to
acquire an additional 70 square miles of 3-D seismic data in 1995 and will
continue to add to its 96,000 net leasehold acres.

39
<PAGE>

In the Bend Arch Area, EEX plans to drill additional wells and also obtain
additional 3-D seismic data and acreage in 1995. EEX's land position and
seismic inventory in this area consists of 64,000 net leasehold acres and 165
square miles of 3-D seismic, of which a large portion remains to be fully
interpreted or evaluated by drilling. In 1995, EEX plans to acquire an
additional 40 square miles of 3-D seismic data in this area.

Management believes that EEX's successful history in the North Central Texas
area, its financial strength and its technological capabilities give it a
competitive advantage over its primary competition, the small, local
independents. EEX plans to continue its efforts in the Mississippian reef
plays and continue its evaluation of the shallow Palo Pinto play, also in the
Bend Arch.

Other plays of interest in the North Central Texas and Other Region are the
Delaware and Strawn plays in Southeastern New Mexico, which are being pursued
using 2-D seismic, and the Anadarko Basin in Oklahoma, where EEX has a
substantial acreage position and an extensive 2-D seismic base as a result of
the DALEN Acquisition.

GULF COAST REGION

The Gulf Coast Region conducts exploration and development activities in the
onshore Gulf Coast areas of Texas, Louisiana, Mississippi and Alabama. EEX has
a total of 126 fields and operates fields containing 72% of its reserves in
this region.

EEX has a combination of long-lived, tight sands and high production rate
fields. EEX also has an active exploration program based on 3-D seismic that
is focused on high potential prospects.

In addition to adding 76.4 Bcfe of proved reserves to this region, the DALEN
Acquisition included the Destec fee acreage. This fee acreage is located
primarily in Louisiana and consists of approximately 60,000 gross acres. EEX
believes that the existing fields and the fee acreage provide many high
potential exploration prospects.

Total proved reserves in the Gulf Coast Region at June 30, 1995, are 168.4
Bcfe, which represents 9.5% of EEX's total proved reserves.

<TABLE>
<CAPTION>
PROVED 1994
RESERVES PRODUCTION
(BCFE) (BCFE)
-------- ----------
<S> <C> <C>
EEX:
Proved reserves at December 31, 1994 and production
for 1994:
Fashing............................................ 53.0 8.3
Sheridan........................................... 4.1 .8
Ranch Viejo........................................ 3.4 .6
Other.............................................. 40.7 9.9
January through June 1995--
Production......................................... (9.2)
----- ----
Total EEX proved reserves at June 30, 1995 and
production for 1994.............................. 92.0 19.6
----- ----
DALEN proved reserves at June 30, 1995 and production
for 1994:
Riceville.......................................... 14.2 3.3
Provident City Area................................ 12.7 .2
Los Indios......................................... 10.9 1.9
North Turtle Bayou Area............................ 10.5 7.7
Lake Arthur........................................ 6.5 1.4
Guerra............................................. 5.0 1.8
Other.............................................. 16.6 6.9
----- ----
Total DALEN proved reserves at June 30, 1995 and
production for 1994.............................. 76.4 23.2
----- ----
Total............................................. 168.4 42.8
===== ====
</TABLE>

40
<PAGE>

Fashing Field. Located approximately 60 miles south of San Antonio, Texas,
the field was discovered by EEX in 1956. The areal extent of the reservoir is
approximately 7,100 acres. The field is divided into the Edwards Lime "A" and
"B" zones. There are currently 58 "A" zone completions and 22 "B" zone
completions throughout the field, of which EEX operates 43. EEX owns a 100%
working interest in the operated wells and a 47% working interest in the non-
operated wells. Net interest in the entire field is 63%. Production rates in
the field have increased almost 30% over the last few years as a result of a
successful drilling campaign. Development drilling activities, including
horizontal drilling, are currently ongoing in Fashing field.

Sheridan. This field is located in Colorado County, Texas, 80 miles west of
Houston. The field was discovered by Shell in 1940. An anticlinal feature
covering 14,900 acres provides the structural trap for
hydrocarbons in the field. More than 8,000 acres are proven productive, with
production primarily from Wilcox age sandstones. The Wilcox sands range in
gross thickness from 1,200 to 1,700 feet. EEX acquired additional interests in
the field in 1992, resulting in the current 22.8% working interest. There are
presently 39 wells producing from the Wilcox and Frio reservoirs. Exploration
and development activities, including a 3-D seismic survey, are underway to
exploit Lower Wilcox, Yequa and Frio reservoirs within the anticline. All of
these formations have produced hydrocarbons on this structure.

Rancho Viejo. The Rancho Viejo field, located in South Texas, was discovered
in 1982. The field lies at the southeastern downdip edge of the Lobo sand trend
in Webb County, approximately 30 miles east of Laredo. The Lobo section is a
sequence of sandstones and shales at a depth of 9,700 feet, with individual
sand units forming laterally continuous lobes varying from 10 to 50 feet in
thickness. Permeabilities within the sand are generally low but hydraulic
fracturing treatments have been effective in stimulating production. In 1993,
EEX acquired additional interest in and operational control of the field. EEX
currently owns interests in 25 wells, with a total working interest of 51.7%
and has under lease 3,291 acres.

Riceville. In this southwest Louisiana property, EEX has two non-operated gas
and condensate wells producing from the Cib Op reservoir at a depth of 13,000
feet. EEX's average working interest in this field is 33%.

Provident City Area. Four fields in the Wilcox trend of South Texas make up
this area--Allen Ranch, Provident City, North Provident City and Northeast
Provident City. EEX controls 6,580 acres and operates nine wells with an
average working interest of 91.6%. Further drilling in this area awaits
interpretation of a recently acquired 3-D seismic survey.

Los Indios. EEX operates 65 wells in this South Texas field and has a 100%
working interest. Utilizing a recently completed 3-D seismic survey, an
exploratory well was drilled in 1994 to test the deeper Vicksburg formation,
which has been a prolific producing formation in several nearby fields. This
well, in which EEX has a 50% working interest, was completed in October 1994.
In 1994, three additional development wells were drilled for the shallower Frio
formation. In 1995, additional drilling is planned to develop the Vicksburg
formation discovery. EEX owns 4,893 acres in this area.

North Turtle Bayou Area. Three fields located in southeast Louisiana make up
this area--North Turtle Bayou, Kent Bayou and Turtle Bayou. EEX has interests
in ten wells of which it operates five wells and has under lease 10,144 acres,
with an average working interest of 92%. Production has been established in six
different pay zones. A 3-D seismic survey has been acquired over this area and
three development wells and one exploratory well were drilled in 1994. Two
development wells were completed as gas wells, and the one exploratory well has
been temporarily abandoned. Drilling plans for 1995 include one exploratory
well and one development well.

South Lake Arthur. EEX controls 993 acres and has an interest in six wells in
this Miogyp field in South Louisiana. Three wells are operated by EEX with a
working interest of 37.7%.

Guerra. Producing from the Elvella member of the Wilcox series in South
Texas, EEX has 1,671 acres under lease and operates four wells with an average
working interest of 84.4% in this field. EEX has interests in an additional
nine non-operated wells in this field.

41
<PAGE>

Exploration in the Gulf Coast Region. In the Gulf Coast Region, EEX is using
computer technology to evaluate subsurface logs, seismic amplitudes, amplitude
versus offset and 3-D seismic surveys to create additional value and reduce
exploration risk when drilling for new production or acquiring additional
prospects or production. The 3-D seismic surveys are limited to areas large
enough to economically support 3-D acquisition costs. Presently, EEX has
interests in 16 3-D seismic surveys covering 310 square miles.

During 1995, activity in the Gulf Coast Region will be concentrated in the
Smackover Trend play in Alabama, the Planulina and Miocene plays in South
Louisiana and the Yegua, Frio and Wilcox Trends of South Texas.

In addition, EEX plans to exploit its interest in approximately 60,000 gross
(52,000 net) acres in South Louisiana acquired in the DALEN Acquisition. This
acreage represents fee mineral acres predominately in the Atchafalaya Basin of
South Louisiana. The majority of these fee mineral interests are currently
unleased and have had only a limited amount of 3-D seismic coverage.
Approximately 8,600 net acres are held by production with the majority of the
acreage considered prospective at this time. This asset provides EEX with the
competitive advantage of fee mineral ownership in a prospective area.

INTERNATIONAL

EEX's international activities are concentrated in areas which are intended
to broaden the utilization of its expertise in the exploitation of mature
natural gas and oil fields and to develop offshore properties utilizing its
experience in subsea completion technology and floating production technology.
EEX has concessions in Indonesia, Malaysia and Israel.

All of EEX's international reserves are in the Mudi discovery on the island
of Java in Indonesia. A plan of development will be submitted later this year
to the Indonesian government so that development and production may begin. To
date, three wells have been drilled and tested with flow rates between 1,350
and 5,024 Bbls of oil per day. A fourth well is currently being drilled. First
production is expected in 1997. EEX currently has a 25% non-operating working
interest, which will be reduced after cost recovery to 12.5% by government
participation.

Enserch India, Inc., an affiliate of EEX, has entered into a Memorandum of
Understanding with ONGC Videsh Limited, a wholly-owned subsidiary of the Oil &
Natural Gas Corporation Limited of New Delhi, India, which is intended to
result in the formation of a joint venture company to explore and develop
hydrocarbon resources in India and other countries. The joint venture company
would be equally owned by the EEX affiliate and ONGC Videsh Limited.

GAS AND OIL RESERVES

Reserve volumes for EEX are estimated by D&M. The present value of proved
reserves for EEX has been determined by EEX using EEX's December 1994 weighted
average sales prices of $14.05 per Bbl for oil and $2.29 per Mcf for natural
gas. Reserve volumes and the present value of proved reserves for DALEN were
estimated by Netherland, Sewell using DALEN's December 31, 1994, weighted
average sales prices of $14.33 per Bbl for oil and $1.57 per Mcf for natural
gas. The present value of estimated future net revenues (after tax) at December
31, 1994 was as follows (in millions):

<TABLE>
<S> <C>
EEX................................................................ $ 879.3
Green Canyon Transaction........................................... 12.7
Garden Banks Transaction........................................... (38.4)
--------
Total EEX...................................................... 853.6
DALEN.............................................................. 262.0
--------
Total.......................................................... $1,115.6
========
</TABLE>

42
<PAGE>

The following table sets forth estimated net proved reserves at December 31,
1994.

<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -------
<S> <C> <C> <C>
Natural gas (Bcf).............................. 961.5 409.3 1,370.8
Oil and gas liquids (MMBbls)................... 25.6 42.4 68.0
Total reserves (Bcfe)........................ 1,114.9 664.1 1,779.0
</TABLE>

During 1994, EEX filed Form EIA-23 with the Department of Energy reflecting
reserve estimates for the year 1993. Such reserve estimates were not materially
different from the 1993 reserve estimates reported in Note 8 of Notes to
Financial Statements of EEX in this Prospectus.

DRILLING ACTIVITY

Drilling activity for the years ended December 31, 1992, 1993 and 1994, is
set forth below:

<TABLE>
<CAPTION>
1992 1993 1994
---------- ---------- ----------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Exploratory wells:
Productive................................ 5 3.2 7 3.8 21 13.8
Dry....................................... 23 11.0 33 15.6 56 30.5
--- ---- --- ---- --- ----
Total................................... 28 14.2 40 19.4 77 44.3
=== ==== === ==== === ====
Development wells:
Productive................................ 108 47.4 131 86.6 90 63.0
Dry....................................... 15 6.3 9 4.5 15 7.5
--- ---- --- ---- --- ----
Total................................... 123 53.7 140 91.1 105 70.5
=== ==== === ==== === ====
</TABLE>

Through the first seven months of 1995, EEX had completed 69 wells (43.7 net)
and at August 1, 1995, was participating in 62 wells (33.0 net) that were
either being drilled or in some stage of completion.

The number of wells drilled is not a significant measure or indicator of the
relative success or value of a drilling program because the significance of the
reserves and economic potential may vary widely for each project. It is also
important to recognize that reported completions may not necessarily correspond
to capital expenditures, since the Commission guidelines do not allow a well to
be reported as completed until it is ready for production. In the case of
offshore wells, this may be several years following initial drilling because of
the timing of construction of platforms, pipelines and other necessary
facilities.

ACQUISITION, DEVELOPMENT AND EXPLORATION EXPENDITURES

Acquisition, development and exploration expenditures for the years ended
December 31, 1993 and 1994, are set forth below:

<TABLE>
<CAPTION>
1993 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Property acquisitions:
Proved............................................... $ 9,263 $ 15,670
Unproved............................................. 17,170 43,917
Development costs...................................... 117,734 128,720
Exploration costs...................................... 50,871 90,126
-------- --------
Total................................................ $195,038 $278,433
======== ========
</TABLE>

See Note 8 of Notes to Financial Statements of EEX in this Prospectus for
acquisition, development and exploration expenditures of EEX for the three
years ended December 31, 1994.

<PAGE>

ACREAGE DATA AND PRODUCTIVE WELLS

Developed and undeveloped lease acreage as of December 31, 1994, are set
forth below:

<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
--------------- -------------------
GROSS NET GROSS NET
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Domestic:
Offshore............................... 118,729 36,497 437,756 204,159
Onshore................................ 578,218 357,464 1,571,809 920,174
------- ------- --------- ---------
Total................................ 696,947 393,961 2,009,565 1,124,333
International............................ -- -- 899,271 224,818
------- ------- --------- ---------
Total................................ 696,947 393,961 2,942,376 1,353,781
======= ======= ========= =========
</TABLE>

EEX plans further drilling on undeveloped acreage but at this time cannot
specify the extent of the drilling or predict how successful it will be in
establishing commercial reserves sufficient to justify retention of the
acreage. The primary terms, under which the undeveloped acreage can be retained
by the payment of delay rentals without the establishment of gas and oil
reserves, expire as follows:

<TABLE>
<CAPTION>
UNDEVELOPED ACRES EXPIRING
-------------------------------
DOMESTIC INTERNATIONAL
--------------- ---------------
GROSS NET GROSS NET
------- ------- ------- -------
<S> <C> <C> <C> <C>
1995......................................... 275,542 171,146 -- --
1996......................................... 445,374 259,177 547,896 136,974
1997 and later............................... 715,271 420,298 351,376 87,844
</TABLE>

Drilling rights with regard to a portion of the undeveloped acreage may be
allowed to expire before the expiration of primary terms specified in this
schedule by nonpayment of delay rentals.

At December 31, 1994, EEX owned interests in 4,554 wells, of which 3,028
(1,365 net) were natural gas and 1,526 (444 net) were oil. Of these, 249 were
completed and are producing from more than one horizon.

PRODUCTION AND SALES

Production and sales data for the years ended December 31, 1993 and 1994 are
set forth below:

<TABLE>
<CAPTION>
1993 1994
------ ------
<S> <C> <C>
Production data:
Natural gas (Bcf)........................................... 137.5 121.5
Oil and gas liquids (MMBbls)................................ 5.4 4.8
Total production (Bcfe)................................... 170.1 150.2
Sales (in millions):
Natural gas(1).............................................. $281.9 $249.9
Oil and gas liquids(1)...................................... 88.9 71.2
Average sales price:
Natural gas (per Mcf)(1).................................... $ 2.05 $ 2.06
Oil (per Bbl)(1)(2)......................................... 17.26 15.80
</TABLE>
--------
(1) Reflects the net effects of price hedging activities.
(2) Excludes gas liquids.

See Note 8 of Notes to Financial Statements of EEX in this Prospectus for
production and sales information for EEX for the three years ended December 31,
1994.

44
<PAGE>

MAJOR CUSTOMERS

EEX sells its gas and oil under long- and short-term contracts. Enserch Gas
Company ("EGC"), an ENSERCH subsidiary, is EEX's largest gas customer,
purchasing gas under two long-term variable price contracts. A division of
ENSERCH, Lone Star Gas Company, purchases gas under a long-term fixed price
service contract. In 1994, approximately 14.0% of EEX's natural gas volumes
(exclusive of DALEN's production) was sold to Lone Star Gas Company. A loss of
sales under this contract could have an adverse financial impact on the
earnings to the extent that the price in effect under the contract at such time
exceeds the price at which the gas may be sold by EEX to others. EGC provides
marketing services for substantially all of EEX's gas production, other than
gas sold under existing long-term contracts. Presently the majority of the gas
production is sold by EGC under short-term (90 days or less) agreements at
market responsive prices. EGC is continually in search of long-term agreements
that meet the price expectations of EEX and will make such commitments with
approval of Management. In addition, EEX, through EGC, attempts to maintain a
portfolio of customer types and contract terms that maximizes value, provides
dependable outlets for EEX's production and minimizes purchaser nonperformance
and credit risk. See "Relationship Between EEX and ENSERCH" and Note 6 of Notes
to Financial Statements of EEX in this Prospectus.

Oil sales contracts are for one year or less, and prices generally are based
upon field posted prices plus negotiated bonuses.

EEX utilizes futures contracts, commodity price swaps and other financial
instruments to reduce exposure of EEX's gas and oil production to price
volatility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources--Hedging Activities"
and Notes 2 and 8 of Notes to Financial Statements of EEX in this Prospectus.

COMPETITION

The oil and gas industry is highly competitive in all its phases. EEX
competes in the acquisition of properties, the search for and development of
reserves, the production and sale of gas and oil, and the securing of the labor
and equipment required to conduct operations. EEX's competitors include major
gas and oil companies, other independent gas and oil concerns and individual
producers and operators. Many of these competitors have financial and other
resources that substantially exceed those available to EEX. Gas and oil
producers also compete with other industries that supply energy and fuel.

TITLE TO PROPERTIES

EEX believes that it has satisfactory title to its properties in accordance
with standards generally accepted in the oil and gas industry, subject to such
exceptions which, in the opinion of EEX, are not so material as to detract
substantially from the use or value of its properties. EEX performs extensive
title review in connection with acquisitions of proved reserves and has
obtained title opinions on substantially all of its material producing
properties. As is customary in the oil and gas industry, only a perfunctory
title examination is performed in connection with acquisition of leases
covering undeveloped properties. Generally, prior to drilling a well, a more
thorough title examination of the drill site tract is conducted and curative
work is performed with respect to significant title defects, if any, before
proceeding with operations.

ROYALTIES AND OTHER INTERESTS

EEX's gas and oil properties are subject to royalty, overriding royalty,
carried, net profits, working and other similar interests and contractual
arrangements customary in the oil and gas industry. Except as otherwise
indicated, all information presented in this Prospectus is presented net of
such interests. EEX's properties are also subject to liens for current taxes
not yet due and other encumbrances. EEX believes that such burdens do not
materially detract from the value of such properties or from the respective
interests therein or materially interfere with their use in the operation of
the business.

45
<PAGE>

GOVERNMENT REGULATION

The gas and oil industry is extensively regulated by federal, state and local
authorities. Legislation affecting the gas and oil industry is under constant
review for amendment or expansion. Numerous departments and agencies, both
federal and state, have issued rules and regulations binding on the gas and oil
industry and its individual members, some of which carry substantial penalties
for the failure to comply. The legislative and regulatory burden on the gas and
oil industry increases its cost of doing business and, consequently affects its
profitability. Inasmuch as such laws and regulations are frequently amended,
reinterpreted or expanded, EEX is unable to predict the future cost or impact
of complying with such laws and regulations.

FEDERAL INCOME TAXATION

EEX's operations are significantly affected by certain provisions of the
federal income tax laws applicable to the gas and oil industry. The principal
provisions affecting EEX are those that permit EEX, subject to certain
limitations, to deduct as incurred, rather than to capitalize and amortize, a
portion of its domestic "intangible drilling and development costs" and to
claim depletion on a portion of its domestic gas and oil properties based on
l5% of its gas and oil gross income from such properties (up to an aggregate of
l,000 Bbls per day of domestic crude oil and/or energy equivalent units of
domestic natural gas) even though EEX may have little or no basis in such
properties. Under certain circumstances, however, a portion of such intangible
drilling and development costs and the percentage depletion allowed in excess
of basis will be tax preference items that will be taken into account in
computing the alternative minimum tax. EEX will be included in ENSERCH's
consolidated federal income tax returns. See "Relationship Between EEX and
ENSERCH--Tax Sharing Agreements."

ENVIRONMENTAL MATTERS

Gas and oil operations are subject to extensive federal, state and local laws
and regulations, including the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") also known as the "Superfund Law,"
and similar state statutes, and, with respect to federal leases, to
interruption or termination by governmental authorities on account of
environmental and other considerations. Regulations of the Department of the
Interior currently impose absolute liability upon the lessee under a federal
lease for the costs of clean-up of pollution resulting from a lessee's
operations, and such lessee may also be subject to possible legal liability for
pollution damages. EEX maintains insurance against costs of clean-up
operations, but is not fully insured against all such risks. A serious incident
of pollution may result in the Department of the Interior requiring lessees
under federal leases to suspend or cease operation in the affected area. With
respect to any EEX operations conducted on offshore federal leases, liability
may generally be imposed under the Outer Continental Shelf Lands Act for costs
of clean-up and damages caused by pollution resulting from such operations,
other than damages caused by acts of war or the negligence of third parties.

The Oil Pollution Act of l990 (the "OPA") and regulations thereunder impose a
variety of regulations on "responsible parties" (which includes owners and
operators of offshore facilities) related to the prevention of oil spills and
liability for damages resulting from such spills in United States waters. In
addition, it imposes ongoing requirements on responsible parties, including
proof of financial responsibility to cover at least some costs in a potential
spill. On August 25, 1993, the Mineral Management Service (the "MMS"), a
federal agency, published an advance notice of its intention to adopt a rule
under OPA that would require owners and operators of offshore gas and oil
facilities to establish $l50 million in financial responsibility. Under the
proposed rule, financial responsibility could be established through insurance,
guaranty, indemnity, surety bond, letter of credit, qualification as a self-
insurer or a combination thereof. There is substantial uncertainty as to
whether insurance companies or underwriters will be willing to provide coverage
under OPA because the statute provides for direct lawsuits against insurers who
provide financial responsibility coverage, and most insurers have strongly
protested this requirement. The financial tests or other criteria that will be
used to judge self-insurance are also uncertain. Recently, certain members of
Congress and industry representatives

46
<PAGE>

have raised substantial objections to the rules as proposed by the MMS. Various
proposals have been made to resolve the objections of industry while satisfying
environmental concerns. EEX cannot predict the final form of the financial
responsibility rule that will be adopted by the MMS, but such rule has the
potential to result in the imposition of substantial additional annual costs on
EEX or otherwise materially adversely affect EEX. The impact of the rule,
however, should not be any more adverse to EEX than it would be to other
similarly situated owners or operators in the Gulf of Mexico.

The operations of EEX are also subject to the Clean Water Act and the Clean
Air Act, as amended, and comparable state statutes. The EPA is currently
implementing regulations pursuant to the Clean Air Act, and the states are also
implementing programs. EEX may be required to incur certain capital
expenditures over the next five to ten years for air pollution control
equipment.

EEX's onshore operations are subject to numerous United States federal, state
and local laws and regulations controlling the discharge of materials into the
environment or otherwise relating to the protection of the environment,
including CERCLA. Such regulations, among other things, impose absolute
liability on the lessee under a lease for the cost of clean-up of pollution
resulting from a lessee's operations, subject the lessee to liability for
pollution damages, may require suspension or cessation of operations in
affected areas, and impose restrictions on the injection of liquids into
subsurface aquifers that may contaminate groundwater. In particular, CERCLA
imposes liability, without regard to fault on persons that are considered to
have contributed to the release of a "hazardous substance" into the
environment. These persons include the owner or operator of the disposal site
or sites where the release occurred and companies that disposed or arranged for
the disposal of hazardous substances found at the site. Persons who are or were
responsible for releases of hazardous substances under CERCLA may be subject to
joint and several liability for the remediation and clean-up costs and for
damages to natural resources. EEX has received inquiries regarding, and could
be named as a potentially responsible party at two Superfund sites. However,
EEX does not believe that any liabilities in connection with such matters will
have a material adverse effect on its business or results of operations.

In addition, the recent trend toward stricter standards in environmental
legislation and regulation may continue. For instance, if exploration and
production wastes were to be reclassified as "hazardous wastes", it would make
such wastes subject to more stringent handling, disposal and clean-up
requirements. If such legislation were to be enacted, it could have a
significant impact on the operating costs of EEX, as well as the gas and oil
industry in general. Initiatives to further regulate the disposal of gas and
oil wastes are also pending in certain states, and these initiatives could have
a similar impact on EEX.

OTHER LAWS AND REGULATIONS

Various laws and regulations require permits for drilling wells and the
maintenance of bonding requirements in order to drill or operate wells, and
also regulate the spacing and location of wells, the method of drilling and
casing wells, the surface use and restoration of properties upon which wells
are drilled, the plugging and abandoning of wells, the prevention of waste of
gas and oil, the prevention and cleanup of pollutants, the maintenance of
certain gas/oil ratios, and other matters. EEX's operations are also subject to
various conservation requirements. These include the regulation of the size and
shape of drilling and spacing units or proration units, the density of wells
which may be drilled and the unitization or pooling of oil and gas properties.
In this regard, some states allow the forced pooling or integration of tracts
to facilitate exploration while other states rely on voluntary pooling of lands
and leases. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, generally prohibit the venting or flaring of
natural gas and impose certain requirements regarding the ratability of
production. The effect of these laws and regulations is to limit the amounts of
gas and oil EEX can produce from its wells and limit the number of wells or the
locations at which EEX can drill, and thereby limit its profitability.

EEX has oil and gas leases in the Gulf of Mexico, which were granted by the
federal government and are administered by the MMS. Such leases are issued
through competitive bidding, contain relatively

47
<PAGE>

standardized terms and require compliance with detailed MMS regulations and
orders (which are subject to change by the MMS). For offshore operations,
lessees must obtain MMS approval for exploration, development and production
plans prior to the commencement of such operations. In addition to permits
required from other agencies (such as the Coast Guard, the Army Corps of
Engineers and the EPA), lessees must obtain a permit from the MMS prior to the
commencement of drilling. The MMS has promulgated regulations requiring
offshore production facilities located on the outer continental shelf to meet
stringent engineering and construction specifications. Similarly, the MMS has
promulgated other regulations governing the plugging and abandoning of wells
located offshore and the removal of all production facilities. Under certain
circumstances, including but not limited to, conditions deemed to be a threat
or harm to the environment, the MMS may also require any EEX operations on
federal leases to be suspended or terminated in the affected area.

EMPLOYEES

Prior to the acquisition, EEX and DALEN had 373 and 241 employees,
respectively. After realizing some of the synergies of the acquisition, the
combined employee count of the two companies as of July 20, 1995 is 542. After
further integration of financial and other support staff is fully implemented,
an additional reduction in the number of employees is expected.

LEGAL PROCEEDINGS

See Note 7 to the EEX Financial Statements included in this Prospectus and
Note 9 to the DALEN Financial Statements included in this Prospectus for
information on legal proceedings. EEX is a party to lawsuits and claims arising
in the ordinary course of its business. EEX believes, based on its current
knowledge and the advice of its counsel, that all lawsuits and claims would not
have a material adverse effect on its financial condition.

48
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is information concerning the directors and executive
officers of EEX:

<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
D. W. Biegler........... 48 Chairman and Director
J. T. Williams.......... 57 Vice Chairman, Chief Executive Officer and Director
Gary J. Junco........... 45 President, Chief Operating Officer and Director
Frederick S. Addy....... 63 Director
B. A. Bridgewater, Jr... 61 Director
B. K. Irani............. 44 Senior Vice President, Production and Engineering Division
R. L. Kincheloe......... 64 Senior Vice President, Offshore and International
J. P. McCormick......... 53 Senior Vice President and Chief Financial Officer
Randall B. Wilson....... 46 Vice President and General Counsel
</TABLE>

Mr. Biegler has served EEX as Chairman and Director since September 1994 and
served as Chief Executive Officer of EEX until June 1995. He began his career
in 1966 as a staff engineer with the exploration and production company of
ENSERCH that later became the managing general partner of EP and is referred to
herein as "EEH" and served in various positions with EEH until assigned to
other ENSERCH affiliates in 1978. He served Lone Star Gas Company, the utility
division of ENSERCH, as President from 1985 and as Chairman from 1989 and was
elected President and Chief Operating Officer of ENSERCH in 1991. He also began
serving as Chairman and Chief Executive Officer of EEH in 1992. In May of 1993,
he was made Chairman and President, Chief Executive Officer of ENSERCH. Mr.
Biegler is a Director of ENSERCH, Texas Commerce Bancshares National
Association and Trinity Industries, Inc.

Mr. Williams has been Vice Chairman, Chief Executive Officer and a Director
of EEX since June 1995. Mr. Williams was President and Chief Executive Officer
of DALEN from March 1989 to June 1995. Mr. Williams previously had been with
Lear Petroleum Corporation and its subsidiaries from 1983 to 1989, where he
last held the position of President, Chief Executive Officer and Chairman. From
1981 to 1983, he was with Sovran Energy Corp., a company he founded, and from
1978 to 1981, Mr. Williams served as Senior Vice President, Acquisitions, and
later President, Administrative Division, of Mitchell Energy and Development
Corp. Prior to that, Mr. Williams had been with Chevron Corporation for 18
years where he last held the position of General Manager, Operations, for
Chevron Petroleum (U.K. Ltd.).

Mr. Junco has been President, Chief Operating Officer and Director of EEX
since September 1994. He also served EEH as President, Chief Operating Officer
since January 1991 and Director since 1985 and was Senior Vice President, Land
and Marketing Division, from July 1985 to December 1990. Mr. Junco held various
positions with EEH from 1977 to July 1985.

Mr. Addy has been a Director of EEX since January 1995. He is the retired
Executive Vice President and Chief Financial Officer, and Director of Amoco
Corporation, an international integrated gas and oil company. Mr. Addy was
elected to such position with Amoco in 1990 and retired as an officer and
Director effective April 1, 1994. He is a Director of ENSERCH; Baker, Fentress
& Company; and The Pierpont Funds.

Mr. Bridgewater has been a Director of EEX since January 1995. He is
Chairman, President and Chief Executive Officer, and a Director of Brown Group,
Inc., a consumer products company with operations in footwear. He is a Director
of ENSERCH, Boatmen's Bancshares, Inc., FMC Corporation and McDonnell Douglas
Corporation.

Mr. Irani was elected Senior Vice President, Production and Engineering
Division, of EEX in June 1995. He had been Vice President, Production and
Engineering Division from September 1994 to June 1995. He also served as Vice
President, Production and Engineering of EEH since September 1988 and a Vice
President of EEH since August 1984.

49
<PAGE>

Mr. Kincheloe has been Senior Vice President, Offshore and International, of
EEX since September 1994. He also served EEH as Senior Vice President, Offshore
and International since January 1992 and was Senior Vice President, Drilling
and Production Operations, from April 1985 to January 1992.

Mr. McCormick has been Senior Vice President and Chief Financial Officer of
EEX since June 1995. Mr. McCormick served Lone Star Gas Company, a division of
ENSERCH, as a Director from July 1991 to June 1993 and as Senior Vice
President, Transmission, from February 1993 to June 1995, and Senior Vice
President, Finance, from July 1991 to February 1993. Prior to joining Lone Star
Gas Company, Mr. McCormick practiced public accounting for 26 years and was a
partner in KPMG Peat Marwick and KMG Main Hurdman and served in management
positions and as a Director in each Firm.

Mr. Wilson has been Vice President and General Counsel of EEX since June
1995. He was Vice President and General Counsel of DALEN from June 1990 to June
1995. Mr. Wilson was a partner with the law firm of Jenkens & Gilchrist, P.C.
in Dallas, Texas from 1987 to 1990. He served as Vice President, General
Counsel and Secretary of Lear Petroleum Corporation from 1984 to 1987. Mr.
Wilson was with Turner, Hitchins, Webb, Hicks & Wilson and predecessor firms
from 1974 to 1984.

There are no family relationships between any of the above officers and
directors. Directors are elected at the annual meeting of shareholders.
Officers are elected annually by the Board of Directors and may be removed by
the Board of Directors whenever, in its judgment, the best interests of EEX
will be served thereby.

COMMITTEES OF THE BOARD OF DIRECTORS

The Audit Committee functions 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; reviewing the letter of engagement and statement of fees that 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; authorizing and reviewing certain transactions between
EEX and ENSERCH Companies; and performing any other function deemed appropriate
by the Board of Directors. Mr. Bridgewater is the Chairman and Mr. Addy is a
member of the Audit Committee.

The Compensation Committee establishes, approves or recommends 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. The Committee also administers the EEX 1994 Stock Incentive Plan. Mr.
Addy is the Chairman and Mr. Bridgewater is a member of the Compensation
Committee.

DIRECTOR COMPENSATION

Directors are 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 EEX do not receive any fees.

50
<PAGE>

EXECUTIVE COMPENSATION

COMPENSATION TABLE

The following table sets forth the annual base salary of the Chief Executive
Officer and the four other most highly compensated executive officers (the
"named executive officers") who devote substantially their full time to EEX.

<TABLE>
<CAPTION>
NAME SALARY TITLE
---- -------- -----
<S> <C> <C>
J. T. Williams... $400,000 Vice Chairman and Chief Executive Officer
Gary J. Junco.... 325,000 President and Chief Operating Officer
R. L. Kincheloe.. 240,000 Senior Vice President, Offshore and International
J. P. McCormick.. 195,000 Senior Vice President and Chief Financial Officer
B. K. Irani...... 210,000 Senior Vice President, Production and Engineering
</TABLE>

During 1995, Messrs. Junco and Irani received bonuses for services rendered
during 1994 and discretionary bonuses totaling $221,883 and $111,804,
respectively. Mr. McCormick and Mr. Williams began employment with EEX in June
1995. Mr. Williams has an employment contract with EEX for five years providing
for a minimum salary as above stated, bonus provisions and future awards of
stock options and restricted stock (or the cash value thereof).

D. W. Biegler, Chairman of EEX, is employed as Chairman and President, Chief
Executive Officer of ENSERCH and is directly paid all of his compensation by
ENSERCH. It is anticipated that in 1996, approximately $150,000 of Mr.
Biegler's compensation will be allocated from ENSERCH to EEX under a management
cost allocation arrangement. See "Certain Transactions."

THE 1994 STOCK INCENTIVE PLAN

The 1994 Stock Incentive 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 EEX.
Such shares may be authorized but unissued shares or shares held in EEX'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 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.
Awards made during 1995 to the named executive officers and Mr. Biegler of EEX
are:

51
<PAGE>

<TABLE>
<CAPTION>
STOCK OPTIONS RESTRICTED STOCK(1)
------------- -------------------
<S> <C> <C>
D. W. Biegler............................. 15,000 10,000
J. T. Williams............................ 35,000(2) 25,000(2)
Gary J. Junco............................. 25,000 15,000
B. K. Irani............................... 10,000 0
R. L. Kincheloe........................... 4,000 0
</TABLE>
--------
(1) Performance-based restricted shares will be earned after a three-year
performance period ending December 31, 1997 (June 30, 1998 for Mr.
Williams), based upon the three year total shareholder return of EEX
compared to the Dow Jones Oil-Secondary Index. All shares are earned if the
total is 110% of the Index, decreasing to no shares below 85% of the Index.
Shares earned at the end of a performance period remain restricted, subject
to continued employment for two additional years.
(2) Pursuant to an employment contract Mr. Williams will receive an equal or
greater grant of stock options and awards of restricted stock (or the cash
value thereof) each year during the five-year term of the employment
contract.

OTHER PLANS

EEX has the Plan and a bonus plan entitled the Performance Incentive Plan--
Calendar Year 1995. In addition, executive officers are entitled to participate
in the ENSERCH Employee Stock Purchase and Savings Plan, the ENSERCH Retirement
Income Restoration Plan, the Deferred Compensation Plan and in the Retirement
and Death Benefit Program of ENSERCH and Participating Subsidiaries (the
"Program"), the cost of which is charged to EEX.

The following table illustrates the amount of annual compensation benefits
payable on a normal retirement basis beginning at normal retirement age to a
person in specified average salary and years-of-service classifications under
the Program, the ENSERCH Retirement Income Restoration Plan and any annuities
previously purchased in satisfaction of pension obligations.

PENSION PLAN TABLE

<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------------
REMUNERATION(1) 15 20 25 30 35 40 45
--------------- -------- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$275,000. $ 69,452 $ 92,603 $ 115,754 $ 138,905 $ 162,056 $ 168,931 $ 175,806
350,000. 89,140 118,853 148,567 178,280 207,993 216,743 225,493
425,000. 108,827 145,103 181,379 217,655 253,931 264,556 275,181
500,000. 128,515 171,353 214,192 257,030 299,868 312,368 324,868
575,000. 148,202 197,603 247,004 296,405 345,806 360,181 374,556
650,000. 167,890 223,853 279,817 335,780 391,743 407,993 424,243
725,000. 187,577 250,103 312,629 375,155 437,681 455,806 473,931
</TABLE>
--------
(1) Highest average covered compensation over any consecutive five year period.

Covered compensation under the Program includes base wages and annual-
performance based bonuses. The credited years of service under the Program, as
of June 1, 1995, for Messrs. Biegler, Williams, Junco, McCormick, Kincheloe,
and Irani are 26.9, 0, 18.1, 3.9, 36.7, and 20.4, years, respectively, and the
highest average covered compensation during any consecutive five-year period
for each of them is $598,296, $0, $306,009, $198,656, $229,484, and $172,618,
respectively. The normal retirement benefit is in the form of a benefit
guaranteed for ten years and life thereafter and is not subject to any
deduction for Social Security or other offset amounts.

52
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The beneficial ownership of Common Stock by certain beneficial owners and
each director, the named executive officers and all directors and executive
officers as a group (nine persons) as of August 15, 1995, is as follows:

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED PRIOR TO OFFERING(1) OFFERING(1)
------------------------------ ------------------
NAME NUMBER PERCENT NUMBER PERCENT
---- ---------------- ------------- ---------- -------
<S> <C> <C> <C> <C>
ENS Holdings Limited
Partnership (2)(5)........... 53,336,434 50.4% 53,336,434 42.4%
Enserch Exploration Holdings,
Inc. (3)(5).................. 13,883,529 13.1 13,883,529 11.0
ENSERCH Corporation (4)(5).... 37,795,365 35.7 37,795,365 30.0
D. W. Biegler................. 11,000 * 11,000 *
J. T. Williams................ 25,000 * 25,000 *
Gary J. Junco................. 15,100 * 15,100 *
Frederick S. Addy............. 2,000 * 2,000 *
B. A. Bridgewater, Jr. ....... 1,000 * 1,000 *
J. P. McCormick............... 0 0
R. L. Kincheloe............... 0 0
B. K. Irani................... 0 0
R. B. Wilson.................. 0 0
All directors and executive
officers as a group.......... 54,100 * 54,100 *
</TABLE>
--------
* Less than 1%

(1) The number of shares owned by directors and named executive officers
includes shares of Restricted Stock awarded under the Plan, where
applicable. The percentages shown assume no exercise of the U.S.
Underwriters' over-allotment option.

(2) ENS Holdings Limited Partnership, a Texas limited partnership, is trustee
(the "Trustee") of the ENS Holdings Trust, a Texas trust (the "Trust") of
which ENSERCH is the beneficiary. ENS Holdings I, Inc., the general partner
(the "Trustee GP") of the Trustee and ENS Holdings II, Inc., the sole
limited partner of the Trustee, are each wholly owned subsidiaries of
ENSERCH. The Trustee has voting and dispositive power with respect to the
53,336,434 shares of the outstanding Common Stock owned by the Trust and
may be deemed to beneficially own those shares. ENSERCH has the power to
revoke the Trust by giving not less than 90 days' prior notice of
revocation. Upon termination of the Trust, the assets in the Trust
(including any shares of Common Stock in the Trust at that time) would be
distributed to ENSERCH. Actions of the Trustee are effected by the Trustee
GP in its capacity as general partner of the Trustee.

(3) A wholly owned subsidiary of ENSERCH.

(4) ENSERCH has sole voting and dispositive power with respect to 37,795,365
shares of the Common Stock and, by virtue of its ownership of the
securities of EEH, the Trustee and the Trustee GP, may be deemed to share
voting and dispositive power with respect to the 67,219,963 shares of
Common Stock shown in the table as owned by EEH and the Trust. ENSERCH,
therefore, may be deemed to own beneficially, directly or indirectly,
105,015,328 shares of the Common Stock shown.

(5) The address for each party is 300 S. St. Paul, Dallas, Texas 75201.

53
<PAGE>

RELATIONSHIP BETWEEN EEX AND ENSERCH

CONTROL OF EEX

After the Offering, ENSERCH will own beneficially approximately 83.4% of the
outstanding Common Stock (or approximately 81.5% if the U.S. Underwriters
exercise their over-allotment option in full), enabling it to elect all
directors of EEX. Through its ability to elect all directors of EEX, ENSERCH
will retain the ability to control all matters relating to the management of
EEX, the future issuance of Common Stock and other securities of EEX and the
payment of dividends on the Common Stock. ENSERCH also has the ability to
control EEX's drilling, development, capital, operating and acquisition
expenditure plans. In addition, ENSERCH will retain effective control over the
outcome of all matters upon which EEX shareholders vote. Certain of EEX's
directors and officers are also directors and/or officers of ENSERCH or its
other subsidiaries. There is no agreement between ENSERCH and any other party,
including EEX, that would prevent ENSERCH from acquiring additional Common
Stock.

TAX SHARING AGREEMENT

EEX is and after the Offering will continue to be included in ENSERCH's
consolidated federal income tax returns, and EEX's federal income tax liability
will therefore be included in the consolidated federal income tax liability of
ENSERCH and its subsidiaries. EEX and ENSERCH have entered into a tax-sharing
agreement with respect to EEX's share of that tax liability. Pursuant to the
agreement, EEX and ENSERCH will make payments between them generally calculated
so that the amount of taxes to be paid by EEX with respect to any period will
be determined as though EEX and its subsidiaries filed a separate consolidated
federal income tax return.

Pursuant to the agreement, ENSERCH will be the sole and exclusive agent for
EEX in any and all matters relating to the income tax liability of EEX and its
subsidiaries, will have sole and exclusive responsibility for the preparation
and filing of consolidated federal income tax returns for the consolidated
group, and will have the power, in its sole discretion, to contest or
compromise any asserted tax adjustment or deficiency and to file, litigate or
compromise any claim for refund on behalf of EEX and its subsidiaries.

Each member of an affiliated group for federal income tax purposes is jointly
and severally liable for the federal income tax liability of each other member
of its affiliated group. Accordingly, each of EEX and its subsidiaries will
have joint and several liability for the federal income tax liability of the
ENSERCH affiliated group, including that attributable to ENSERCH.

CONFLICTS OF INTEREST

As a result of ENSERCH's control of EEX and the other subsidiaries of
ENSERCH, certain conflicts of interest arise in relations between EEX and the
ENSERCH Companies, including conflicts with respect to the issuance of Common
Stock and other voting securities of EEX, the election of directors of EEX, the
payment of dividends by EEX and various transactions between ENSERCH Companies
and EEX.

EEX and ENSERCH Companies have in the past entered into significant
transactions and agreements incident to their respective businesses. Such
transactions and agreements have related to, among other things, the purchase
and marketing of natural gas, the financing of acquisition, development and
sales activities of EEX and the provision of certain corporate services. See
"Certain Transactions" and Note 6 of Notes to Financial Statements in this
Prospectus. The terms of previous transactions between EEX and the ENSERCH
Companies were not established on an arm's-length basis and involved conflicts
of interest. Nonetheless, EEX believes that these transactions were on terms at
least as favorable to EEX as could have been obtained from unaffiliated third
parties. It is anticipated that ENSERCH Companies and EEX will enter into
material transactions and agreements from time to time in the future. EEX
intends that the terms of any future transactions and agreements between EEX
and ENSERCH Companies will be at least as favorable to EEX as could be obtained
from unaffiliated third parties.

54
<PAGE>

In addition, a number of specific types of transactions and relationships
between EEX and any entity in which ENSERCH has a direct or indirect interest
are contemplated and permitted by Article Eleven of the Restated Articles of
Incorporation of EEX, including the following:

. Any such entity may lend funds to EEX at interest rates not greater than
the lesser of the such entity's actual average interest cost of the funds
or the rate that EEX would be charged by unrelated lenders on comparable
loans. EEX may lend funds to such entities at rates not less than would
be charged by unrelated lenders on comparable loans.

. Any such entity may sell gas, oil, goods and services to, and may
purchase gas, oil, goods and services from, EEX on terms comparable to
those effected with unaffiliated persons.

Transactions on terms at variance with the terms above, and transactions not
specifically provided for in these and other provisions of Article Eleven,
including transactions that have not previously been determined to be fair, may
occur if authorized or ratified by a majority of EEX shareholders or a majority
of the EEX Board of Directors or a Board committee. ENSERCH controls a majority
of the shares of EEX. In determining whether a majority vote of the EEX Board
or a Board committee has been achieved, the vote of a director of ENSERCH who
is also a director of EEX may be counted toward the authorization or
ratification.

The nature of the respective businesses of EEX and the ENSERCH Companies may
also give rise to conflicts of interest. ENSERCH has advised EEX that it does
not currently intend to engage in the acquisition or development of, or
exploration for, gas and oil except through its beneficial ownership of Common
Stock of EEX. However, as part of ENSERCH's business strategy, it may from time
to time acquire businesses primarily engaged in other activities that also
include gas and oil operations. In addition, consistent with Article Eleven, an
ENSERCH Company may engage in direct competition with EEX without first being
obligated to offer the transaction or other opportunity to EEX.

For a discussion of transactions between EEX and ENSERCH and other ENSERCH
Companies, see "Certain Transactions."

THE REORGANIZATION

EEX's gas and oil operations represent the gas and oil exploration and
production business of ENSERCH. From 1985 through December 30, 1994, this
business was conducted primarily through EP, a limited partnership in which,
since 1989, a minority interest (less than 1%) was held by the public. At year-
end 1994, pursuant to a plan for the reorganization of EP, EEX acquired,
through a series of transactions, all of the operating properties of EP
Operating Limited Partnership ("EPO"), EP's 99%-owned operating partnership, in
exchange for shares of Common Stock. On December 30, 1994, the Reorganization
was consummated, EPO was merged into EEX, EP was liquidated, and the Common
Stock held by EP was distributed to EP's limited and general partners in
accordance with their partnership interests.

In connection with the Reorganization, EEH (which, prior to the
Reorganization was named Enserch Exploration, Inc. and was the Managing General
Partner of EP) received EP's interests in and assumed EP's obligations under
certain equipment lease arrangements relative to the Garden Banks project and
the Mississippi Canyon project, with the equipment being simultaneously
subleased to EEX. ENSERCH Companies also assumed approximately $395 million
principal amount of EP's indebtedness (including $86 million of debt owed by EP
to EPO that did not appear on EP's consolidated balance sheet), plus accrued
interest. Upon the liquidation of EP and distribution of Common Stock, public
unitholders of EP received 805,914 shares (.77%) of Common Stock, and ENSERCH
Companies received 103,775,328 shares (99.23%) of EEX's 104,581,242 shares then
outstanding.

In 1995, EEX acquired the international gas and oil operations of ENSERCH for
$15.6 million, payable in 1,240,000 shares of Common Stock and $2.6 million in
cash, as adjusted, and acquired ENSERCH's interest in the SACROC Unit, Kelly
Field, Scurry County, Texas ("SACROC") for approximately $1.65 million in cash.
See "Certain Transactions."

55
<PAGE>

As used in this Prospectus, the "Reorganization" means the series of
transactions by which EEX acquired all of the operating properties of EP's 99%-
owned operating partnership and the acquisition by EEX of the international gas
and oil and SACROC properties of ENSERCH.

The financial statements of EEX for periods prior to December 30, 1994
include the assets, liabilities, operations and cash flows of EP, restated to
include the 1% general partners' interest in EPO and the international gas and
oil operations and the SACROC operations in a manner similar to a pooling-of-
interests since the operations were under the common control of ENSERCH prior
to the establishment of EEX. EP and EPO were partnerships and, as a result, the
income or loss of the partnerships was included in the tax returns of the
individual partners. Accordingly, no recognition was given to income taxes in
the financial statements of EP. EEX, as a corporation, is a taxable entity. Pro
forma net income includes an adjustment to provide for income taxes on the
partnership's operations at the applicable statutory rate. See "Certain
Transactions" and the EEX financial statements included in this Prospectus.

CERTAIN TRANSACTIONS

The equipment and facilities used in developing and producing reserves in the
Mississippi Canyon project and the Garden Banks project were financed under
lease agreements between certain financial institutions and EPO that were
guaranteed by ENSERCH. In connection with the Reorganization, all rights and
obligations under the leases were assigned to and assumed by EEH, with EEX
entering into sublease arrangements with EEH for such equipment and facilities.
The Mississippi Canyon sublease has a term of five years, with EEX having an
option to purchase the subleased equipment at the end of the term. The Garden
Banks equipment is subleased under two subleases: one covers the floating
production facility, which has a term of 20 years, and the other covers the
subsea equipment, pipelines and the shallow-water production facility, which
has an initial term of 12 years. For additional information concerning the
subleases, see Note 7 of the Notes to Financial Statements of EEX in this
Prospectus.

In March 1995, EEX purchased the SACROC properties from ENSERCH, which
represented ENSERCH's only other domestic gas and oil property. The purchase
price of approximately $1.65 million included $1.25 million for the fair market
value of the properties, as estimated by D&M, and approximately $.40 million
for the net book value of related assets acquired and liabilities assumed.

In June 1995, EEX acquired all of the international gas and oil operations of
ENSERCH for $15.6 million, payable in 1,240,000 shares of Common Stock and $2.6
million in cash, as adjusted. The purchase price included $13 million for the
fair market value of the properties, as estimated by D&M, and $2.6 million for
the net book value of the other assets acquired and liabilities assumed. The
price per share for the shares issued to ENSERCH is equal to the net proceeds
per share received by EEX for the Common Stock in the Offering, as shown on the
cover page of this Prospectus.

EEX and ENSERCH have entered into a letter agreement dated effective as of
January 1, 1995, to formalize borrowing arrangements between EEX and ENSERCH.
Funds may be drawn under the terms of the letter agreement until March 31,
1999, pursuant to certain limitations. The agreement provides for automatic one
year extensions beginning March 31, 1998, unless a cancellation notice has been
given by one of the parties. The aggregate amount of borrowing is limited to
$100 million outstanding at any time between May 1, 1995, and the date EEX
concludes a public offering of Common Stock and $50 million thereafter. As of
June 30, 1995, $39.1 million was outstanding under this arrangement. Beginning
May 1, 1995, EEX pays interest on the daily net balance of loans from ENSERCH
at a per annum rate equal to the average rate of all loans EEX has outstanding
under its bank facilities or if no such loans are outstanding the current one
month LIBOR rate plus the spread specified in EEX's bank facilities. If the
rate payable by EEX exceeds the rate specified by the formula in EEX's Restated
Articles of Incorporation, the rate calculated pursuant to the Restated
Articles of Incorporation will be charged. See "Relationship Between EEX and
ENSERCH."

56
<PAGE>

ENSERCH pays interest on loans from EEX at the rate it would have to pay on one
month commercial paper as of the first day of the month in which the borrowing
is outstanding. For each entity, the interest rate on any overdue amounts is
the applicable interest rate plus 2% per annum.

ENSERCH charges EEX for the general and administrative staff costs incurred
by ENSERCH in performing accounting, treasury, internal audit, income tax
planning and compliance, legal, information systems, human resources and other
functions for EEX. Costs are determined on a basis reasonably calculated to
reflect the actual costs of the services performed for EEX and may include
allocations based on such factors as net capital employed, the number of
employees or the percentage of time spent on projects or services. See Note 6
of Notes to Financial Statements of EEX in this Prospectus.

For additional discussion of transactions between EEX and its affiliates, see
"Business--Sales", "Relationship Between EEX and ENSERCH", "The Reorganization"
and Notes 6 and 7 of Notes to Financial Statements of EEX in this Prospectus.
EEX believes that all of the transactions described above were on terms at
least as favorable to EEX as could have been obtained from unaffiliated third
parties.

DESCRIPTION OF THE CAPITAL STOCK

The following description of the capital stock does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
more complete statements thereof set forth in EEX's Restated Articles of
Incorporation and its Bylaws. EEX is currently authorized by its Restated
Articles of Incorporation to issue 200,000,000 shares of Common Stock, par
value $1.00 per share, and 2,000,000 shares of Preferred Stock, of no par
value.

COMMON STOCK

Subject to the rights of the holders of any Preferred Stock that may be
outstanding from time to time and except as otherwise provided by law, 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 cast 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. Holders of Common Stock have
no preemptive rights and are not subject to any further call or assessment and
the Common Stock is not subject to redemption.

EEX's bank revolving credit agreement provides that EEX will not declare or
pay any dividend or distribute any assets to its shareholders during the
continuance of an Event of Default, as defined (including a default in the
payment of interest or principal, when due, various proceedings relating to
insolvency, liquidation and bankruptcy, continuing defaults or unpaid judgments
in excess of $25 million and such time as ENSERCH ceases to own, directly or
indirectly, at least 50% of the voting stock of EEX).

Generally, holders of the Common Stock are entitled to elect all members of
the Board of Directors and vote upon all corporate matters put to shareholder
vote. However, any Preferred Stock that may be issued in the future may have
voting rights. Cumulative voting is prohibited by EEX's Restated Articles of
Incorporation.

The Common Stock is listed on the New York Stock Exchange under the symbol
"EEX."

The Transfer Agent and Registrar of the Common Stock is Harris Trust Company
of New York, New York.

PREFERRED STOCK

Preferred Stock may be issued in one or more series as the Board of Directors
may from time to time determine. The Common Stock will be subject and
subordinate to the rights (including voting rights),

57
<PAGE>

privileges and preferences of any series of Preferred Stock to the extent set
forth in the resolutions adopted by the Board of Directors establishing such
series. The Board of Directors may establish 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 and the Restated Articles of Incorporation.

There are currently outstanding fifteen (15) shares of Preferred Stock,
Series A, stated value $10 million per share, all of which are owned by EEX
Capital L.L.C., a limited liability company wholly owned by EEX. The shares
were issued in connection with the $150 million financing that was closed on
August 4,1995. See "Capitalization." So long as any of the Preferred Stock,
Series A, remains outstanding, no dividend (other than a dividend payable in
the Common Stock of EEX) or other distribution may be paid upon or declared or
set apart for the Common Stock, nor may any Common Stock be redeemed,
purchased, retired or otherwise acquired by EEX unless and until all dividends
on the then outstanding shares of Preferred Stock, Series A, for all past
quarterly dividend periods shall have been paid or declared and set apart for
payment, but without interest, and the full dividends thereon for the then
current quarterly dividend period shall have been concurrently paid or declared
and set apart for payment. After such full dividends on the Preferred Stock,
Series A, will have been so paid or declared and set apart for payment,
dividends may be declared and paid on the Common Stock when and as determined
by the Board of Directors out of any funds legally available for dividends. In
the event of any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of EEX, the holders of the Preferred Stock, Series A, will be
entitled to receive for each share thereof an amount equal to $10 million
together with unpaid accumulated dividends without interest, before any
distribution of the assets of EEX may be made to the holders of Common Stock.
The holders of the Preferred Stock, Series A, have no pre-emptive rights and
have no voting rights other than the voting rights as are specifically provided
for by law.

STOCK OWNERSHIP RESTRICTIONS

The Mineral Lands Leasing Act of 1920, as amended, 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 lease acquired thereunder. EEX is not aware of any country to which this
restriction would be applicable. Nevertheless, the Bylaws of EEX contain
provisions that restrict transfers of EEX capital stock to, and suspend voting,
dividend and distribution rights of, any persons who would cause EEX to be
disqualified under any applicable federal or state law from owning or leasing
interests in lands or leases or otherwise conducting its business.

CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS

The following is a discussion of the principal United States federal income
and estate tax consequences of the ownership and disposition of the Common
Stock applicable to Non-United States Holders of such Common Stock. For the
purpose of this discussion, a "Non-United States Holder" is a person other than
(i) an individual who is a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in the United States or under
the law of the United States or any state or (iii) an estate or trust, the
income of which is includable in gross income for United States federal income
tax purposes regardless of its source. This discussion does not deal with all
aspects of United States federal income and estate taxation and does not deal
with foreign, state and local tax consequences that may be relevant to Non-
United States Holders in light of their particular circumstances. Furthermore,
the following discussion is based on current

58
<PAGE>

provisions of the Internal Revenue Code of 1986 (the "Code") and administrative
and judicial interpretations as of the date hereof, all of which may be changed
either retroactively or prospectively.

Prospective foreign investors are urged to consult their tax advisors
regarding the United States federal, state and local, and Non-United States,
income and other tax consequences of owning and disposing of the Common Stock.

DIVIDENDS

Generally, any dividend paid to a Non-United States Holder of the Common
Stock will be subject to United States income tax which is collected through
withholding at a rate of 30% of the gross amount of the dividend or lesser
applicable income tax treaty rate. Dividends received by a Non-United States
Holder that are effectively connected with a United States trade or business
conducted by such holder are subject to tax at ordinary federal income tax
rates, and will be exempt from the withholding tax if the Non-United States
Holder files Internal Revenue Service Form 4224 with the payor. A non-United
States corporation receiving such effectively connected dividends may also be
subject to an additional "branch profits tax" which is imposed, under certain
circumstances, at a rate of 30% (or such lower rate as may be specified by an
applicable treaty) of the Non-United States corporation's effectively connected
earnings and profits, subject to certain adjustments.

Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country absent knowledge of the status of the shareholder to the contrary for
purposes of the withholding discussed above. However, under proposed United
States Treasury regulations not currently in effect, a Non-United States Holder
of Common Stock who wishes to claim the benefit of an applicable treaty rate
would be required to satisfy applicable certification and other requirements.

Dividends paid to a Non-U.S. Holder at an address within the United States
may be subject to backup withholding at the rate of 31% if the Non-U.S. Holder
fails to establish that it is entitled to an exemption or to provide a correct
taxpayer identification number and other information to the payor.

DISPOSITION OF COMMON STOCK

A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the disposition of his Common
Stock unless (i) such gain is effectively connected with a United States trade
or business of the Non-United States Holder, (ii) in the case of a non-
corporate Non-United States Holder, such holder is present in the United States
for a period or periods aggregating 183 days or more during the taxable year in
which such disposition occurs, or (iii) subject to the exception discussed
below, EEX is or has been a "United States real property holding corporation"
within the meaning of section 897(c)(2) of the Code at any time within the
shorter of the five-year period preceding such disposition or such holder's
holding period.

EEX believes it currently is and may remain a U.S. real property holding
corporation. However, gain realized on a disposition of Common Stock by a Non-
U.S. Holder that is not deemed to own more than five percent of the Common
Stock during such period will not be subject to U.S. federal income tax except
as provided in the following paragraph.

The preceding discussion with respect to the tax consequences to a Non-U.S.
Holder where the Company is a U.S. real property holding corporation assumes
that the Common Stock is and always will be listed on the New York Stock
Exchange and hence will be "regularly traded" on an established securities
market (within the meaning of section 897(c)(3) of the Code) located in the
United States at the time of disposition. However, it may be possible to
interpret the Temporary U.S. Treasury regulations that define "regularly
traded" for this purpose as providing that the Common Stock will not be
"regularly traded" for any calendar

59
<PAGE>

quarter during which 100 or fewer persons (treating related persons as one
person) in the aggregate own 50% or more of the Common Stock. Because the
ENSERCH Companies currently own and may continue to own at least 50% of the
Common Stock, in the event that this interpretation is determined to be
correct, a Non-U.S. Holder (without regard to its ownership percentage of
Common Stock) may be subject to U.S. federal income tax with respect to gain
realized on any sale or other disposition of Common Stock as well as to
withholding tax (generally at a rate of 10% of the cash proceeds). Any amount
withheld pursuant to such withholding tax will be creditable against such
holder's U.S. federal income tax liability.

BACKUP WITHHOLDING AND INFORMATION REPORTING

Under Treasury regulations, EEX must report annually to the IRS the amount of
dividends paid to each Non-United States Holder, the name and address of the
recipient and the federal income tax, if any, withheld with respect to such
dividends. A similar report is sent to the holder. Such information may be made
available by the IRS to the tax authorities in a foreign country under the
provisions of an applicable tax treaty or information exchange agreement.

Payments of dividends to a Non-United States Holder at an address outside the
United States will generally not be subject to backup withholding. The payment
of the proceeds of the disposition of Common Stock to or through the United
States office of a broker may be subject to information reporting and backup
withholding at a rate of 31% unless the owner certifies its non-United States
status under penalties of perjury or otherwise establishes an exemption. The
payment of the proceeds of the disposition by a Non-United States Holder of
Common Stock to or through a foreign office of a broker generally will not be
subject to backup withholding. However, information reporting will apply to
such payments of proceeds to or through a foreign office of a broker that is a
United States person or a United States-related person unless such broker has
documentary evidence in its files of the owner's Non-United States status or
the owner otherwise establishes an exemption.

Amounts withheld under the backup withholding rules do not constitute a
separate United States federal income tax. Rather, such amounts withheld from a
payment to a Non-United States Holder will be allowed as a credit against such
Non-United States Holder's federal income tax liability and any amounts
withheld in excess of such federal income tax liability may be refunded to such
Non-United States Holder.

ESTATE TAX

Common Stock owned, or treated as owned, by an individual who is a Non-United
States Holder at the time of his death will be included in such holder's gross
estate for United States federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.

60
<PAGE>

UNDERWRITERS

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below, for whom Morgan Stanley & Co. Incorporated, Bear,
Stearns & Co. Inc., Dean Witter Reynolds Inc., Howard, Weil, Labouisse,
Friedrichs Incorporated and Smith Barney Inc. are serving as U.S.
Representatives, have severally agreed to purchase, and EEX has agreed to sell
to them, and the International Underwriters named below, for whom Morgan
Stanley & Co. International Limited, Howard, Weil, Labouisse, Friedrichs
Incorporated, SBC Warburg, a division of Swiss Bank Corporation ("SBC
Warburg"), Smith Barney Inc. and UBS Limited are serving as International
Representatives, have severally agreed to purchase, and EEX has agreed to sell
to them, the respective number of shares of Common Stock set forth opposite the
names of such Underwriters below:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated............................. 2,080,000
Bear, Stearns & Co. Inc. ..................................... 2,080,000
Dean Witter Reynolds Inc. .................................... 2,080,000
Howard, Weil, Labouisse, Friedrichs Incorporated.............. 2,080,000
Smith Barney Inc. ............................................ 2,080,000
CS First Boston Corporation................................... 320,000
Dillon, Read & Co. Inc. ...................................... 320,000
Donaldson, Lufkin & Jenrette Securities Corporation........... 320,000
A.G. Edwards & Sons, Inc. .................................... 320,000
EVEREN Securities, Inc. ...................................... 160,000
Fahnestock & Co. Inc. ........................................ 160,000
Goldman, Sachs & Co. ......................................... 320,000
Interstate/Johnson Lane Corporation........................... 160,000
Josephthal Lyon & Ross Incorporated........................... 160,000
Lehman Brothers Inc. ......................................... 320,000
McDonald & Company Securities, Inc. .......................... 160,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated............ 320,000
PaineWebber Incorporated...................................... 320,000
Petrie Parkman & Co. ......................................... 320,000
Prudential Securities Incorporated............................ 320,000
Rauscher Pierce Refsnes, Inc. ................................ 160,000
Raymond James & Associates, Inc. ............................. 160,000
The Robinson-Humphrey Company, Inc. .......................... 160,000
Rodman & Renshaw, Inc. ....................................... 160,000
Salomon Brothers Inc ......................................... 320,000
UBS Securities Inc. .......................................... 320,000
S.G. Warburg & Co. Inc. ...................................... 320,000
----------
Subtotal.................................................... 16,000,000
----------
</TABLE>

61
<PAGE>

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ----------
<S> <C>
International Underwriters:
Morgan Stanley & Co. International Limited.................... 656,000
Howard, Weil, Labouisse, Friedrichs Incorporated.............. 656,000
SBC Warburg................................................... 656,000
Smith Barney Inc.............................................. 656,000
UBS Limited................................................... 656,000
ABN AMRO Bank N.V. ........................................... 80,000
Argentaria Bolsa S.V.B., S.A. ................................ 80,000
Banque Paribas................................................ 80,000
Bear, Stearns International Limited........................... 80,000
Credit Commercial de France................................... 80,000
Daiwa Europe Limited.......................................... 80,000
Dean Witter International Ltd. ............................... 80,000
Dresdner Bank Aktiengesellschaft.............................. 80,000
Enskilda, Skandinaviska Enskilda Banken....................... 80,000
----------
Subtotal.................................................... 4,000,000
----------
Total..................................................... 20,000,000
==========
</TABLE>

The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters," and the U.S. Representatives and the
International Representatives are collectively referred to as the
"Representatives." The Underwriting Agreement provides that the obligations of
the several Underwriters to pay for and accept delivery of the shares of Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated
to take and pay for all of the shares of Common Stock offered hereby (other
than those shares covered by the U.S. Underwriters' over-allotment option
described below) if any such shares are taken.

Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions, (a)
it is not purchasing any U.S. Shares (as defined below) for the account of
anyone other than a United States or Canadian Person (as defined below) and (b)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares
outside the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement Between U.S. and International
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions, (x) it is not purchasing any International Shares (as
defined below) for the account of any United States or Canadian Person and (y)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any International Shares or distribute any prospectus relating to the
International Shares within the United States or Canada or to any United States
or Canadian Person. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement
Between U.S. and International Underwriters. As used herein, "United States or
Canadian Person" means any national or resident of the United States or Canada,
or any corporation, pension, profit-sharing or other trust or other entity
organized under the laws of the United States or Canada or of any political
subdivision thereof (other than a branch located outside the United States and
Canada of any United States or Canadian Person) and includes any United States
or Canadian branch of a person who is otherwise not a United States or Canadian
Person. All shares of Common Stock to be purchased by the U.S. Underwriters and
the International Underwriters under the Underwriting Agreement are referred to
herein as the U.S. Shares and the International Shares, respectively.

Pursuant to the Agreement Between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and the International Underwriters of
any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares so sold shall be the price to public set forth on the cover page herein,
in United States dollars, less an amount not greater than the per share amount
of the concession to dealers set forth below.

62
<PAGE>

Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any shares of Common Stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and, without limiting the generality of the
foregoing, has represented that any offer of Common Stock in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus in
the province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
shares of Common Stock a notice stating in substance that, by purchasing such
shares of Common Stock, such dealer represents and agrees that it has not
offered or sold, and will not offer or sell, directly or indirectly, any of
such shares of Common Stock in Canada or to, or for the benefit of, any
resident of Canada in contravention of the securities laws of Canada or any
province or territory thereof and, without limiting the generality of the
foregoing, that any offer of shares of Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made, and that such
dealer will deliver to any other dealer to whom it sells any of such shares of
Common Stock a notice to the foregoing effect.

Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not
offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 (the "Regulations"); (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 and
the Regulations with respect to anything done by it in relation to the shares
of Common Stock in, from or otherwise involving the United Kingdom; and (iii)
it has only issued or passed on and will only issue or pass on to any person in
the United Kingdom any document received by it in connection with the issue of
the shares of Common Stock if that person is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995 or is a person to whom such document may otherwise
lawfully be issued or passed on.

The Underwriters initially propose to offer part of the Common Stock directly
to the public at the price to public set forth on the cover page hereof and
part to certain dealers at a price that represents a concession not in excess
of $.33 a share under the public offering price. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $.10 a share to
other Underwriters or to certain dealers. After the initial offering of the
Common Stock, the offering price and other selling terms may be varied from
time to time by the Underwriters.

Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable at any time for 30 days from the date of
the Underwriting Agreement, to purchase up to 3,000,000 additional shares of
Common Stock at the price to public set forth on the cover page hereof, less
underwriting discounts and commissions. The U.S. Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
incurred in the sale of the shares of Common Stock offered hereby. To the
extent such option is exercised, each U.S. Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth next to such U.S. Underwriter's
name in the preceding table bears to the total number of shares of Common Stock
offered by the U.S. Underwriters hereby.

EEX has agreed that, without the prior written consent of Morgan Stanley &
Co. Incorporated, it will not (a) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (b) enter
into any swap or other agreement that transfers, in whole or in part, any of
the economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (a) or (b) of this sentence is to be settled by
delivery of Common Stock or such other securities, in cash or

63
<PAGE>

otherwise, for a period of 180 days after the date of this Prospectus, other
than (i) the shares of Common Stock to be sold hereby, or (ii) any shares of
Common Stock issued or sold by EEX pursuant to the ENSERCH Employee Stock
Purchase and Savings Plan or stock options granted or restricted stock awarded
pursuant to the EEX 1994 Stock Incentive Plan. In addition, the beneficial
owners named under "Security Ownership of Certain Beneficial Owners and
Management" holding substantially all of the outstanding Common Stock, have
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated, they will not (a) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (b) enter
into any swap or other agreement that transfers, in whole or in part, any of
the economic consequences of ownership of Common Stock, whether any such
transaction described in clause (a) or (b) of this sentence is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise, for a
period of 180 days after the date of this Prospectus.

Certain Underwriters have from time to time performed various investment
banking services for ENSERCH, certain of its subsidiaries and EEX's
predecessor, for which compensation has been received. Within the last year,
Morgan Stanley & Co. Incorporated provided a fairness opinion in regard to the
DALEN Acquisition, provided advice and assistance in regard to EEX's potential
acquisition of another company, which acquisition was not consumated, and has
been conducting a financial advisory review of ENSERCH's shareholder relations
program. Also within the last year, Dean Witter Reynolds Inc. provided a
fairness opinion in connection with the Reorganization, and Smith Barney Inc.
served as sole underwriter of ENSERCH's $150 million principal amount 7 1/8%
Notes due 2005.

EEX has agreed to indemnify the several Underwriters against certain
liabilities, including certain liabilities arising under the Securities Act.

PRICING OF THE OFFERING

Prior to the Offering, less than 900,000 shares of Common Stock have been
held by persons unaffiliated with EEX or ENSERCH and only a limited number of
shares have traded publicly. Therefore, although the Common Stock is listed and
traded on the NYSE, its current market price is not considered dispositive in
determining the price of the Common Stock in the Offering. The Offering price
was determined by negotiations between EEX and the Representatives. Among the
factors considered in such negotiations were the sales, earnings and certain
other financial and operating information of EEX in recent periods, the future
prospects of EEX and its industry in general, certain ratios, market prices of
securities and financial and operating information of companies engaged in
activities similar to those of EEX and the general
condition of the securities markets. For certain recent market prices of the
Common Stock, see "Market Price of Common Stock and Dividend Policy."

The National Association of Securities Dealers, Inc. (the "NASD") prohibits
NASD members from participating in a public offering of an issuer's securities
where more than 10% of the net offering proceeds, not including underwriting
compensation, are paid to members participating in the distribution of the
offering or associated or affiliated persons of such members unless the public
offering price is no higher than that recommended by a qualified independent
underwriter, as defined in Section 2(1) of Schedule E of the NASD's By-Laws.
Because affiliates of certain of the underwriters will receive in the aggregate
an amount that is in excess of 10% of the net proceeds, pursuant to repayment
of debt incurred in connection with the DALEN Acquisition, Morgan Stanley & Co.
Incorporated has assumed the responsibilities of acting as a qualified
independent underwriter in pricing the Offering and conducting due diligence in
order to comply with such requirements. See "Use of Proceeds."

64
<PAGE>

LEGAL MATTERS

The validity of the issuance of the Common Stock will be passed upon for EEX
by Jackson & Walker, L.L.P., Dallas, Texas. Certain legal matters will be
passed upon for the Underwriters by Davis Polk & Wardwell, New York, New York.

EXPERTS

The consolidated balance sheet of EEX as of December 31, 1994 and 1993, and
the related statements of consolidated operations, cash flows and owners'
equity of EEX for each of the three years in the period ended December 31,
1994, included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.

With respect to the unaudited interim financial information of EEX for the
periods ended June 30, 1995 and 1994, which is included in this Prospectus, and
for the periods ended March 31, 1995 and 1994 which is incorporated by
reference in this Prospectus, Deloitte & Touche LLP have applied limited
procedures in accordance with professional standards for a review of such
information. However, as stated in their reports, they did not audit and they
do not express an opinion on that interim financial information. Accordingly,
the degree of reliance on their reports on such information should be
restricted in light of the limited nature of the review procedures applied.
Deloitte & Touche LLP are not subject to the liability provisions of Section 11
of the Securities Act for their reports on the unaudited interim financial
information because those reports are not a "report" or a "part" of the
Registration Statement prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Securities Act.

The audited consolidated financial statements of DALEN and its subsidiaries
included in this Prospectus, to the extent and for the period indicated in
their report, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report. Reference is made to said
report, which includes an explanatory paragraph with respect to the change in
method of accounting for income taxes as of January 1, 1993, as discussed in
Note 2 to the DALEN Financial Statements included in this Prospectus.

The estimates of the reserves of gas and oil of EEX made by DeGolyer and
MacNaughton, independent petroleum consultants, have been included herein in
reliance upon such estimates given upon such firm's authority as experts with
respect to the matters contained therein.

Information relating to the estimated reserves of gas and oil of DALEN and
the related estimates of future net cash flows and present values thereof for
certain periods included herein and in the Notes to the DALEN Financial
Statements included in this Prospectus have been audited by Netherland, Sewell
& Associates, Inc., independent petroleum engineers, and are included herein
and incorporated by reference herein in reliance upon the authority of such
firm as an expert in petroleum engineering.

65
<PAGE>

CERTAIN DEFINITIONS

Amplitude Anomaly--A change in seismic reflection signal strength of a specific
geologic layer, especially if attributable to an accumulation of
hydrocarbons, sometimes called a "bright spot".

Areal--Pertaining to area.

Barrel or Bbl--The unit of volume measurement used for petroleum products. One
barrel = 42 U.S. gallons.

MBbls: thousand barrels
MMBbls: million barrels

Basin--A synclinal structure in the subsurface, once the bed of a prehistoric
sea. Regarded as a good prospect for gas and oil exploration.

Behind Pipe--Oil and gas reservoirs penetrated by wells but not perforated
which therefore remain behind the pipe.

Block--Numerical designation of a specific location in an offshore area, or, an
onshore acreage "block".

Btu--British thermal unit, the quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.

MMBtu: million Btus

Condensate--A hydrocarbon mixture that becomes liquid and separates from
natural gas when the gas is subject to the production process; similar to
crude oil.

Confirmation Well--A well drilled to validate an initial discovery.

Cubic Foot--The amount of natural 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

Cubic Foot of Natural Gas Equivalent--The amount of oil, condensate or natural
gas liquids necessary to equal an amount of natural gas based on a
conversion ratio of one Bbl of oil, condensate or natural gas liquids to six
Mcf of gas.

Mcfe:thousand cubic feet of natural gas equivalent
MMcfe:million cubic feet of natural gas equivalent
Bcfe:billion cubic feet of natural gas equivalent
Tcfe:trillion cubic feet of natural gas equivalent

Development Drilling--The drilling and drilling-related activities undertaken
to recover gas and oil after initial discovery.

Development Well--A well drilled into a reservoir of gas or oil that contains
proved reserves.

Exploitation--The development of an existing producing area in order to
increase production, usually characterized by the drilling of infill
development wells and the reworking of old wells.

Exploratory Well--A well drilled into a previously untested geologic structure
or formation to determine the presence of gas or oil.

66
<PAGE>

Gross Acres/Gross Wells--Total acreage or total wells in which a company holds
varying interests.

Leasehold--Property or acreage offered under contract for the exploration and
production of gas, oil or other minerals.

NGL--Natural gas liquids.

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.

Overriding Royalty Interest--A royalty interest created from the working
interest which entitles the holder to a specific fractional share of gross
gas or oil production.

Proved Reserves--Reserves which can be estimated with reasonable certainty to
be recoverable under current economic conditions.

Proved Developed/Undeveloped Reserves--Proved reserves which are expected to be
recovered from existing wells (including reserves behind pipe).

Production--The phase of the petroleum industry that deals with bringing the
gas and well fluids to the surface, separating them and storing, gauging and
otherwise preparing the product for the pipeline. Also, the amount of gas or
oil produced in a given period.

Productive Wells--Either producing wells or wells capable of commercial
production, although currently shut-in.

Recompletion--A workover in which a previously productive formation or interval
is abandoned and a different interval is completed for production.

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.

Spudded--The beginning of the actual drilling of a well, which involves using a
spudding bit to drill down several hundred feet to accommodate the surface
pipe.

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.

3-D Seismic--Three-dimensional, computer-aided imaging of underground
formations based on acoustical data.

2-D Seismic--Two-dimensional, computer-aided imaging of underground formations
based on acoustical data.

Working Interest--A share of the ownership in drilling and production of gas
and oil.

Workover--One or more of a variety of remedial operations on a producing well
to restore or increase production by reconditioning or stimulating the
reservoir or by a recompletion.

67
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enserch Exploration, Inc.:
As of or for the Three Years Ended December 31, 1994:
Independent Auditors' Report............................................ F-2
Statements of Consolidated Operations................................... F-3
Statements of Consolidated Cash Flows................................... F-4
Consolidated Balance Sheets as of December 31, 1994 and 1993............ F-5
Statements of Owners' Equity............................................ F-6
Notes to Financial Statements........................................... F-7
Enserch Exploration, Inc. (Unaudited):
Independent Accountants' Report......................................... F-17
Condensed Statements of Consolidated Income for the Six Months Ended
June 30, 1995 and 1994................................................. F-18
Condensed Statements of Consolidated Cash Flows for the Six Months Ended
June 30, 1995 and 1994................................................. F-19
Condensed Consolidated Balance Sheets as of June 30, 1995 and December
31, 1994............................................................... F-20
Notes to Condensed Consolidated Financial Statements.................... F-21
DALEN Corporation:
As of or for the Three Years Ended December 31, 1994:
Report of Independent Public Accountants................................ F-23
Consolidated Statements of Operations................................... F-24
Consolidated Balance Sheets............................................. F-25
Consolidated Statements of Stockholder's Equity......................... F-26
Consolidated Statements of Cash Flows................................... F-27
Notes to Consolidated Financial Statements.............................. F-28
DALEN Corporation (Unaudited):
Consolidated Statements of Operations for the Three Months Ended March
31, 1995 and 1994...................................................... F-37
Consolidated Balance Sheets as of March 31, 1995 and December 31, 1994.. F-38
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1995 and 1994...................................................... F-39
Notes to Financial Statements........................................... F-40
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of
Enserch Exploration, Inc.

We have audited the accompanying consolidated balance sheets of Enserch
Exploration, Inc. and subsidiaries (the "Company") as of December 31, 1994 and
1993 and the related statements of consolidated operations, cash flows, and
owners' equity for each of the three years in the period ended December 31,
1994. These financial statements give retroactive effect to the transactions
which have been accounted for in a manner similar to a pooling-of-interests, as
described in Note 1. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of the Company at December 31,
1994 and 1993, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.

Deloitte & Touche LLP

Dallas, Texas
February 10, 1995 (June 21, 1995 as to Note 1)

F-2
<PAGE>

ENSERCH EXPLORATION, INC.

STATEMENTS OF CONSOLIDATED OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues
Natural gas.............................. $ 144,550 $ 146,355 $ 118,639
Oil and condensate....................... 30,880 36,863 45,064
Natural gas liquids...................... 2,377 4,148 6,554
Other.................................... 1,333 2,430 1,287
---------- ---------- ----------
Total.................................. 179,140 189,796 171,544
---------- ---------- ----------
Costs and Expenses
Production and operating................. 31,667 31,404 29,560
Exploration.............................. 9,136 8,668 11,164
Depreciation and amortization............ 80,819 78,418 76,742
(Sale) write-down of inactive pipeline... (7,551) 16,500
Write-down of non-U.S. gas and oil
properties.............................. 10,191
General, administrative and other........ 19,807 29,980 23,149
Taxes, other than income................. 13,233 15,950 15,615
---------- ---------- ----------
Total.................................. 147,111 174,611 172,730
---------- ---------- ----------
Operating Income (Loss).................... 32,029 15,185 (1,186)
Other Income (Expense)-Net................. (314) (6)
Interest Income............................ 671 2,041 3,692
Interest Expense........................... (20,919) (30,584) (20,675)
---------- ---------- ----------
Income (Loss) Before Income Taxes.......... 11,467 (13,358) (18,175)
Income Taxes (Benefit)..................... (334) (3,398) 448
---------- ---------- ----------
Net Income (Loss).......................... $ 11,801 $ (9,960) $ (18,623)
========== ========== ==========
Pro Forma Information:
Income (loss) before income taxes $ 11,467 $ (13,358) $ (18,175)
Income taxes (benefit) (including income
taxes on partnership operations)........ 3,990 (4,666) (6,421)
---------- ---------- ----------
Net Income............................... $ 7,477 $ (8,692) $ (11,754)
========== ========== ==========
Net Income (Loss) Per Share.............. $ .07 $ (.08) $ (.11)
========== ========== ==========
Weighted Average Shares Outstanding........ 105,695 105,695 105,695
========== ========== ==========
</TABLE>

See Notes to Financial Statements.

F-3
<PAGE>

ENSERCH EXPLORATION, INC.

STATEMENTS OF CONSOLIDATED CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993 1992
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities
Net income (loss)............................ $ 11,801 $ (9,960) $(18,623)
Depreciation and amortization................ 80,819 78,418 76,742
Deferred income tax expense (benefit)........ (366) (3,494) (682)
(Sale) write-down of inactive pipeline....... (7,551) 16,500
Write-off of unsuccessful foreign exploration
costs....................................... 10,191
Other........................................ (10,332) 8,994 (9,659)
Changes in current operating assets and
liabilities
Accounts receivable........................ 3,464 3,839 18,648
Other current assets....................... (26,333) (15,461) (304)
Accounts payable........................... 11,894 10,219 8,284
Other current liabilities.................. (1,714) (3,223) (5,660)
--------- --------- --------
Net cash flows from operating activities... 61,682 79,523 85,246
--------- --------- --------
Investing Activities
Additions of property, plant and equipment... (132,590) (118,759) (64,831)
Retirements of property, plant and equipment. 13,051 (598) 9,532
Other........................................ 10,755 (9,726) (3,403)
--------- --------- --------
Net cash flows used for investing
activities................................ (108,784) (129,083) (58,702)
--------- --------- --------
Financing Activities
Change in temporary advances with ENSERCH
Companies................................... 76,331 34,405 (44,274)
Proceeds from long-term notes payable to
ENSERCH Companies........................... 11,000 32,000 32,000
(Decrease) increase in advances under leasing
arrangements-net............................ (32,771) 13,588 17,652
Cash distributions paid...................... (7,842) (31,061) (31,061)
Other........................................ 275
--------- --------- --------
Net cash flows from (used for) financing
activities................................ 46,993 48,932 (25,683)
--------- --------- --------
Net (Decrease) Increase in Cash and
Equivalents................................... (109) (628) 861
Cash and Equivalents at Beginning of Year...... 343 971 110
--------- --------- --------
Cash and Equivalents at End of Year............ $ 234 $ 343 $ 971
========= ========= ========
Interest Paid (Net of amounts capitalized)..... $ 20,248 $ 23,067 $ 16,983
========= ========= ========
</TABLE>

See Notes to Financial Statements.

F-4
<PAGE>

ENSERCH EXPLORATION, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash................................................... $ 234 $ 343
Accounts receivable-trade (net of allowance for
possible losses of $670 and $706)..................... 16,828 17,475
Accounts receivable-affiliated companies............... 11,581 14,093
Notes receivable-affiliated companies.................. 86,077
Materials and supplies, at average cost................ 2,168 1,853
Other.................................................. 3,049 1,803
---------- ----------
Total current assets................................. 119,937 35,567
---------- ----------
Property, Plant and Equipment (at cost)
Gas and oil properties (full-cost method, $174,951 and
$83,067 excluded from amortization base).............. 2,094,494 1,843,925
Other.................................................. 15,582 6,242
---------- ----------
Total................................................ 2,110,076 1,850,167
Less accumulated depreciation and amortization......... 856,062 803,807
---------- ----------
Net property, plant and equipment.................... 1,254,014 1,046,360
---------- ----------
Other Assets............................................. 7,284 29,568
---------- ----------
Total................................................ $1,381,235 $1,111,495
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable-trade................................. $ 58,593 $ 69,881
Accounts payable-affiliated companies.................. 7,060 3,621
Temporary advances-affiliated companies (net).......... 105,469 27,068
Current portion of capital lease obligations........... 4,760
Advances under leasing arrangements.................... 31,240
Other.................................................. 1,728 12,372
---------- ----------
Total current liabilities............................ 177,610 144,182
---------- ----------
Long-term Debt--Affiliated Companies (Note 6)............ 298,000
---------- ----------
Capital Lease Obligations................................ 151,095
---------- ----------
Other Liabilities
Deferred income taxes.................................. 284,299
Deferred royalties..................................... 25,536 28,842
Other.................................................. 6,687 9,786
---------- ----------
Total other liabilities.............................. 316,522 38,628
---------- ----------
Commitments and Contingent Liabilities (Note 7)
Owners' Equity........................................... 736,008 630,685
---------- ----------
Total................................................ $1,381,235 $1,111,495
========== ==========
</TABLE>

See Notes to Financial Statements.

F-5
<PAGE>

ENSERCH EXPLORATION, INC.

STATEMENTS OF OWNERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(IN THOUSANDS)

<TABLE>
<S> <C>
Balance, December 31, 1991.......................................... $721,390
Net loss.......................................................... (18,623)
Distributions declared............................................ (31,061)
---------
Balance, December 31, 1992.......................................... 671,706
Net loss.......................................................... (9,960)
Distributions declared............................................ (31,061)
---------
Balance, December 31, 1993.......................................... 630,685
Net income........................................................ 11,801
Reorganization Adjustments:
Assumption by ENSERCH Companies:
Assets and obligations of offshore facilities and leases...... (24,418)
EP's notes payable to other ENSERCH Companies and EPO......... 395,077
Accrued interest on notes payable............................. 12,566
Assumption of deferred income taxes by EEX...................... (289,703)
---------
Balance, December 31, 1994.......................................... $ 736,008
=========
Common Stock--$1.00 par value, authorized 200,000,000 shares, issued
and outstanding
105,694,787 shares................................................. $ 105,695
Paid in Capital..................................................... 630,313
---------
Common Shareholders' Equity at December 31, 1994.................... $ 736,008
=========
</TABLE>

See Notes to Financial Statements.

F-6
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS
All dollar amounts, except per share and per unit amounts, in the notes to
financial statements are stated in thousands unless otherwise indicated.

1. ORGANIZATION AND BASIS OF PRESENTATION

Prior to December 30, 1994, Enserch Exploration, Inc. ("EEX"), a corporation,
operated as Enserch Exploration Partners, Ltd. ("EP"), a partnership, and its
published financial statements were those of EP. On December 30, 1994, EEX
acquired all of the partnership interests of EP Operating Limited Partnership
("EPO"), the 99% owned operating partnership of EP, and EP received common
stock of EEX. EPO was then merged into EEX and thereafter EP was liquidated,
and its partners received one share of EEX common stock for each limited and
general partnership interest held. Certain affiliates of ENSERCH other than EEX
(collectively, the "ENSERCH Companies") also received EP's interest in and
assumed EP's obligations under certain equipment leases (the equipment was
simultaneously subleased to EEX) and assumed approximately $395 million
principal amount of EP's indebtedness, plus accrued interest.

In 1995, EEX acquired the international gas and oil operations of ENSERCH by
the issuance of 1,113,545 shares of EEX Common Stock and acquired the SACROC
operations of ENSERCH for $1.65 million in cash. Both transactions were based
on the value of the underlying properties as determined by independent
petroleum engineers. ENSERCH's historical carrying value of the assets acquired
and liabilities assumed has been recorded by EEX. The excess of ENSERCH's
carrying value over the purchase price of the SACROC properties has been
credited to paid in capital. The stated number of shares issued to acquire the
international operations were determined using an estimated value per share of
EEX Common Stock of $14.00. The number of shares will be adjusted in the future
based on the actual net proceeds per share received by EEX in a planned public
offering of Common Stock.

EP and EPO were partnerships and, as a result, the income or loss of the
partnerships was included in the tax returns of the individual partners.
Accordingly, no recognition was given to income taxes in the financial
statements of EP. EEX, as a corporation, is a taxable entity. Pro forma net
income includes an adjustment to provide for income taxes on the partnerships'
operations at the applicable statutory rate.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Gas and Oil Properties--The full-cost accounting method prescribed by the
Securities and Exchange Commission (SEC), is followed for gas and oil
properties. Under this method, all acquisition, exploration and development
costs incurred, including salaries, benefits and other internal costs directly
attributable to these activities, are capitalized. All costs associated with
production and general corporate activities are expensed in the period
incurred. Costs directly associated with the acquisition and evaluation of
unproved gas and oil properties are excluded from the amortization base until
the related properties are evaluated. Such unproved properties are assessed
periodically and a provision for impairment is made to the full-cost
amortization base when appropriate. Amortization of evaluated gas and oil
properties is computed on the unit-of-production method using estimated proved
gas and oil reserves quantified on the basis of their equivalent energy
content. Amortization of gas and oil properties was approximately 5.7% in 1994,
6.0% in 1993 and 5.7% in 1992. Depreciation of other property, plant and
equipment is provided principally by the straight-line method over the
estimated service lives of the related assets. At December 31, 1994, estimates
of

F-7
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
future site restoration, dismantlement and abandonment costs, as assessed on an
overall cost center basis, were less than estimates of future salvage values.
Therefore, no accruals were required.

Natural Gas and Oil Hedging Activities--Gas and oil swaps, collars and
futures agreements are used to hedge volatile product prices for a portion
(normally 30 to 70 percent) of anticipated future gas and oil production. The
purpose of these hedging activities is to fix the prices to be received. Under
these agreements, payments are received or made based on the differential
between a fixed and a variable product price. These agreements are settled in
cash at or prior to expiration or exchanged for physical delivery contracts.
Realized gains and losses on hedging activities are deferred and included in
revenues during the month that the related physical sale occurs. In the event
of nonperformance by counterparties, the Company is exposed to price risk. The
Company does not obtain collateral to support the agreements but monitors the
financial viability of counterparties. The Company has no off-balance sheet
risk of accounting loss.

Fair Value of Financial Instruments--The fair value of financial instruments,
consisting primarily of cash, accounts receivable, investments, accounts
payable, temporary advances payable and other accrued liabilities, approximates
carrying value.

3. INCOME TAXES

EP was a partnership and, as a result, the income or loss of the partnership,
which reflected differences in the timing of the deduction of certain gas and
oil drilling and development costs for federal income-tax purposes, was
includable in the tax returns of the individual partners. Accordingly, no
recognition was given to income taxes in the financial statements of EP. EEX,
as a corporation, is a taxable entity. The accompanying statements of
operations include a pro forma provision for income taxes on the partnership
operations based on the applicable federal statutory rate.

Following is a reconciliation of the provision for income taxes computed at
the federal statutory rate and income tax expense (benefit):

<TABLE>
<CAPTION>
1994 1993 1992
------- -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes.............. $11,467 $(13,358) $(18,175)
Federal statutory rate......................... 35% 35% 34%
------- -------- --------
Provision for income taxes computed at the
federal statutory rate........................ 4,013 (4,675) (6,180)
Impact of 1% increase on federal statutory rate
applicable to international and SACROC opera-
tions......................................... 44
Percentage depletion........................... (23) (35) (241)
------- -------- --------
Total pro forma provision for income taxes..... 3,990 (4,666) (6,421)
Less pro forma income tax (expense) benefit
applicable to partnership operations.......... (4,324) 1,268 6,869
------- -------- --------
Income tax expense (benefit)................... $ (334) $ (3,398) $ 448
======= ======== ========
</TABLE>

F-8
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The deferred tax effect of the difference in financial accounting basis and
income tax basis of EEX's assets and liabilities at December 31, 1994 is as
follows:

<TABLE>
<CAPTION>
1994
-------------------------------
TOTAL CURRENT NONCURRENT
-------- ------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Reserves for injury and damage claims..... $ 663 $ -- $ 663
All other................................. 1,190 420 770
-------- ----- --------
Total................................... 1,853 420 1,433
-------- ----- --------
Deferred tax liabilities:
Property-related differences.............. 56,919 -- 56,919
Exploration and intangible development
costs.................................... 234,637 -- 234,637
-------- ----- --------
Total................................... 291,556 -- 291,556
-------- ----- --------
Net deferred tax liability (asset) recorded
on formation of EEX ....................... 289,703 (420)(a) 290,123
Deferred tax asset applicable to property
related differences of international and
SACROC operations acquired from ENSERCH.... (5,824) (5,824)
-------- ----- --------
Total................................... $283,879 $(420) $284,299
======== ===== ========
</TABLE>
--------
(a) Included in other current assets in the balance sheet.

At December 31, 1993 EEX had a deferred tax asset applicable to property
related differences of international and SACROC operations of $5,375 which is
included in Other Assets.

4. SHAREHOLDERS' EQUITY

EEX is authorized to issue 200 million shares of common stock at $1.00 par
value and 2 million shares of preferred stock.

The Company has a stock option plan that provides for the granting of stock
options to officers and key employees to purchase shares of EEX Common Stock
and has provisions for awarding restricted stock to officers, which are subject
to vesting based on the achievement of certain performance criteria. Options
granted under the plan have an exercise price of not less than the fair market
value of the common stock on the grant date. Options become exercisable in
stages of 25% after one year to 100% after four years and expire after ten
years. The plan covers a maximum of 2 million shares of EEX Common Stock. No
options or restricted stock were granted or awarded in 1994.

5. EMPLOYEE BENEFIT PLANS

Substantially all personnel associated with the Company are covered by an
ENSERCH pension plan and some retirees are eligible for varying levels of
health care and life insurance benefits. Employees hired after July 1, 1989 are
not eligible for medical benefits when they retire. The allocation of the costs
of these plans is actuarially determined. Total pension costs allocated to the
Company were $1,220, $875 and $1,078 in 1994, 1993 and 1992, respectively.
Postretirement health care and life insurance benefit costs allocated to the
Company were $824, $830 and $556 in 1994, 1993 and 1992, respectively.

F-9
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

ENSERCH pension plan information:

<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Valuation Assumptions:
Discount rate........................................... 9.0% 7.25%
Rate of increase in compensation levels................. 4.0% 4.0%
Expected long-term rate of return on assets............. 9.5% 9.5%
Amounts Recognized (in millions):
Actuarial present value of pension benefit obligation:
Vested benefit obligation............................. $(237.4) $(268.5)
======= =======
Accumulated benefit obligation........................ $(249.6) $(277.3)
======= =======
Projected pension benefit obligation.................. $(271.4) $(311.7)
Plan assets at fair value................................. 231.7 243.2
------- -------
Projected benefit obligation in excess of plan assets..... (39.7) (68.5)
Unrecognized net asset at transition...................... (8.0) (9.7)
Unrecognized prior service cost (credit).................. (2.2) 1.7
Unrecognized net actuarial loss (gain).................... (3.7) 26.3
------- -------
ENSERCH accrued pension cost.............................. $ (53.6) $ (50.2)
======= =======
EEX accrued pension cost.................................. $ (3.9) $ (3.2)
======= =======
ENSERCH postretirement benefit information:
Valuation Assumptions:
Discount rate......................................... 9.0% 7.25%
Medical cost trend rate............................... 12.0% 12.0%
Amounts Recognized (in millions):
Accumulated postretirement benefit obligation......... $ (82.9) $ (82.9)
Unrecognized obligation at transition................. 62.1 66.2
Unrecognized net actuarial loss....................... 15.1 14.8
------- -------
ENSERCH accrued postretirement benefit cost............... $ (5.7) $ (1.9)
======= =======
EEX accrued postretirement benefit cost................... $ (.5) $ (.2)
======= =======
</TABLE>

The assumed health care cost trend rate is 12.0% for 1994, declining
gradually to 6.0% in 2003, and remaining at that level thereafter. If the
health care cost trend rate were increased by 1%, the accumulated
postretirement benefit obligation of ENSERCH as of December 31, 1994 would be
increased by $4.8 million and the net periodic postretirement benefit cost for
1994 by $.4 million.

Investment Plan--ENSERCH provides a voluntary contributory investment plan
that is available to substantially all employees and matches a portion of
employee's contribution with ENSERCH common stock. The Company's share of costs
under the plan was $236, $254 and $260 in 1994, 1993 and 1992, respectively.

6. RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company engages in various
transactions with ENSERCH and its affiliates. The Company is charged for direct
costs incurred by ENSERCH Companies that are associated with managing the
Company's business and operations. Additionally, the Company is charged for
indirect

F-10
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
costs. Prior to July 1, 1994, the Company was charged for the general and
administrative staff costs incurred by ENSERCH in performing accounting,
treasury, internal audit, income tax planning and compliance, legal,
information systems, human resources and other functions, but was not charged
for the cost of higher level management (i.e. all of the elected officers of
ENSERCH) of these functions. Effective July 1, 1994, ENSERCH began charging all
of its affiliates, including EP, for the cost of management by higher level
ENSERCH personnel of these functions. Costs are determined on a basis that
reasonably reflects the actual costs of the services performed for EEX and may
include allocations based on such factors as net capital employed, the number
of employees or the percentage of time spent on projects or services. The
Company believes that the method used is reasonable and approximates costs that
would have been incurred if the Company had operated as an unaffiliated entity.
ENSERCH charges for all indirect costs amounted to $2,162, $2,154 and $2,048 in
1994, 1993 and 1992, respectively.

The Company had sales to certain ENSERCH Companies (Enserch Gas Company, Lone
Star Gas Company and Enserch Processing Company) of $108,936, $108,916 and
$32,508 in 1994, 1993 and 1992, respectively. In March 1993, the Company
entered into new contracts to sell essentially all gas production not committed
under existing contracts to Enserch Gas Company.

EEX maintains separate short-term borrowing arrangements with ENSERCH to meet
operating needs. Under these arrangements, ENSERCH may advance funds to EEX,
and EEX may advance funds to ENSERCH. EEX had long-term notes payable to
ENSERCH Companies at December 31, 1993 of $298 million bearing interest at 5.3%
to 9.95% per annum. During 1994, the long-term notes were increased by $11
million. EEX incurred interest cost including amounts capitalized of $21.6
million, $27.1 million and $24.7 million in 1994, 1993 and 1992 on long-term
borrowings from ENSERCH Companies. In connection with the Reorganization,
ENSERCH Companies assumed EEX's long-term debt. EEX will benefit in the future
as a result of the ENSERCH Companies assumption of its debt in the
Reorganization in that interest expense will not be incurred on that debt.

The notes receivable from ENSERCH Companies at December 31, 1994, had an
interest rate of 7.5%. Interest on the temporary advance from ENSERCH Companies
was based on the 30-day commercial paper rate available to ENSERCH and was 6.1%
at December 31, 1994. In February 1995, the receivable and the obligation were
settled. Net interest costs incurred on borrowings from ENSERCH Companies were
$23,993, $25,364 and $22,179 in 1994, 1993 and 1992, respectively.

See Note 7 for information concerning lease commitments with ENSERCH
Companies.

7. COMMITMENTS AND CONTINGENT LIABILITIES

Legal Proceedings--On March 23, 1994, a lawsuit was brought in the 299th
District Court of Harris County, Texas against EPO and five other defendants by
19 royalty owners under leases contained within the Corby Gas Unit in Leon
County, Texas. Defendants are working interest owners and lessees under the
leases. The Company owned a 7.1% interest in these leases. The plaintiffs
allege causes of action involving breach of express and implied obligations
under the leases, drainage, failure to explore and develop for gas and oil
under the leases, civil conspiracy, tortious interference with contractual
relationships, specific performance, negligence and conversion. The plaintiffs
seek to recover alleged actual damages in excess of $5.4 million, punitive
damages of at least ten times the actual damages, if any, found by a jury,
interest and attorneys' fees.

A lawsuit was filed against ENSERCH, its utility division, EPO and EPO's
managing general partner in the 348th Judicial District Court of Tarrant County
in May 1989. Plaintiffs seek unspecified actual damages

F-11
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and punitive damages in the amount of $5 million. Plaintiffs allege royalties
were not fully paid, certain expenses were improperly charged against the
amount of royalties due, negligence in the venting of gas and liquid
hydrocarbons into the air, and breach of duty of good faith and fair dealing by
wrongfully concealing certain material facts concerning sales of gas from the
subject leases to the utility division.

A lawsuit was filed on February 24, 1987, in the 112th Judicial District of
Sutton County, Texas, against certain subsidiaries and affiliates of ENSERCH,
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. Plaintiffs seek actual damages in excess of $5 million and punitive
damages in an amount equal to 0.5% of the consolidated gross revenues of
ENSERCH for the years 1982 through 1986 (approximately $85 million), interest,
costs and attorneys' fees.

Management believes that the named defendants have meritorious defenses to
the claims made in these and other actions brought in the ordinary course of
business. In the opinion of management, the Company will incur no liability
from these and all other pending claims and suits that would be considered
material for financial reporting purposes.

Leases--The equipment and facilities used in developing and producing
reserves in the Mississippi Canyon project and Garden Banks project were
financed under equipment leases between certain financial institutions and EPO.
In connection with the merger of EPO into EEX, the leases were assigned to and
assumed by Enserch Exploration Holdings, Inc. ("EEH"). EEX entered into three
subleases with EEH for such offshore facilities. For accounting purposes, one
of the leases is an operating lease, and two are capital leases, with the lease
obligations and related assets totaling approximately $156 million. The
operating lease is for twelve years, with an option to purchase the equipment
under lease at the end of the lease term at a fixed price equal to its
estimated fair value.

A component of the payments to be made by EEX under the subleases is based on
a floating interest rate of LIBOR plus 1.75% per annum.

Estimated future minimum lease payments for the leases, based on a LIBOR rate
at December 31, 1994 of 5.625% for the Garden Banks project and 5.9375% for the
Mississippi Canyon project, are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
1995.................................................. $ 15,784 $ 14,667
1996.................................................. 18,793 17,021
1997.................................................. 18,794 17,021
1998.................................................. 18,794 17,021
1999.................................................. 18,794 17,021
Thereafter............................................ 136,044 199,528
-------- --------
Total................................................. $227,003 282,279
========
Less interest factor.................................. 126,424
--------
Capital lease obligations............................. $155,855
========
</TABLE>

The ENSERCH Companies' cost for the Garden Banks facilities and equipment
will exceed the $300 million cost that is the basis for current lease
obligations, primarily due to the recent discovery on Block 387. The total cost
of these facilities and equipment is expected to be approximately $350 million,
including $20 million of capitalized financing costs. The Company anticipates
that the leases will be modified for the additional costs.

F-12
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The Company bears an allocated share of rental expenses incurred by ENSERCH
Companies under noncancelable long-term operating leases, principally for
office space. The Company's allocated share of rental expenses totaled $3,102,
$5,035 and $3,621 in 1994, 1993 and 1992, respectively.

Environmental Matters--The Company is subject to federal, state and local
environmental laws and regulations that regulate the discharge of materials
into the environment. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. The level of future expenditures
for environmental matters, including costs of obtaining operating permits,
enhanced equipment monitoring and modifications under the Clean Air Act and
cleanup obligations, cannot be fully ascertained until the regulations that
implement the applicable laws have been approved and adopted. However, the
capital expenditures required to achieve compliances with the Clean Air Act
regulations, in their current form, have been estimated to be less than $1
million. It is management's opinion that all such costs, when finally
determined, will not have a material adverse effect on the financial position
or results of operations of the Company.

8. SUPPLEMENTARY GAS AND OIL INFORMATION

Gas and Oil Producing Activities--The following tables set forth information
relating to gas and oil producing activities of EEX. Reserve data for natural
gas liquids attributable to leasehold interests owned by the Company are
included in oil and condensate.

<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
CAPITALIZED COSTS:
Proved gas and oil properties....................... $1,919,543 $1,760,858
Unproved gas and oil properties..................... 174,951 83,067
---------- ----------
Total............................................. $2,094,494 $1,843,925
========== ==========
Accumulated depreciation and amortization............. $ 846,038 $ 800,027
========== ==========
</TABLE>

<TABLE>
<CAPTION>
1994 1993 1992
----------------- ----------------- ----------------
U.S. NON-U.S. U.S. NON-U.S. U.S. NON-U.S.
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
COSTS INCURRED:
Property acquisition
costs:
Proved................ $ 1,562 $ $ 8,262 $ $ 895 $
Unproved.............. 20,591 12,554 32 9,060
Exploration costs....... 60,145 3,076 38,028 3,536 36,946 2,303
Development costs....... 84,249 63,067 16,579
-------- ------ -------- ------ ------- ------
Total............... $166,547 $3,076 $121,911 $3,568 $63,480 $2,303
======== ====== ======== ====== ======= ======
Amortization (per
MMBtu)(a).............. $ 0.96 $ 0.89 $ 0.90
======== ======== =======
</TABLE>
--------
(a) Amortization expense per unit of production converted to a common unit of
measure, millions of British thermal units (MMBtu). 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.

COSTS EXCLUDED from the amortizable base as of December 31, 1994:

<TABLE>
<CAPTION>
TOTAL AT
PRIOR DECEMBER 31,
1994 1993 1992 YEARS 1994
YEAR INCURRED -------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Property acquisition costs..... $ 20,591 $11,369 $ 4,178 $10,506 $ 46,644
Exploration costs.............. 19,338 3,797 6,794 9,021 38,950
Development costs.............. 77,380 77,380
Interest capitalized........... 4,530 3,394 3,062 991 11,977
-------- ------- ------- ------- --------
Total...................... $121,839 $18,560 $14,034 $20,518 $174,951
======== ======= ======= ======= ========
</TABLE>

F-13
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Approximately 64% of excluded costs relates to offshore activities in the
Gulf of Mexico, about 35% is domestic onshore exploration activities and the
remainder is non-U.S. The anticipated timing of the inclusion of these costs in
the amortization computation will be determined by the rate at which
exploratory and development activities continue, which are expected to be
accomplished within ten years.

The following information is required and defined by the Financial Accounting
Standards Board. The disclosure does not represent the results of operations
based on historical financial statements. In addition to requiring different
determinations of revenues and costs, the disclosure excludes the impact of
interest expense and corporate overheads.

<TABLE>
<CAPTION>
1994 1993 1992
----------------- ----------------- -----------------
U.S. NON-U.S. U.S. NON-U.S. U.S. NON-U.S.
RESULTS OF OPERATIONS: -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $173,468 $ $191,027 $ $170,996 $
Less:
Production costs (a)... 43,899 46,243 22 43,935 113
Exploration costs (b).. 8,407 729 7,603 1,065 9,772 1,392
Depreciation and
amortization (c)...... 79,232 77,034 10,191 75,483
Income-tax effects..... 14,647 (255) 21,009 (3,947) 13,990 (512)
-------- ----- -------- ------- -------- -----
Net producing activi-
ties................ $ 27,283 $(474) $ 39,138 $(7,331) $ 27,816 $(993)
======== ===== ======== ======= ======== =====
</TABLE>
--------
(a) Includes severance, ad valorem and production taxes.
(b) Includes internal costs that cannot be directly identified with
acquisition, exploration or development activities.
(c) Excludes a $7,551 gain from the sale of an inactive offshore pipeline and
facilities in 1994 and the $16,500 write-down of that pipeline and
facilities in 1992. The pipeline and facilities were not related to gas and
oil producing activities. 1993 includes write-off of costs related to
unsuccessful non-U.S. exploratory projects of $10,191.

Hedging Activities--At December 31, 1994, the Company had outstanding swaps,
collars and futures agreements extending through December 31, 1995 to exchange
payments on 17.8 Bcf of natural gas and 1.2 MMBbls of oil on which the Company
had $4.1 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, 1994, realized gains on hedging activities of $.9 million were
deferred. The weighted average strike price and market price per Mcf of natural
gas was $2.06 and $1.84, respectively, and the weighted average strike price
and market price per barrel of oil was $17.98 and $17.82, respectively.

Gas and Oil Reserves (Unaudited)--The following table of estimated proved and
proved developed reserves of gas and oil has been prepared utilizing estimates
of year-end reserve quantities provided by DeGolyer and MacNaughton,
independent petroleum consultants. Reserve estimates are inherently imprecise
and estimates of new discoveries are more imprecise than those of producing gas
and oil properties. Accordingly, the reserve estimates are expected to change
as additional performance data become available.

<TABLE>
<CAPTION>
UNITED STATES
-------------------------------------------------------
GAS (MMCF) OIL (MBBL)(A)
------------------------------- ----------------------
1994 1993 1992 1994 1993 1992
--------- --------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
At January 1............ 1,086,482 1,101,426 1,168,075 39,349 39,231 40,012
Changes in reserves
Revisions of previous
estimates............ (25,106) 20,196 (6,811) (499) 1,344 552
Extension, discoveries
and additions........ 47,580 34,549 20,817 9,877 1,292 1,444
Purchase of minerals
in place............. 787 4,379 198 14 3 102
Sales of minerals in
place................ (894) (4,042) (15,665) (28) (40) (42)
Production............ (67,113) (70,026) (65,188) (2,227) (2,481) (2,837)
--------- --------- --------- ------ ------ ------
At December 31.......... 1,041,736 1,086,482 1,101,426 46,486 39,349 39,231
========= ========= ========= ====== ====== ======
Proved Developed Re-
serves:
At January 1.......... 735,093 676,851 974,822 15,380 14,844 19,738
At December 31........ 698,643 735,093 676,851 14,437 15,380 14,844
</TABLE>
--------
(a) Includes condensate and natural gas liquids attributable to leasehold
interests of 911 MBbl for 1994, 1,117 MBbl for 1993 and 985 MBbl for 1992.

F-14
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

In 1994, foreign (non-U.S.) extensions, discoveries and additions resulted in
4,105 MBbl of oil at December 31, 1994.

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Gas and Oil Reserve Quantities (Unaudited)--has been prepared using estimated
future production rates and associated production and development costs.
Continuation of economic conditions existing at the balance sheet date was
assumed. Accordingly, estimated future net cash flows were computed by applying
prices and contracts in effect in December to estimated future production of
proved gas and oil reserves, estimating future expenditures to develop proved
reserves and estimating costs to produce the proved reserves based on average
costs for the year. Average prices used in the computations were: Gas (per Mcf)
$2.29 in 1994, $2.38 in 1993 and $2.20 in 1992; Oil (per barrel) $14.07 in
1994, $11.73 in 1993 and $16.89 in 1992.

Because reserve estimates are imprecise and changes in the other variables
are unpredictable, the standardized measure should be interpreted as indicative
of the order of magnitude only and not as precise amounts.

<TABLE>
<CAPTION>
1994 1993 1992
STANDARDIZED MEASURE (IN MILLIONS): -------- -------- --------
<S> <C> <C> <C>
Future cash inflows.............................. $3,081.5 $3,047.0 $3,080.0
Future production and development costs.......... (1,065.8) (1,057.9) (1,057.2)
Future income-tax expense (a).................... (542.6) (1.7)
-------- -------- --------
Future net cash flows............................ 1,473.1 1,989.1 2,021.1
Less 10% annual discount......................... 593.8 886.5 909.8
-------- -------- --------
Standardized measure of discounted future net
cash flows...................................... $ 879.3 $1,102.6 $1,111.3
======== ======== ========
CHANGE IN STANDARDIZED MEASURE (IN MILLIONS):
Sales and transfers of gas and oil produced, net
of production costs............................. $ (120.5) $ (136.1) $ (115.8)
Changes in prices, net of production and future
development costs............................... (33.9) (.6) 21.9
Extensions, discoveries and improved recovery,
less related costs.............................. 158.7 41.4 22.3
Other purchases of minerals in place............. 1.6 9.4 .9
Revisions of previous quantity estimates......... (26.5) (28.5) 17.3
Sale of minerals in place........................ (1.3) (4.9)
Accretion of discount............................ 102.7 105.5 102.8
Net change in income taxes....................... (295.3) 1.2 .1
Other............................................ (8.8) (1.0) 3.1
-------- -------- --------
Total........................................ $ (223.3) $ (8.7) $ 47.7
======== ======== ========
</TABLE>
--------
(a) EEX operated as a partnership, except for the international operations and
SACROC operations, until December 30, 1994. Accordingly no income taxes
were applicable to its partnership operations until December 31, 1994.

F-15
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

9. SUPPLEMENTAL FINANCIAL INFORMATION

Quarterly Results (Unaudited)--The results of operations of the Company by
quarters are summarized below. In the opinion of the Company's management, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation have been made. The financial statements include interest charges
on the debt now assumed by certain ENSERCH Companies.

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1994:
Revenues.......................... $50,737 $44,473 $41,426 $42,504
Operating Income.................. 11,017 8,400 3,059 9,553
Net Income (Loss)................. 3,139 3,179 (1,475) 2,634
Net Income (Loss) Per Unit........ .03 .03 (.01) .02
1993:
Revenues.......................... $41,034 $48,982 $48,787 $50,993
Operating Income.................. 5,106 9,256 5,998 (5,175)
Net Income (Loss)................. 74 2,346 (322) (10,790)
Net Income (Loss) Per Unit........ .00 .02 .00 (.10)
</TABLE>

Reconciliation of Previously Reported Information--Amounts reported for 1994,
1993 and 1992 have been restated in a manner similar to a pooling of interests
to reflect the acquisition of the international gas and oil operations and
SACROC operations of ENSERCH under common control as follows:

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------- ANNUAL
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- -------
INCREASE (DECREASE)
<S> <C> <C> <C> <C> <C>
1994:
Revenues.............. $ 1,028 $ 1,046 $1,022 $ 942 $ 4,038
Net Income (Loss)..... (1,778) (2,006) 607 (1,312) (4,489)
1993:
Revenues.............. 1,279 1,273 1,149 1,103 4,804
Net Income (Loss)..... 714 (397) (870) (4,258) (4,811)
1992:
Revenues.............. 5,636
Net Income (Loss)..... 8,511
</TABLE>

Interest Costs--are summarized below:

<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Interest costs incurred........ $25,678 $34,841(a) $25,990
Interest capitalized........... (4,759) (4,257) (5,315)
------- ------- -------
Interest charged to expense..... $20,919 $30,584 $20,675
======= ======= =======
</TABLE>
--------
(a) Includes $6 million provision for interest due royalty owners.

F-16

<PAGE>

INDEPENDENT ACCOUNTANTS' REPORT

Enserch Exploration, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of
Enserch Exploration, Inc. as of June 30, 1995, and the related condensed
statements of consolidated income and cash flows for the six months ended June
30, 1995 and 1994. The condensed consolidated financial statements give
retroactive effect to the transactions which have been accounted for in a
manner similar to a pooling-of-interests, as described in Note 1. These
financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data, and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to such condensed financial statements for them to be in
conformity with generally accepted accounting principles.

We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Enserch Exploration, Inc., as of
December 31, 1994, and the related statements of consolidated operations, cash
flows and common shareholders' equity for the year then ended; and in our
report dated February 10, 1995 (June 21, 1995 as to Note 1), we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1994, is fairly stated in all material respects, in
relation to the consolidated balance sheet from which it has been derived.

Deloitte & Touche LLP

Dallas, Texas
August 4, 1995

F-17
<PAGE>

ENSERCH EXPLORATION, INC.

CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
----------------------
1995 1994
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues
Natural gas.......................................... $ 67,008 $ 78,417
Oil and condensate................................... 20,677 15,743
Natural gas liquids.................................. 1,695 841
Other................................................ 268 209
---------- ----------
Total.............................................. 89,648 95,210
---------- ----------
Costs and Expenses
Production and operating............................. 19,543 15,612
Exploration.......................................... 5,474 4,534
Depreciation and amortization........................ 46,547 40,930
General, administrative and other.................... 14,743 7,944
Taxes, other than income............................. 7,746 6,773
---------- ----------
Total.............................................. 94,053 75,793
---------- ----------
Operating Income (Loss)................................ (4,405) 19,417
Other Income (Expense)--Net............................ (3) 17
Interest Income........................................ 1,026 188
Interest Expense....................................... (3,599) (9,885)
---------- ----------
Income (Loss) Before Income Taxes...................... (6,981) 9,737
Income Tax Benefit..................................... (2,443) (198)
---------- ----------
Net Income (Loss)...................................... $ (4,538) $ 9,935
========== ==========
Pro Forma Information
Income before income taxes........................... $ 9,737
Income taxes (including income taxes on partnership
operations)......................................... 3,419
----------
Net Income........................................... $ 6,318
==========
Net Income (Loss) Per Share (Pro forma for the six
months ended June 30, 1994)........................... $ (.04) $ .06
========== ==========
Weighted Average Shares Outstanding.................... 105,695 105,695
========== ==========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

F-18
<PAGE>

ENSERCH EXPLORATION, INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1995 1994
--------- --------
<S> <C> <C>
Operating Activities
Net income (loss)....................................... $ (4,538) $ 9,935
Depreciation and amortization........................... 46,547 40,930
Deferred income-tax expense (benefit)................... 5,499 (30)
Other................................................... (14,400) (7,191)
Changes in current operating assets and liabilities:
Accounts receivable................................... (9,273) 5,242
Other current assets.................................. (4,602) (1,144)
Accounts payable...................................... 13,075 (5,701)
Other current liabilities............................. 5,519 1,481
--------- --------
Net cash flows from operating activities.............. 37,827 43,522
--------- --------
Investing Activities
Purchase of DALEN, net of cash acquired................. (332,888)
Additions to property, plant and equipment.............. (90,057) (58,251)
Retirements of property, plant and equipment............ 2,715 2,615
Collection of note receivable from affiliated company... 86,077
Other................................................... (16,453) (9,330)
--------- --------
Net cash flows used for investing activities.......... (350,606) (64,966)
--------- --------
Financing Activities
Change in temporary advances with affiliated companies.. (66,333) 47,669
Payments of capital lease obligations................... (1,997)
Borrowings under bank revolving credit agreement........ 350,000
Borrowings under bridge loan............................ 150,000
Repayment of DALEN bank debt assumed at acquisition..... (115,000)
Proceeds from long-term notes payable to affiliated
companies.............................................. 8,000
Decrease in advances under leasing arrangements--net.... (26,212)
Cash distributions paid................................. (7,843)
--------- --------
Net cash flows from financing activities.............. 316,670 21,614
--------- --------
Net Increase in Cash...................................... 3,891 170
Cash at Beginning of Period............................... 234 343
--------- --------
Cash at End of Period..................................... $ 4,125 $ 513
========= ========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

F-19
<PAGE>

ENSERCH EXPLORATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(JUNE 30, 1995 UNAUDITED)

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash.................................................. $ 4,125 $ 234
Accounts receivable--trade............................ 34,924 16,828
Accounts receivable--affiliated companies............. 18,603 11,581
Note receivable--affiliated company................... 86,077
Other................................................. 13,437 5,217
---------- ----------
Total current assets................................ 71,089 119,937
---------- ----------
Property, Plant and Equipment (at cost):
Gas and oil properties (full-cost method)............. 2,630,346 2,094,494
Other................................................. 13,863 15,582
---------- ----------
Total............................................... 2,644,209 2,110,076
Less accumulated depreciation and amortization........ 897,999 856,062
---------- ----------
Net property, plant and equipment................... 1,746,210 1,254,014
---------- ----------
Other Assets............................................ 24,038 7,284
---------- ----------
Total............................................... $1,841,337 $1,381,235
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable--trade............................... $ 73,024 $ 58,593
Accounts payable--affiliated companies................ 7,060
Temporary advances-affiliated companies (net)......... 39,136 105,469
Current portion of bank revolving credit agreement.... 300,000
Current portion of capital lease obligations.......... 4,760 4,760
Other................................................. 16,914 1,728
---------- ----------
Total current liabilities........................... 433,834 177,610
---------- ----------
Bank Revolving Credit Agreement......................... 50,000
---------- ----------
Capital Lease Obligations............................... 149,098 151,095
---------- ----------
Deferred Income Taxes................................... 289,798 284,299
---------- ----------
Other Liabilities....................................... 37,274 32,223
---------- ----------
Bridge Loan............................................. 150,000
---------- ----------
Common Shareholders' Equity
Common stock (200,000 shares authorized; 105,723 and
105,695 shares outstanding).......................... 105,723 105,695
Paid in capital....................................... 630,494 630,313
Retained earnings (deficit)........................... (4,538)
Unamortized restricted stock compensation............. (346)
---------- ----------
Common shareholders' equity......................... 731,333 736,008
---------- ----------
Total............................................... $1,841,337 $1,381,235
========== ==========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

F-20
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Prior to December 30, 1994, the operations of Enserch Exploration, Inc.
("EEX"), a corporation, were conducted through Enserch Exploration Partners,
Ltd. ("EP"), a partnership. EP was a publicly traded entity with published
financial statements. On December 30, 1994, through a series of transactions,
EEX (then a newly formed corporation) acquired all of the partnership interests
of EP Operating Limited Partnership ("EPO"), the 99% owned operating
partnership of EP, and EP received common stock of EEX. EPO was then merged
into EEX and thereafter EP was liquidated, and its partners received one share
of EEX common stock for each limited and general partnership interest held.
ENSERCH companies also received EP's interests in and assumed EP's obligations
under certain equipment lease arrangements (the equipment was simultaneously
subleased to EEX) and assumed approximately $395 million principal amount of
EP's indebtedness (including $86 million of debt owed by EP to EPO that did not
appear on EP's consolidated balance sheet), plus accrued interest.

2. On June 8, 1995, EEX acquired all the capital stock of DALEN Corporation for
cash of $340 million and refinanced DALEN's bank debt of $115 million. The
acquisition has been accounted for as a purchase. The acquired assets,
consisting principally of gas and oil properties, and the liabilities assumed
are being evaluated for purposes of assigning the purchase price. It is
anticipated that essentially all of the valuation adjustments will be assigned
to gas and oil properties.

EEX borrowed $350 million under a four-year revolving credit agreement (at an
interest rate based on LIBOR) to pay the purchase price and reduce advances
from ENSERCH by $10 million. In addition, EEX borrowed $150 million under a
bridge loan to repay DALEN's bank debt of $115 million and reduce advances from
ENSERCH by $35 million. A registration statement for a planned offering of
approximately 20 million shares of EEX common stock has been filed with the
Securities and Exchange Commission. The borrowing under the revolving credit
agreement will be reduced with the proceeds from the offering. Accordingly,
$300 million of the borrowing under the revolving credit agreement has been
classified as a current liability. The bridge loan was repaid on August 4, 1995
with the proceeds from a $150 million preferred stock offering by subsidiary of
EEX.

F-21
<PAGE>

ENSERCH EXPLORATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Following is a summary of pro forma results of operations of EEX assuming the
DALEN acquisition had occurred at the beginning of the periods presented:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------
1995 1994
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE)
<S> <C> <C>
Revenues................................................. $137,972 $174,300
Net Income (Loss)........................................ (14,873) 7,287
Net Income, Adjusted to Include Income Taxes on
Partnership Operations.................................. 3,670
Net Income (Loss) Per Share.............................. (.14) .03
</TABLE>

3. On August 4, 1995, a subsidiary ("Issuer"), whose common equity interests
are wholly-owned by another subsidiary of EEX, completed the private placement
of $150 million of adjustable rate redeemable preferred stock that is expected
to be redeemed by August 4, 2000. Issuer is a special purpose finance
subsidiary and has no independent operations. The proceeds were loaned, under a
Demand Note, by Issuer to its parent, a wholly-owned subsidiary of EEX
("Capital") that has no independent operations. Capital used the proceeds to
purchase $150 million of preferred stock from EEX, and EEX repaid the bridge
loan. The EEX preferred stock will be eliminated in EEX's consolidated
financial statements, and the Issuer's preferred stock will be reflected on the
balance sheet as "Company-obligated mandatorily redeemable preferred securities
of subsidiary." Dividend payments on the EEX preferred stock support the
interest payments due under the Demand Note loan agreement which, in turn,
support the dividend requirements of Issuer's preferred stock. EEX has
guaranteed Capital's obligations under the Demand Note. The dividend rate on
the Issuer's preferred stock, which is adjusted quarterly, approximates LIBOR
plus .625%.

4. At June 30, 1995, based on a preliminary allocation of the DALEN purchase
price, EEX's full cost ceiling amount attributable to the properties acquired
was approximately $42 million ($27 million after tax) less than the unamortized
cost of producing properties acquired. EEX believes that the DALEN properties
have significant exploration and development potential. EEX expects to be able
to utilize its expertise, particularly with respect to tight sands reservoirs,
to enhance production and cash flows from these properties because of the
geologic similarity and proximity of DALEN's major producing properties to
EEX's properties. EEX believes that the unamortized cost of the gas and oil
properties acquired in the DALEN acquisition is recoverable from future
production and was not in fact impaired at June 30, 1995. Accordingly, EEX did
not recognize a charge to earnings at June 30, 1995; however, if an excess
exists after a year of operation, a write-off may be required.

5. Earnings per share applicable to common stock are based on the weighted
average number of common shares outstanding during the period, including common
equivalent shares when dilutive.

6. Components of current liabilities in the December 1994 balance sheet have
been reclassified to conform to the 1995 presentation.

7. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results for the
interim periods included herein have been made.

F-22
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
DALEN Corporation:

We have audited the accompanying consolidated balance sheets of DALEN
Corporation (formerly DALEN Resources Corp.) and subsidiaries as of December
31, 1994 and 1993 (as restated, see note 1), and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DALEN Corporation and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.

As explained in Note 2 to the financial statements, effective January 1, 1993,
DALEN Corporation and subsidiaries adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Prior year financial
statements have not been restated.

Arthur Andersen LLP

Dallas, Texas
February 24, 1995

F-23
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(STATED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Natural gas.................................... $115,593 $152,488 $111,779
Oil and gas liquids............................ 51,054 73,852 82,003
Other.......................................... 2,341 5,144 5,822
-------- -------- --------
168,988 231,484 199,604
-------- -------- --------
OPERATING EXPENSES:
Lease operating................................ 43,533 56,367 52,389
General and administrative..................... 18,057 17,783 18,788
Depreciation, depletion and amortization....... 101,151 128,364 109,294
Exploration.................................... 24,886 19,453 25,278
-------- -------- --------
187,627 221,967 205,749
-------- -------- --------
OPERATING INCOME (LOSS).......................... (18,639) 9,517 (6,145)
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income................................ 3,656 1,360 1,848
Interest expense............................... (6,002) (7,255) (6,885)
Other, net..................................... 2,845 85 1,105
-------- -------- --------
499 (5,810) (3,932)
-------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE....................................... (18,140) 3,707 (10,077)
INCOME TAX BENEFIT (EXPENSE):
Current........................................ 21,859 18,997 25,656
Deferred....................................... (6,653) (13,153) (22,125)
-------- -------- --------
15,206 5,844 3,531
-------- -------- --------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.................. (2,934) 9,551 (6,546)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE....................................... -- 7,958 --
-------- -------- --------
NET EARNINGS (LOSS).............................. $ (2,934) $ 17,509 $ (6,546)
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-24
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1994 AND 1993
(STATED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents................................ $ 10,888 $ 48,117
Accounts receivable:
Oil and gas............................................. 20,009 29,934
Trade................................................... 6,030 5,537
Affiliates.............................................. 7,616 11,154
Inventories.............................................. 2,125 3,802
Prepaid expenses......................................... 3,635 6,310
-------- --------
Total current assets................................... 50,303 104,854
-------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties, based on successful efforts
method.................................................. 787,579 916,354
Other property and equipment............................. 6,671 5,808
-------- --------
794,250 922,162
Less: Accumulated depreciation, depletion and
amortization............................................ (362,548) (353,455)
-------- --------
Net property and equipment............................. 431,702 568,707
-------- --------
OTHER ASSETS............................................... 655 1,745
-------- --------
TOTAL ASSETS............................................... $482,660 $675,306
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable......................................... $ 15,394 $ 25,641
Interest payable......................................... 67 954
Accrued liabilities...................................... 10,998 12,937
-------- --------
Total current liabilities.............................. 26,459 39,532
-------- --------
DEFERRED INCOME TAXES...................................... 72,529 65,876
ABANDONMENT, DISMANTLEMENT AND OTHER LIABILITIES........... 13,864 15,156
LONG-TERM DEBT............................................. 115,000 130,000
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value, 1,000 shares authorized;
100 shares issued and outstanding....................... 1 1
Additional paid-in capital............................... 335,470 502,470
Accumulated deficit...................................... (80,663) (77,729)
-------- --------
Total stockholder's equity............................. 254,808 424,742
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................. $482,660 $675,306
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-25

<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
(STATED IN THOUSANDS OF DOLLARS, EXCEPT COMMON SHARES)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTALS
------ ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1992...... 100 $ 1 $ 637,470 $(88,692) $ 548,779
Dividends to Parent........... -- -- (135,000) -- (135,000)
Net loss...................... -- -- -- (6,546) (6,546)
--- --- --------- -------- ---------
BALANCE AT DECEMBER 31, 1992.... 100 1 502,470 (95,238) 407,233
Net earnings.................. -- -- -- 17,509 17,509
--- --- --------- -------- ---------
BALANCE AT DECEMBER 31, 1993.... 100 1 502,470 (77,729) 424,742
Dividends to Parent........... -- -- (167,000) -- (167,000)
Net loss...................... -- -- -- (2,934) (2,934)
--- --- --------- -------- ---------
BALANCE AT DECEMBER 31, 1994.... 100 $ 1 $ 335,470 $(80,663) $ 254,808
=== === ========= ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-26
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(STATED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
1994 1993 1992
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)........................... $ (2,934) $ 17,509 $ (6,546)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization.... 101,151 128,364 109,424
Surrendered leases and impairments.......... 9,461 9,344 12,983
Dry hole expense............................ 9,352 4,143 7,482
Deferred income taxes....................... 6,653 13,153 22,125
Loss (gain) on sale of assets............... (2,509) 146 (365)
Cumulative effect of change in accounting
principle.................................. -- (7,958) --
Other....................................... (769) (2,630) (737)
--------- -------- ---------
120,405 162,071 144,366
--------- -------- ---------
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.. 8,563 34,869 (13,141)
Decrease (increase) in prepaid expenses..... 2,534 54 (1,461)
Decrease in accounts payable................ (9,842) (11,985) (22,279)
Increase (decrease) in interest payable..... (887) (529) 556
Decrease in accrued liabilities and other... (3,629) (544) (4,183)
--------- -------- ---------
Net cash provided by operating activities.. 117,144 183,936 103,858
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........... (108,105) (94,442) (89,892)
Proceeds from sales of property and equipment. 135,732 1,540 1,907
Receivable related to acquisition............. -- -- 5,573
--------- -------- ---------
Net cash provided by (used in) investing
activities................................ 27,627 (92,902) (82,412)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to Parent........................... (167,000) -- (135,000)
Long-term debt borrowing...................... 15,000 -- 111,000
Repayment of long-term debt................... (30,000) (60,007) (6)
--------- -------- ---------
Net cash used in financing activities...... (182,000) (60,007) (24,006)
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (37,229) 31,027 (2,560)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR... 48,117 17,090 19,650
--------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR......... $ 10,888 $ 48,117 $ 17,090
========= ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-27
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1994 AND 1993

1. ORGANIZATION:

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of DALEN Corporation (formerly DALEN Resources Corp.) and its wholly-
owned subsidiaries (the "Company"). All significant intercompany balances and
transactions are eliminated in consolidation. The Company is a wholly-owned
subsidiary of PG&E Enterprises ("Parent"), which is 100% owned by Pacific Gas
and Electric Company ("PG&E"). The Company's primary business activity is the
exploration, development and production of natural gas and crude oil reserves
in the continental United States.

During 1994, the Parent determined that the Company did not fit within its
long-term corporate strategy. As a result, the Parent intends to sell its 100%
ownership interest in the Company through an initial public offering of the
Company's common stock or by other means. A registration statement was filed on
Form S-1 with the Securities and Exchange Commission during 1994 to effect the
disposition. The accompanying prior year financial statements were restated in
connection with the filing of the Form S-1, resulting in an increase in 1993
net earnings and stockholder's equity of $24.2 million.

2. ACCOUNTING POLICIES:

Property and Equipment

The Company uses the successful efforts method of accounting for oil and gas
properties. Under the successful efforts method, lease acquisition costs are
capitalized when incurred. Unproved leasehold costs are periodically assessed
on a property-by-property basis, and a loss is recognized when assessment
indicates a permanent impairment in value has occurred. Any remaining unproved
leasehold costs are charged to expense upon abandonment of the respective
leases.

Exploratory costs, excluding successful exploratory wells, are charged to
expense as incurred. Costs of drilling exploratory wells are initially
capitalized pending determination of whether the wells have found proved
reserves which justify commercial development. If proved reserves are not
found, the drilling costs are charged to expense. Costs applicable to
productive wells and development dry holes are capitalized and amortized on the
units-of-production method based on estimated proved reserve quantities.

The Company periodically reviews the carrying value of its proved oil and gas
properties for impairment in value on a company-wide basis by comparing
capitalized costs of proved oil and gas properties with undiscounted future net
cash flows, after income taxes. Under this policy, no impairment in carrying
value has been required during 1994, 1993, or 1992. However, in November 1993
the Financial Accounting Standards Board issued an exposure draft "Accounting
for the Impairment of Long-Lived Assets." Under this proposed standard, an
assessment of fair value of oil and gas properties will be required to be
performed using certain groupings of property costs. Fair value is to be
measured by market value, if an active market exists. If the market value is
not readily determinable, discounted future net cash flows, after income taxes,
are to be used to estimate fair value. The impact of adoption of this proposed
statement on the consolidated financial statements of the Company has not been
determined.

Other property and equipment are depreciated on a straight-line basis over
their estimated useful lives ranging from 5 to 20 years. Major renewals and
betterments, which improve or extend the life of the asset, are capitalized.
The costs of repairs and maintenance are charged to expense as incurred.

F-28
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Abandonment and Dismantlement Costs

Estimated abandonment and dismantlement costs of offshore wells and platforms
are accrued as liabilities on the units-of-production method based on estimated
proved reserves of the property. At December 31, 1994, total estimated future
abandonment and dismantlement costs associated with proved developed properties
were $11.3 million, of which $6.2 million was accrued.

Inventories

Inventories, consisting principally of equipment and oil field supplies, are
recorded at cost which approximates market value.

Gas Balancing Arrangements

The Company only recognizes revenue associated with volumes sold to which it is
entitled under respective property divisions of interest. Proceeds received for
natural gas volumes in excess of entitlements are deferred and recognized as
revenue when the gas is made up to the other interest owners. Accounts
receivable and payable resulting from gas balancing arrangements were not
significant at December 31, 1994 or 1993.

Hedging Transactions

The Company periodically enters into oil and natural gas hedging transactions
to minimize the risk of price decreases. Such hedging transactions also limit
revenues which might result from potential price increases. Under the hedging
transactions, the Company receives or makes payments based on the differential
between a specified price and the actual quote market price of oil and natural
gas. The Company does not use derivative financial instruments for trading
purposes.

Gains and losses resulting from hedging activities are recognized in the same
period that revenues on hedged volumes are recorded. Net gains (losses) of $2.4
million, ($8.9) million and ($12.8) million resulting from such transactions
are included in oil and natural gas revenues for the years ended December 31,
1994, 1993 and 1992, respectively. The Company had no open hedging positions at
December 31, 1994.

Income Taxes

The operations of the Company are ultimately included in the consolidated tax
return of PG&E. A tax-sharing agreement between PG&E and the Parent provides
that the Parent pay its proportionate share of state and federal income taxes
and that PG&E reimburse the Parent for related tax benefits to the extent
realized in the consolidated tax return. The Parent then allocates its
proportionate share of income taxes to the Company based on its contribution to
the consolidated tax liability or benefit.

Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"),
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statement or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates. The
cumulative effect of adopting SFAS No. 109 at January 1, 1993 resulted in an
increase in gas and oil properties and deferred income taxes of $22.0 million
and $14.0 million, respectively, and a cumulative gain of $8.0 million. The
financial statements for 1992 have not been restated.

Prior to 1993, the provision for income taxes was based on income and expenses
included in the consolidated statements of operations. Differences between
taxes computed on financial earnings and taxes currently payable under
applicable state and federal statutes and regulations were classified as
deferred taxes.

F-29
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The Company's financial
instruments are comprised of short-term investments, accounts receivable,
accounts payable and long-term debt. The carrying amount of the Company's
financial instruments approximate fair value because of the short maturity of
the instruments or because the interest rates of the instruments are based on
current market rates.

Statements of Cash Flows

For purposes of the statements of cash flows, the Company considers all highly
liquid cash investments with an original maturity of three months or less to be
cash equivalents.

Supplemental cash flow information is as follows (stated in thousands of
dollars):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Cash paid for interest during the year............... $ 6,889 $ 7,656 $ 6,329
======= ======= =======
Cash received from Parent for income tax benefit..... $25,196 $25,041 $14,433
======= ======= =======
</TABLE>

3. RELATED PARTY TRANSACTIONS:

The Company sells natural gas to PG&E and to other affiliates. These sales were
made on terms approximating spot market prices at the time of the transactions.
During 1994, 1993 and 1992, such sales totaled approximately $1.2 million, $1.7
million and $2.8 million, respectively.

The Company's employee benefit plans and insurance programs are administered or
combined with affiliated companies under the Parent's control. The Company has
paid its proportionate share of related costs (administration fees to third
parties and premiums) which approximates the cost of obtaining such programs
from non-affiliates.

PG&E and the Parent perform certain other administrative functions, including
cash management services, for the Company. Costs associated with such services
for 1994, 1993 and 1992 were not significant. At December 31, 1994 and 1993,
$8.9 million and $46.1 million, respectively, of the Company's cash was held by
PG&E, at the Company's option, for cash management purposes. The average
interest rate received by the Company on such cash investments was 4.9% in 1994
and 3.8% in 1993, which approximates market rates.

Accounts receivable from affiliates at December 31, 1994 and 1993 result
primarily from income tax benefits due from the Parent, and are liquidated upon
the filing of the annual consolidated tax return of PG&E. Other accounts
receivable and payable to affiliates resulting from the above activities are
liquidated by receipts and payments in the normal course of business.

4. LONG-TERM DEBT:

The Company's credit agreement (the "Agreement"), as amended February 22, 1995,
provides for a two-year revolving loan (expiring February 1997), which is
convertible at the Company's option, to a five year term loan. The revolving
loan may be extended annually by consent of the banks. The Agreement has a
maximum commitment from the banks of $200 million, with actual commitment
amounts potentially limited

F-30
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
by the periodic determination of a "Borrowing Base" (determined based on
discounted future net revenues expected from the Company's proved oil and gas
reserves, using various parameters set forth in the Agreement). The Borrowing
Base at December 31, 1994, was approximately $168.5 million, of which $115
million in loans was outstanding.

The Agreement, at the request of the banks, shall be secured by the Company's
interest in the Borrowing Base assets, including all related property and
equipment.

Interest on loans outstanding is based on the Agent Bank's Reference Rate, as
defined, or on the Agent Bank's CD Rate, or an adjusted Offshore Rate, and is
payable quarterly. At December 31, 1994, the interest rate in effect was 7.0%.
The Company is also required to pay certain fees in connection with the
facility, as well as comply with various covenants set forth in the Agreement.

The aggregate maturities of long-term debt outstanding as of December 31, 1994
are as follows (stated in thousands of dollars):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
<S> <C>
1995.......................... $ --
1996.......................... --
1997.......................... 23,000
1998.......................... 23,000
1999.......................... 23,000
Thereafter...................... 46,000
--------
$115,000
========
</TABLE>

5. INCOME TAXES:

The components of the income tax benefit (expense), before cumulative effect of
change in accounting principle, are as follows (stated in thousands of
dollars):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1993 1992
------- -------- --------
<S> <C> <C> <C>
Current income taxes:
Federal....................................... $19,368 $ 17,216 $ 21,982
State......................................... 2,491 1,781 3,674
------- -------- --------
21,859 18,997 25,656
------- -------- --------
Deferred income taxes:
Federal....................................... (5,455) (11,176) (18,619)
State......................................... (1,198) (1,977) (3,506)
------- -------- --------
(6,653) (13,153) (22,125)
------- -------- --------
Total income tax benefit........................ $15,206 $ 5,844 $ 3,531
======= ======== ========
</TABLE>

F-31
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A reconciliation of income tax benefit computed by applying the federal
statutory income tax rate to earnings (loss) before income taxes is as follows
(stated in thousands of dollars):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Expected federal tax benefit (expense) at
statutory rate................................... $ 6,349 $(1,297) $ 3,426
State tax benefit (expense)....................... 1,097 (224) 619
Section 29 tight sands gas tax credits............ 6,112 7,434 2,128
Permanent differences arising from acquisitions
and other........................................ 1,648 (69) (2,642)
------- ------- -------
Total income tax benefit.......................... $15,206 $ 5,844 $ 3,531
======= ======= =======
</TABLE>

The sources of deferred tax benefit (expense) and their tax effect are as
follows (stated in thousands of dollars):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Sale of gas and oil properties................ $ 16,498 $ -- $ --
Oil and gas property impairments.............. 4,782 2,250 5,694
Depreciation, depletion and amortization...... 1,779 13,079 1,392
Intangible drilling costs..................... (29,712) (28,482) (29,211)
-------- -------- --------
Total deferred income tax expense............. $ (6,653) $(13,153) $(22,125)
======== ======== ========
</TABLE>

The net deferred tax liability reflected in the Company's consolidated balance
sheet at December 31, 1994 and 1993 results primarily from temporary
differences in the treatment of costs of oil and gas properties for financial
and income tax reporting purposes.

6. OVERRIDING ROYALTY INTEREST:

The Company's interest in certain gas properties acquired in 1991 is subject to
a previously existing undivided overriding royalty interest ("ORRI") held by an
unaffiliated party. The ORRI entitles the holder to receive natural gas
production (aggregating 4.0 Bcf at December 31, 1994) through March 1996,
subject to various daily and annual limitations. Shortfalls in production from
the wells subject to the ORRI must be made up by the Company with production
from other properties or through purchases on the spot market. At December 31,
1994, $1.6 million in accrued liabilities has been provided for future lease
operating expenses on the subject properties and for potential production
shortfalls.

7. EMPLOYEE BENEFIT PLAN:

The Company participates in a 401(k) savings plan ("Plan") sponsored by the
Parent. Under the Plan, eligible employees are permitted to defer receipt of up
to 7% of their compensation (subject to certain limitations by the Internal
Revenue Code of 1986, as amended). After one year of service, the Company will
contribute an amount equal to 5% of an employee's salary into the Plan, and the
Company will match employee contributions on a 100% basis, up to 5% of the
employee's salary. Amounts held under the Plan are invested among various
investment funds at the direction of the individual employee. Employee
contributions are 100% vested at the date of contribution. Company
contributions are vested 100% after five years of employment. For the years
ended December 31, 1994, 1993 and 1992, the Company expensed $1.1 million, $1.2
million and $1.2 million, respectively, for contributions made under the Plan.

F-32
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. MAJOR CUSTOMERS:

The Company markets its oil and gas production to numerous purchasers under a
combination of short and long-term contracts. One customer accounted for 11.1%
of the Company's consolidated revenues in 1993. There were no individual
customers which accounted for more than 10% of total revenues in 1994 or 1992.
Management believes that the loss of any major customers would not have a
material adverse effect on the Company due to the availability of other
purchasers for the Company's production.

9. COMMITMENTS AND CONTINGENCIES:

The Company leases office space under noncancelable leases, which extend
through 2002. In addition, certain office space no longer in use is being
subleased.

The future minimum rental payments required under the leases, net of sublease
income, are as follows (stated in thousands of dollars):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ -------
<S> <C>
1995............................... $ 1,990
1996............................... 2,075
1997............................... 1,998
1998............................... 1,703
1999............................... 1,479
Thereafter........................... 3,822
-------
$13,067
=======
</TABLE>

The Company has established a $1.9 million reserve as of December 31, 1994 for
rent payments on office space no longer in use. The reserve is net of expected
sublease proceeds of $2.5 million under sublease agreements currently in
effect.

The Company has sublet certain of the unused office space to PG&E for which
payments received aggregated $.4 million for each of the three years in the
period ended December 31, 1994. As of December 31, 1994, future sublease
payments from PG&E are expected to aggregate $1.5 million through 1998.

The Company has entered into an agreement to acquire 3-D seismic data in 1995
and 1996 for payments aggregating $3.9 million.

The Company's revenues are derived principally from uncollateralized sales to
customers in the oil and gas industry. The concentration of credit risk in a
single industry affects the Company's overall exposure to credit risk because
customers may be similarly affected by changes in economic and other
conditions. The Company has not experienced significant credit losses on such
receivables.

The Company is directly or indirectly involved in various pending lawsuits and
claims. Reserves for lawsuits and claims are provided for when a loss is
determined to be probable and the amount can be reasonably estimated. In the
opinion of management, the ultimate outcome of such claims will not have a
material impact on the results of operations of the Company.

F-33
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OIL AND GAS PROPERTIES:

The following table sets forth certain information with respect to costs
incurred in connection with the Company's oil and gas producing activities
(stated in thousands of dollars):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
-------- ------- --------
<S> <C> <C> <C>
Property acquisitions:
Proved........................................... $ 14,119 $ 1,001 $ 14,308
Unproved......................................... 23,477 4,944 3,665
Development costs.................................. 49,050 76,099 70,771
Exploratory costs.................................. 26,921 9,653 11,263
-------- ------- --------
$113,567 $91,697 $100,007
======== ======= ========
</TABLE>

Capitalized costs for oil and gas properties are as follows (stated in
thousands of dollars):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Oil and gas properties:
Proved............................................... $ 739,361 $ 880,198
Unproved............................................. 48,218 36,156
--------- ---------
787,579 916,354
Accumulated depreciation, depletion and amortization... (359,331) (351,105)
--------- ---------
$ 428,248 $ 565,249
========= =========
</TABLE>

In the third quarter of 1994, the Company sold certain oil and gas properties
(the "Non-Strategic Properties") that did not fit within the Company's current
business strategy. The Company sold the Non-Strategic Properties, which had a
net book value of $131.7 million, to unrelated third parties for $134.0 million
in cash, resulting in a pre-tax gain of $2.3 million, which is included in
other income in the accompanying consolidated statement of operations.

In October and November 1994, the Company acquired producing and non-producing
oil and gas properties located in Louisiana, Texas and offshore Gulf of Mexico
for approximately $28.1 million in cash.

11. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED):

The estimates of proved oil and gas reserves utilized in the preparation of the
consolidated financial statements were prepared by independent petroleum
engineers at December 31, 1994. Such estimates are in accordance with
guidelines established by the Securities and Exchange Commission and the
Financial Accounting Standards Board, which require that reserve reports be
prepared under existing economic and operating conditions with no provision for
price and cost escalations except by contractual arrangements. All of the
Company's reserves are located in the United States.

The Company emphasizes that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current information
becomes available. In addition, a portion of the Company's proved reserves is
undeveloped, which increases the imprecision inherent in estimating reserves
which may ultimately be produced.

F-34
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Proved oil and gas reserve information, together with the changes therein, are
as follows (oil in MBbls, gas in MMcf):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1993 1992
--------------- --------------- ---------------
OIL GAS OIL GAS OIL GAS
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year......... 20,074 364,181 23,861 414,099 23,255 406,332
Revisions................. (25) (27,253) (740) (15,631) 3,257 (11,110)
Extensions and
discoveries.............. 3,960 80,850 1,582 39,644 1,633 71,300
Purchases and minerals-in-
place.................... 557 12,529 74 2,656 433 16,900
Sales of minerals-in-
place.................... (9,346) (62,722) -- -- -- --
Production................ (3,525) (60,223) (4,703) (76,587) (4,717) (69,323)
------ ------- ------ ------- ------ -------
End of year............... 11,695 307,362 20,074 364,181 23,861 414,099
====== ======= ====== ======= ====== =======
Proved developed reserves:
Beginning of year......... 17,508 335,476 21,670 390,830 19,944 352,285
====== ======= ====== ======= ====== =======
End of year............... 11,134 262,819 17,508 335,476 21,670 390,830
====== ======= ====== ======= ====== =======
</TABLE>

The standardized measure of discounted future net cash flows relating to proved
reserves is as follows (stated in thousands of dollars):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
--------- ---------- ----------
<S> <C> <C> <C>
Future cash inflows...................... $ 651,143 $1,073,395 $1,322,489
Future costs:
Production............................. (185,726) (313,606) (335,634)
Development............................ (45,437) (42,604) (41,961)
Income taxes........................... (74,250) (111,229) (186,259)
--------- ---------- ----------
Future net cash flows.................... 345,730 605,956 758,635
10% discount factor...................... (83,691) (156,009) (204,473)
--------- ---------- ----------
Standardized measure of discounted future
net cash flows.......................... $ 262,039 $ 449,947 $ 554,162
========= ========== ==========
</TABLE>

F-35
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
Changes in the standardized measure of discounted future net cash flows
relating to proved reserves are as follows (stated in thousands of dollars):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Standardized measure, beginning of year.. $ 449,947 $ 554,162 $ 531,868
Net changes in sales prices, net of
production costs........................ (105,808) (64,251) 59,647
Revisions of quantity estimates.......... (22,467) (21,132) 10,585
Changes in future development costs,
including development costs incurred.... 12,722 8,155 15,504
Accretion of discount.................... 47,490 62,254 56,310
Extension and discoveries................ 69,331 44,267 91,800
Purchases of minerals-in-place........... 12,848 1,814 19,695
Sales of minerals-in-place............... (82,300)
Sales, net of production costs........... (121,457) (180,775) (156,480)
Net change in income taxes............... 679 43,429 (37,149)
Changes in timing and other.............. 1,054 2,024 (37,618)
--------- --------- ---------
Standardized measure, end of year........ $ 262,039 $ 449,947 $ 554,162
========= ========= =========
</TABLE>

F-36
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
(STATED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1995 1994
------- -------
<S> <C> <C>
REVENUES:
Natural gas................................................. $19,140 $38,516
Oil and gas liquids......................................... 9,658 13,611
Other....................................................... 69 885
------- -------
28,867 53,012
------- -------
OPERATING EXPENSES:
Lease operating............................................. 8,536 13,689
General and administrative.................................. 4,280 4,761
Depreciation, depletion and amortization.................... 19,603 28,889
Exploration................................................. 2,695 3,770
------- -------
35,114 51,109
------- -------
OPERATING INCOME (LOSS)....................................... (6,247) 1,903
------- -------
OTHER INCOME (EXPENSE)
Interest expense............................................ (2,119) (1,392)
Interest income............................................. 155 525
Other, net.................................................. 144 140
------- -------
(1,820) (727)
------- -------
EARNINGS (LOSS) BEFORE TAXES.................................. (8,067) 1,176
INCOME TAX BENEFIT (EXPENSE):
Current..................................................... 5,727 5,439
Deferred.................................................... (1,316) (4,574)
------- -------
4,411 865
------- -------
NET EARNINGS (LOSS)........................................... $(3,656) $ 2,041
======= =======
</TABLE>

F-37
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
(STATED IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 5,653 $ 10,888
Accounts receivable
Oil and gas.......................................... 11,875 20,009
Trade................................................ 6,798 6,030
Affiliates........................................... 14,708 7,616
Inventories........................................... 1,876 2,125
Prepaid expenses...................................... 2,437 3,635
--------- ---------
Total current assets............................... 43,347 50,303
--------- ---------
PROPERTY AND EQUIPMENT
Oil and gas properties, based on successful efforts
method.............................................. 802,337 787,579
Other property and equipment......................... 6,700 6,671
--------- ---------
809,037 794,250
Less: Accumulated depreciation, depletion and
amortization........................................ (381,754) (362,548)
--------- ---------
Net property and equipment.......................... 427,283 431,702
--------- ---------
OTHER ASSETS........................................... 540 655
--------- ---------
TOTAL ASSETS........................................... $ 471,170 $ 482,660
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 11,954 $ 15,394
Interest payable..................................... 65 67
Accrued liabilities.................................. 10,190 10,998
--------- ---------
Total current liabilities.......................... 22,209 26,459
--------- ---------
DEFERRED INCOME TAXES.................................. 73,845 72,529
ABANDONMENT, DISMANTLEMENT AND OTHER LIABILITIES....... 8,964 13,864
LONG-TERM DEBT......................................... 115,000 115,000
STOCKHOLDER'S EQUITY
Common stock......................................... 1 1
Additional paid-in capital........................... 335,470 335,470
Accumulated deficit.................................. (84,319) (80,663)
--------- ---------
Total stockholder's equity......................... 251,152 254,808
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............. $ 471,170 $ 482,660
========= =========
</TABLE>

F-38
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(STATED IN THOUSANDS DOLLARS)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)....................................... $ (3,656) $ 2,041
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion and amortization................. 19,603 28,889
Deferred income taxes.................................... 1,316 4,574
Dry hole expense......................................... 933 952
Surrendered leases and other impairments................. 584 1,381
Loss (gain) on sale of assets............................ (3) (10)
Other.................................................... (1,309) (532)
-------- --------
17,468 37,295
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable............... (3,540) 5,211
Decrease in prepaid expenses............................. 1,198 798
Increase (decrease) in accounts payable.................. (3,413) 170
Decrease in interest payable............................. (2) (30)
Decrease in accrued liabilities and other................ (559) (4,360)
-------- --------
Net cash provided by operating activities.............. 11,152 39,084
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (16,350) (12,358)
Decrease in drilling well accrual......................... (60) (1,576)
Proceeds from sale of property and equipment.............. 23 207
-------- --------
Net cash used in investing activities.................. (16,387) (13,727)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... (5,235) 25,357
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 10,888 48,117
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 5,653 $ 73,474
======== ========
</TABLE>

F-39
<PAGE>

DALEN CORPORATION AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

1. The accompanying consolidated financial statements of DALEN Corporation and
Subsidiaries (the "Company") have not been audited by independent public
accountants. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of
operations for the interim periods included herein have been made. Certain
information and footnote disclosures normally included in the consolidated
financial statements have been omitted. These consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto included elsewhere herein.

2. In April 1995, Enserch Exploration, Inc., 99.2% owned by ENSERCH, entered
into a definitive agreement to acquire 100% of the capital stock of the Company
for $340 million plus the assumption of $115 million of bank debt.

3. In the third quarter of 1994, the Company sold certain oil and gas
properties that did not fit within the Company's current business strategy. The
Company sold the properties, which had a net book value of $131.7 million, to
unrelated third parties for $134.0 million in cash, resulting in a pre-tax gain
of $2.3 million. As a result of the sale, operating results for the three
months ended March 31, 1995 are not comparable to the three months ended March
31, 1994.

F-40
<PAGE>

[LOGO OF ENSERCH EXPLORATION INC. APPEARS HERE]

<PAGE>

PROSPECTUS

20,000,000 Shares

[LOGO OF ENSERCH EXPLORATION INC. APPEARS HERE]

COMMON STOCK

---------------

ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
OF THE 20,000,000 SHARES OF COMMON STOCK BEING OFFERED, 4,000,000 SHARES ARE
BEING OFFERED FOR SALE OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 16,000,000 SHARES ARE BEING OFFERED CONCURRENTLY
FOR SALE IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE
"UNDERWRITERS." THE COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER
THE SYMBOL "EEX." ON SEPTEMBER 20, 1995, THE REPORTED LAST SALE PRICE OF THE
COMMON STOCK ON THE NEW YORK STOCK EXCHANGE WAS $12 PER SHARE. PRIOR TO THIS
OFFERING, HOWEVER, ONLY A LIMITED NUMBER OF SHARES HAVE TRADED PUBLICLY. FOR A
DISCUSSION OF THE FACTORS CONSIDERED IN DETERMINING THE PRICE OF THE COMMON
STOCK IN THIS OFFERING SEE "UNDERWRITERS."

---------------

SEE "RISK FACTORS" ON PAGE 7 FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.

---------------

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. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

---------------

PRICE $11 A SHARE

---------------

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
-------- --------------- -----------
<S> <C> <C> <C>
Per Share................... $11.00 $.55 $10.45
Total(3).................... $220,000,000 $11,000,000 $209,000,000
</TABLE>
-------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at
$1,250,000.
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
3,000,000 additional shares of Common Stock at the price to public less
underwriting discounts and commissions for the purpose of covering over-
allotments, if any. If the U.S. Underwriters exercise such option in
full, the total price to public, underwriting discounts and commissions
and proceeds to Company will be $253,000,000, $12,650,000 and
$240,350,000, respectively. See "Underwriters."

---------------

The shares of Common Stock are offered, subject to prior sale, when, as and
if accepted by the Underwriters named herein and subject to approval of
certain legal matters by Davis Polk & Wardwell, counsel for the Underwriters.
It is expected that delivery of the shares of Common Stock will be made on or
about September 26, 1995 at the office of Morgan Stanley & Co. Incorporated,
New York, N.Y., against payment therefor in New York funds.

---------------

MORGAN STANLEY & CO.
International

HOWARD, WEIL, LABOUISSE, FRIEDRICHS
Incorporated

SBC WARBURG
A DIVISION OF SWISS BANK CORPORATION

SMITH BARNEY INC.

UBS LIMITED

September 20, 1995