SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1995 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
___________ TO ___________
Commission file number 1-11413
ENSERCH EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2556975
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4849 Greenville Avenue, Suite 1200 Dallas, Texas 75206
(Address of principal executive offices) (Zip Code)
214-369-7893
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such shorter
period that the Registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Number of Shares of Common Stock of Registrant outstanding as of
November 9, 1995: 125,874,160.
<PAGE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENSERCH EXPLORATION, INC.
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
1995 1994 1995 1994
--------- ------- -------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Revenues
Natural gas . . . . . . . . . . . . . . . . . $ 46,817 $ 33,438 $113,825 $111,855
Oil and condensate. . . . . . . . . . . . . . 17,020 7,447 37,697 23,190
Natural gas liquids . . . . . . . . . . . . . 1,425 490 3,120 1,331
Other . . . . . . . . . . . . . . . . . . . . 1,545 51 1,813 260
-------- -------- ------- --------
Total. . . . . . . . . . . . . . . . . . 66,807 41,426 156,455 136,636
-------- -------- ------- --------
Costs and Expenses
Production and operating. . . . . . . . . . . 12,897 7,658 32,440 23,270
Exploration . . . . . . . . . . . . . . . . . 3,491 2,424 8,965 6,958
Depreciation and amortization . . . . . . . . 34,983 19,128 81,530 60,058
General, administrative and other . . . . . . 6,965 6,058 21,708 14,002
Taxes, other than income. . . . . . . . . . . 5,527 3,099 13,273 9,872
-------- -------- ------- -------
Total. . . . . . . . . . . . . . . . . . 63,863 38,367 157,916 114,160
-------- -------- ------- -------
Operating Income (Loss) . . . . . . . . . . . . 2,944 3,059 (1,461) 22,476
Other Income (Expense) - Net. . . . . . . . . . 138 9 135 26
Interest Income . . . . . . . . . . . . . . . . 42 1,026 230
Interest and Other Financing Costs. . . . . . . 7,698 5,397 11,297 15,282
-------- -------- ------- -------
Income (Loss) Before Income Taxes . . . . . . . (4,616) (2,287) (11,597) 7,450
Income Tax Benefit. . . . . . . . . . . . . . . (2,005) (98) (4,448) (296)
-------- -------- ------- -------
Net Income (Loss) . . . . . . . . . . . . . . . $ (2,611) $ (2,189) $ (7,149) $ 7,746
======== ======== ======= =======
Pro Forma Information
Income (loss) before income taxes . . . . . . $ (2,287) $ 7,450
Income taxes (benefit) (including income taxes
on partnership operations). . . . . . . . . . (813) 2,606
------- ------
Net Income (Loss) . . . . . . . . . . . . . . . $ (1,474) $ 4,844
======= =======
Net Income (Loss) Per Share (Pro forma
for the three months and nine months
ended September 30, 1994) . . . . . . . . . . $ (.02) $ (.01) $ (.07) $ .05
======= ======= ======= =======
Weighted Average Shares Outstanding . . . . . . 106,909 105,821 106,188 105,821
======= ======= ======= =======
<FN>
See accompanying Notes.
</TABLE>
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<PAGE>
<PAGE>
<TABLE>
ENSERCH EXPLORATION, INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<CAPTION>
Nine Months Ended
September 30
---------------------
1995 1994
-------- -------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,149) $ 7,746
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 81,530 60,058
Deferred income-tax benefit . . . . . . . . . . . . . . . . . . . . . . (6,626) (27)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,669) (11,746)
Changes in current operating assets and liabilities
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . (972) 5,825
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . (4,012) (595)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 20,416 12,015
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . 6,127 2,546
--------- ---------
Net cash flows from operating activities. . . . . . . . . . . . . . 80,645 75,822
--------- ---------
INVESTING ACTIVITIES
Purchase of DALEN, net of cash acquired . . . . . . . . . . . . . . . . (332,888)
Additions to property, plant and equipment. . . . . . . . . . . . . . . (140,111) (93,038)
Retirements of property, plant and equipment. . . . . . . . . . . . . . 28,157 4,315
Collection of note receivable from affiliated company . . . . . . . . . 86,077
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,722) 1,280
--------- ---------
Net cash flows used for investing activities. . . . . . . . . . . . (374,487) (87,443)
--------- ---------
FINANCING ACTIVITIES
Borrowings under bank revolving credit agreement. . . . . . . . . . . . 350,000
Borrowings under bridge loan. . . . . . . . . . . . . . . . . . . . . . 150,000
Repayment of DALEN bank debt assumed at acquisition . . . . . . . . . . (115,000)
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . 207,898
Repayment of borrowings under bank revolving credit agreement . . . . . (210,000)
Issuance of company-obligated mandatorily redeemable preferred
securities of subsidiary. . . . . . . . . . . . . . . . . . . . . . . 150,000
Repayment of borrowings under bridge loan . . . . . . . . . . . . . . . (150,000)
Proceeds from long-term notes payable to affiliated companies . . . . . 10,138
Change in temporary advances with affiliated companies. . . . . . . . . (81,115) 31,192
Payments of capital lease obligations . . . . . . . . . . . . . . . . . (3,340)
Decrease in advances under leasing arrangements . . . . . . . . . . . . (19,471)
Cash distributions paid . . . . . . . . . . . . . . . . . . . . . . . . (7,843)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,486)
--------- --------
Net cash flows from financing activities. . . . . . . . . . . . . . 294,957 14,016
--------- --------
Net Increase in Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,115 2,395
Cash at Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . 234 343
--------- --------
Cash at End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,349 $ 2,738
========= ========
<FN>
See accompanying Notes.
</TABLE>
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<PAGE>
<PAGE>
<TABLE>
ENSERCH EXPLORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(September 30, 1995 Unaudited)
<CAPTION>
September 30 December 31
1995 1994
------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,349 $ 234
Accounts receivable-trade. . . . . . . . . . . . . . . . . . . . . . 35,364 16,828
Accounts receivable-affiliated companies . . . . . . . . . . . . . . 9,862 11,581
Note receivable - affiliated company . . . . . . . . . . . . . . . . 86,077
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,847 5,217
--------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 59,422 119,937
--------- ----------
Property, Plant and Equipment (at cost)
Gas and oil properties (full-cost method). . . . . . . . . . . . . . 2,599,507 2,094,494
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,922 15,582
---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,613,429 2,110,076
Less accumulated depreciation and amortization . . . . . . . . . . . 930,978 856,062
---------- ----------
Net property, plant and equipment. . . . . . . . . . . . . . . . 1,682,451 1,254,014
---------- ----------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,159 7,284
---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,764,032 $1,381,235
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable-trade . . . . . . . . . . . . . . . . . . . . . . . $ 72,676 $ 58,593
Accounts payable-affiliated companies. . . . . . . . . . . . . . . . 8,416 7,060
Temporary advances-affiliated companies (net) . . . . . . . . . . . 24,354 105,469
Current portion of capital lease obligations . . . . . . . . . . . . 3,859 4,760
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,522 1,728
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 126,827 177,610
---------- ----------
Bank Revolving Credit Agreement. . . . . . . . . . . . . . . . . . . . 140,000
---------- ----------
Capital Lease Obligations. . . . . . . . . . . . . . . . . . . . . . . 95,268 151,095
---------- ----------
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 277,757 284,299
---------- ----------
Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 40,161 32,223
---------- ----------
Company-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
---------- ----------
Preferred Stock-authorized 2,000 shares, issued to subsidiary 15 shares
eliminated in consolidation. . . . . . . . . . . . . . . . . . . . .
---------- ----------
Common Shareholders' Equity
Common stock (200,000 shares authorized;
125,876 and 105,821 shares outstanding). . . . . . . . . . . . . . 125,876 105,821
Paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . 815,790 630,187
Retained earnings (deficit). . . . . . . . . . . . . . . . . . . . . (7,149)
Unamortized restricted stock compensation. . . . . . . . . . . . . . (498)
---------- ----------
Common shareholders' equity. . . . . . . . . . . . . . . . . . . 934,019 736,008
---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,764,032 $1,381,235
========== ==========
<FN>
See accompanying Notes.
</TABLE>
-3-
<PAGE>
<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.
In 1995, EEX acquired the international gas and oil operations of ENSERCH
in exchange for 1,240,000 shares of EEX Common Stock and $2.6 million in
cash 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. Actual net proceeds per share of $10.45 received by EEX in the
September 1995 public offering was used to determine the value of the
shares issued to acquire the international operations.
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. Average shares outstanding have
been restated to include the shares issued to acquire the international gas
and oil operations.
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.
-4-
<PAGE>
<PAGE>
2. On June 8, 1995, EEX acquired all the capital stock of DALEN Corporation
for cash of $340 million and assumed DALEN's bank debt of $115 million.
The acquisition has been accounted for as a purchase. The assets acquired
and the liabilities assumed were recorded at their fair value, and
essentially all of the valuation adjustment was assigned to gas and oil
properties.
Following is a summary of pro forma results of operations of EEX assuming
the DALEN acquisition had occurred at the beginning of the periods
presented:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------------
1995 1994
---------- -----------
(In thousands, except per share)
<S> <C> <C>
Revenues $204,779 $250,049
Net Income (Loss) (17,484) 1,626
Net Loss After Pro Forma
Income Taxes on Partnership
Operations (1,276)
Net Loss Per Share (.16) (.01)
</TABLE>
EEX borrowed $350 million under a four-year revolving credit agreement (at
a floating interest rate) 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. In September 1995, the borrowing under the revolving credit
agreement was reduced to $140 million, mostly with the net proceeds of $208
million received from the public offering of 20 million shares of EEX
common stock. The bridge loan was repaid in August 1995 with the proceeds
from the issuance of securities described in Note 3.
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 mandatorily redeemable
preferred securities. 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 securities from EEX, and EEX repaid the bridge
loan. The EEX preferred securities are eliminated in EEX's consolidated
financial statements, and the Issuer's preferred securities are reflected
on the balance sheet as "Company-obligated mandatorily redeemable preferred
securities of subsidiary." Dividend payments on the EEX preferred
securities support the interest payments due under the Demand Note loan
agreement which, in turn, support the dividend requirements of Issuer's
preferred securities. The dividends on the subsidiary preferred securities
are reflected in interest and other financing costs in the statement of
consolidated income. EEX has guaranteed Capital's obligations under the
Demand Note.
-5-
<PAGE>
<PAGE>
4. On September 26, 1995, EEX sold 20 million shares of its common stock to
the public for net proceeds of approximately $208 million after expenses,
and ENSERCH's ownership percentage was reduced from 99.2% to 83.4%.
5. At September 30, 1995, EEX's full cost ceiling amount attributable to the
properties acquired in the DALEN acquisition was approximately $112 million
($73 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 September 30, 1995.
EEX requested and was granted a waiver of the full cost ceiling limitation
on these properties by the Securities and Exchange Commission through June
30, 1996. If an excess exists after that date, a write-off may be
required. The full cost ceiling surplus on EEX's other gas and oil
properties at September 30, 1995 was approximately $68 million ($44 million
after tax).
6. 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.
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. Components of current
liabilities in the December 1994 balance sheet have been reclassified to
conform to the 1995 presentation.
-6-
<PAGE>
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Enserch Exploration, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Enserch Exploration, Inc. as of September 30, 1995, the related condensed
statements of consolidated income for the three months and nine months
ended September 30, 1995 and 1994, and the condensed statements of
consolidated cash flows for the nine months ended September 30, 1995 and 1994.
These financial statements are the responsibility of the Company's management.
The consolidated financial statements give retroactive effect to the
transactions, which have been accounted for in a manner similar to a pooling-
of-interests, as described in Note 1 of the Notes to Condensed Consolidated
Financial Statements.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Enserch Exploration, Inc., as of
December 31, 1994, and the related consolidated statements of income, cash
flows and common shareholders' equity for the year then ended prior to
restatement for the transactions described in Note 1 of the Notes to Condensed
Consolidated Financial Statements (not presented herein); and in our report
dated February 10, 1995, we expressed an unqualified opinion on those
consolidated financial statements. We also audited the adjustments that were
applied to restate the December 31, 1994 consolidated balance sheet of Enserch
Exploration, Inc. In our opinion, such adjustments are appropriate and have
been properly applied and the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1994, is fairly stated
in all material respects, in relation to the restated consolidated balance
sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 30, 1995
-7-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
REORGANIZATION
On December 30, 1994, through a series of transactions, Enserch Exploration,
Inc. (EEX) acquired all of the partnership interests of EP Operating Limited
Partnership (EPO), the 99% owned operating partnership of Enserch Exploration
Partners, Ltd. (EP). In connection with these transactions, ENSERCH
Corporation (ENSERCH) companies received EP's interest in and assumed EP's
obligations under certain equipment lease arrangements (the equipment was
simultaneously subleased to EEX) and assumed approximately $395 million of
EP's debt. In 1995, EEX acquired the international gas and oil operations
and the SACROC operations of ENSERCH. 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.
The following presents net income of EEX for the three years ended
December 31, 1992, 1993 and 1994 and the nine months ended September 30, 1994
adjusted for (1) the interest on the debt assumed by ENSERCH companies and
related income-tax expense and (2) income-tax expense on partnership
operations.
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31 September 30
-------------------------------------- ------------
1992 1993 1994 1994
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Net income (loss) as shown on EEX's
statements of consolidated income $(18,623) $(9,960) $11,801 $ 7,746
Interest expense included in statements
of consolidated income on debt
assumed by ENSERCH companies 20,650 24,825 20,919 15,282
Income-tax benefit (expense) on:
Partnership operations 6,869 1,268 (4,324) (2,902)
Interest expense on debt assumed by
ENSERCH companies (7,021) (8,689) (7,322) (5,349)
-------- ------- ------- -------
Net income, as adjusted $ 1,875 $ 7,444 $21,074 $14,777
======== ======= ======= =======
</TABLE>
DALEN ACQUISITION
On June 8, 1995, EEX acquired for cash of $340 million all of the capital
stock of DALEN Corporation (DALEN) and assumed DALEN's bank debt of
$115 million. The acquisition of DALEN achieves the goals of increasing
reserves and lowering average reserve life. The "purchase" method was used
to account for the DALEN acquisition; therefore, EEX's results include the
results of operations of DALEN from the date of acquisition.
-8-
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
Operating results for the 1995 third quarter and the first nine months of
1995 were favorably impacted by the acquisition of DALEN. However, a
significant reduction in natural-gas sales prices, which was partially offset
by an improvement in prices for oil, caused an overall decline from results
for the comparable periods of 1994. The table of Operating Data on page 14
provides revenue statistics and other information, including contributions by
DALEN. Borrowings associated with the acquisition of DALEN were principally
responsible for interest expense and other financing costs incurred in the
third quarter and year-to-date periods.
Quarters Ended September 30, 1995 and 1994
EEX had a net loss of $2.6 million ($.02 per share) for the third quarter of
1995, compared with a 1994 third-quarter net loss of $1.5 million ($.01 per
share) after adjustment for income taxes on partnership operations.
Operating income for the 1995 third quarter was $2.9 million, compared with
$3.1 million for the like period a year ago. DALEN operations contributed
operating income of $1.9 million, increasing revenues by $29.5 million and
operating expenses by $27.6 million.
The following comparison of period-to-period operating results excludes the
impact of DALEN. Operating income was $2.1 million below the third quarter
of 1994. Revenues were down $4.1 million (10%) from the prior third quarter
due to both lower natural-gas prices and sales volumes, partially offset by
improved prices and sales volumes for oil. Operating expenses for the third
quarter were $2.0 million (6%) lower than in the 1994 third quarter.
Production and operating costs were down $.9 million, which benefited from a
$1.0 million credit to business insurance expense resulting from favorable
experience for prior years' injuries and damages claims. Exploration
expenses increased $.6 million principally due to higher international
exploration activity. Depreciation and amortization (D&A) for the 1995 third
quarter decreased $1.3 million, and general and administrative (G&A) costs
decreased $.5 million from the prior third quarter.
Interest and other financing costs increased from $5.4 million in the 1994
period to $7.7 million in the 1995 period. The 1995 costs are associated
with the DALEN acquisition, while the 1994 interest relates to debt assumed
by ENSERCH companies in connection with the reorganization.
Nine Months Ended September 30, 1995 and 1994
For the first nine months of 1995, EEX had a net loss of $7.1 million
($.07 per share), compared with net income in the 1994 period of $4.8 million
($.05 per share) after adjustment for income taxes on partnership operations.
The operating loss for the first nine months was $1.5 million versus income
of $22.5 million for the 1994 period. DALEN contributed operating income of
$2.0 million, increasing revenues by $40.2 million and operating expenses by
$38.2 million.
-9-
<PAGE>
<PAGE>
Excluding the impact of DALEN, operating income for the first nine months of
1995 was $26 million lower than in the 1994 period. Revenues decreased
$20 million (15%) due to significantly lower prices and sales volumes for
natural gas, partially offset by improved prices and sales volumes for oil.
Operating expenses for the nine months were $5.6 million (5%) higher than in
the year-ago period. Production and operating expenses were up $1.4 million
from the 1994 period, with higher maintenance costs partially offset by a
$1.0 million credit to business insurance expense resulting from favorable
experience for prior years' injuries and damages claims. Exploration
expenses were $1.6 million higher than in the 1994 period due to increased
international exploration activity. D&A was down $1.7 million from the 1994
period due to a lower level of production. On a per unit basis, D&A
increased from $.98 per thousand cubic feet of natural gas equivalent (Mcfe)
to $1.03 per Mcfe, principally due to capitalized costs related to the
conversion of operating leases to capital leases. G&A expenses increased
$4.4 million from the 1994 period, with 1995 expenses including an overall
$1.5 million addition to the provision for the uninsured portion of injuries
and damages claims versus a $2.0 million reduction in such provisions in the
1994 period.
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, which was repaid in early 1995. Interest and other
financing costs decreased from $15.3 million in the 1994 period to
$11.3 million in 1995. The 1995 costs are associated with the DALEN
acquisition, while the 1994 interest related to debt assumed by ENSERCH
companies in connection with the reorganization.
HEDGING ACTIVITIES
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. The table below summarizes the
impact of hedging activities on revenues and average sales prices for the
third quarter and nine months of 1995 and 1994.
<TABLE>
<CAPTION>
Third Quarter Nine Months
---------------- ---------------
1995 1994 1995 1994
---- ----- ---- -----
<S> <C> <C> <C> <C>
Natural gas:
Increase in revenues (in millions) $1.8 $1.6 $5.9 $2.1
Impact on average sales price
(per thousand cubic feet) .06 .10 .09 .04
Oil:
Increase (decrease) in revenues
(in millions) .3 (.8) (.3) (.6)
Impact on average sales price
(per barrel) .29 (1.71) (.12) (.37)
</TABLE>
-10-
<PAGE>
<PAGE>
At September 30, 1995, EEX had outstanding swaps, collars and futures
agreements extending through December 1996 to exchange payments on
approximately 4.7 billion cubic feet (Bcf) of gas and 582 thousand barrels of
oil on which EEX had $1.3 million of net unrealized gains. At September 30,
1995, realized gains on hedging activities of $.7 million were deferred.
DEEP-WATER PROJECTS AND RESERVES
In the third quarter of 1995, a Mobil Corporation (Mobil) affiliate completed
a transaction in which it acquired a 40% working interest in EEX's Garden
Banks project. EEX now owns a 60% working interest in the Garden Banks
project and remains the operator. EEX received cash, property interests and
future work commitments on the project. In addition, EEX was relieved of
capital and operating lease obligations of approximately $140 million on the
Garden Banks project, as well as a portion of the future capital expenditure
requirements.
Sales of production from two wells on Garden Banks Block 388 commenced in
late September and had a negligible impact on third-quarter results.
However, operating results for the remainder of 1995 are expected to be
adversely affected, since revenues from the initial production from these two
wells are not expected to 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. Operating results are expected to improve in 1996 as production
begins from several additional development wells in the Garden Banks project
and as the related equipment lease and other fixed costs are spread over
greater production. Drilling began in November 1995 on a third well on
Block 388, which is expected to be on-stream in early 1996. A second well
currently being drilled on Block 387 is expected to be completed in the
fourth quarter of 1995, and production from the two wells on Block 387 should
commence during the first quarter of 1996 following the tie-back to the
system on Block 388.
In October 1995, another affiliate of Mobil completed a transaction to
purchase a 40% interest in EEX's Green Canyon project, and an affiliate of
Reading & Bates Corp. completed its purchase of a 20% interest in the
project. EEX, which now has a 40% working interest in the project and
remains the operator, received cash, an interest in a gas and oil property
and future work commitments.
After giving effect to the acquisition of DALEN in June and the then pending
sales of a 40% interest in the Garden Banks project and 60% interest in the
Green Canyon project, EEX's estimated net proved reserves at June 30, 1995
were 1.8 trillion cubic feet of natural gas equivalent.
-11-
<PAGE>
<PAGE>
CAPITALIZED COSTS
At September 30, 1995, EEX's full cost ceiling amount attributable to the
DALEN properties was approximately $112 million ($73 million after tax) less
than the unamortized cost of producing properties acquired. EEX believes the
DALEN properties have significant exploration and development potential. EEX
expects to be able to utilize its expertise, particularly with respect to
tight sands reservoirs, to enhance production and cash flows from these
properties because of the geologic similarity and proximity of DALEN's major
producing properties to EEX's properties. EEX believes that the unamortized
cost of the gas and oil properties acquired in the DALEN acquisition is
recoverable from future production and was not in fact impaired at
September 30, 1995. EEX requested and was granted a waiver of the full cost
ceiling limitation on these properties by the Securities and Exchange
Commission through June 30, 1996. If an excess exists after that date, a
write-off may be required.
The full cost ceiling surplus on EEX's other gas and oil properties at
September 30, 1995 was approximately $68 million ($44 million after tax).
Since gas and oil prices are subject to seasonal and other fluctuations, a
decline in prices from September 1995 levels or other factors, without
mitigating circumstances, could cause a future write-down of capitalized
costs and a non-cash charge against income.
LIQUIDITY AND CAPITAL RESOURCES
EEX has funded its activities through cash provided from operations,
borrowings from bank credit facilities and ENSERCH, and both operating and
capital lease arrangements with an ENSERCH company.
Cash Flows
For the first nine months of 1995, operating activities provided net cash
flows of $81 million, a $4.8 million increase from the $76 million provided
in the year-earlier period. Income before depreciation and amortization and
deferred income taxes was virtually unchanged from the 1994 period. However,
the requirement related to changes in other assets and liabilities decreased
$3.1 million, and changes in current operating assets and liabilities
resulted in a $1.7 million year-to-year improvement in cash flows.
Investing activities required net cash flows of $374 million, including
$333 million required for the DALEN acquisition and $86 million provided by
the collection of a note receivable from an affiliated company, compared with
$87 million in the year-ago period. Capital expenditures increased
$47 million (51%) from the year-earlier level to $140 million. Retirements
of property, plant and equipment include cash received from the Mobil
affiliate in connection with the sale of a 40% interest in the Garden Banks
project.
-12-
<PAGE>
<PAGE>
In June 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. In September
1995, EEX sold 20 million shares of its common stock to the public for net
proceeds of $208 million, which were used to reduce the borrowing under the
revolving credit agreement. The common stock issue increased the public
ownership in EEX from less than one percent to 16.6%. The bridge loan was
repaid on August 4, 1995 with the proceeds from $150 million of mandatorily
redeemable preferred securities issued by a subsidiary of EEX for which EEX
is also obligated. The dividends on the preferred securities are included in
interest and other financing costs.
EEX intends to utilize substantially all of its internally generated cash
flows for growth of the business. Internally generated cash flows may be
supplemented by borrowings to fund temporary cash deficiencies. As noted
above, EEX has a $350 million four-year revolving credit agreement,
$210 million of which was unused at September 30, 1995. In addition, EEX has
a $50 million borrowing arrangement with ENSERCH to meet short-term cash
needs, of which $24 million was outstanding at September 30, 1995. EEX does
not anticipate paying cash dividends in the foreseeable future.
Capitalization
Total capitalization at September 30, 1995 was $1.3 billion versus
$.9 billion at December 31, 1994. Common shareholders' equity at
September 30, 1995 was 71% of total capitalization, compared with 83% at the
end of 1994.
Capital Budget
Property, plant and equipment additions, net of proceeds from sales of
properties, for 1995 are expected to total approximately $175 million.
Expenditures for 1995 have been reduced $39 million from the originally
planned level for EEX of $160 million because of low natural-gas prices.
Capital expenditures for 1995 exploration and development of the DALEN
properties following the acquisition by EEX are estimated to be $54 million.
Costs of the floating production platform and related facilities for the
Garden Banks project, which are being provided under lease arrangements with
an ENSERCH affiliate, are not included in these amounts.
Leases
Costs for the Garden Banks facilities and equipment to be obtained through
leasing arrangements will total $350 million, plus $12 million of financing
costs incurred by ENSERCH companies prior to the sublease to EEX. Following
the completion of the transaction with the Mobil affiliate in the third
quarter of 1995, EEX's obligation under the Garden Banks lease arrangements
was reduced by $140 million to approximately $225 million.
-13-
<PAGE>
<PAGE>
<TABLE>
ENSERCH EXPLORATION, INC.
SUMMARY OF OPERATING DATA (UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ------------------------
1995 1994(d) 1995 1994(d)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Income (Loss) (in millions) (a). . . . . $ 2.9 $ 3.1 $ (1.5) $ 22.5
======== ======== ======== ========
Revenues (in millions) (a)
Natural gas . . . . . . . . . . . . . . . . . . $ 46.8 $ 33.4 $ 113.8 $ 111.8
Oil and condensate . . . . . . . . . . . . . . . 17.0 7.5 37.7 23.2
Natural gas liquids. . . . . . . . . . . . . . . 1.4 .4 3.1 1.3
Other. . . . . . . . . . . . . . . . . . . . . . 1.6 .1 1.8 .3
-------- -------- -------- -------
Total. . . . . . . . . . . . . . . . . . . . $ 66.8 $ 41.4 $ 156.4 $ 136.6
======== ======== ======== =======
Sales Volumes (a)
Natural gas (MMcf) . . . . . . . . . . . . . . . 29,083 16,258 63,536 51,667
Oil and condensate (MBbl). . . . . . . . . . . . 1,018 487 2,236 1,523
Natural gas liquids (MBbl) . . . . . . . . . . . 157 45 311 129
Total volumes (MMcfe) (b). . . . . . . . . . . . 36,133 19,450 78,818 61,579
Average Sales Price (a)
Natural gas (per Mcf). . . . . . . . . . . . . . $ 1.61 $ 2.06 $ 1.79 $ 2.16
Oil and condensate (per Bbl) . . . . . . . . . . 16.72 15.29 16.86 15.23
Natural gas liquids (per Bbl). . . . . . . . . . 9.08 10.89 10.03 10.32
Total product revenue (per Mcfe) (b) . . . . . . 1.81 2.13 1.96 2.21
Cost and Expenses (per Mcfe) (b)
Production and operating (c) . . . . . . . . . . $ .36 $ .39 $ .41 $ .38
Exploration. . . . . . . . . . . . . . . . . . . .10 .12 .11 .11
Depreciation and amortization . . . . . . . . . .97 .98 1.03 .98
General, administrative and other. . . . . . . . .19 .31 .28 .23
Taxes, other than income . . . . . . . . . . . . .15 .16 .17 .16
Net Wells
Drilled. . . . . . . . . . . . . . . . . . . . . 14 13 53 48
Productive . . . . . . . . . . . . . . . . . . . 7 9 33 30
</TABLE>
<TABLE>
<CAPTION>
(a) The separate results of EEX and DALEN Three Months Ended Nine Months Ended
are as follows: September 30,1995 September 30, 1995
--------------------- -----------------------
EEX DALEN EEX DALEN*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Income (Loss) (in millions). . . . $ 1.0 $ 1.9 $ (3.5) $ 2.0
======== ======== ======== ========
Revenues (in millions)
Natural gas . . . . . . . . . . . . . . . $ 26.7 $ 20.1 $ 86.2 $ 27.6
Oil and condensate . . . . . . . . . . . . 8.6 8.4 26.5 11.2
Natural gas liquids. . . . . . . . . . . . .7 .7 2.1 1.0
Other. . . . . . . . . . . . . . . . . . . 1.3 .3 1.4 .4
-------- -------- -------- -------
Total. . . . . . . . . . . . . . . . $ 37.3 $ 29.5 $ 116.2 $ 40.2
======== ======== ======== =======
Sales Volumes
Natural gas (MMcf) . . . . . . . . . . . . 15,428 13,655 45,291 18,245
Oil and condensate (MBbl). . . . . . . . . 514 504 1,570 666
Natural gas liquids (MBbl) . . . . . . . . 61 96 185 126
Total volumes (MMcfe) (b). . . . . . . . . 18,878 17,255 55,821 22,997
Average Sales Price
Natural gas (per Mcf). . . . . . . . . . . $ 1.73 $ 1.47 $ 1.90 $ 1.51
Oil and condensate (per Bbl) . . . . . . . 16.85 16.59 16.91 16.74
Natural gas liquids (per Bbl). . . . . . . 10.87 7.94 11.28 8.20
Total product revenue (per Mcfe) (b) . . . 1.91 1.70 2.06 1.73
<FN>
* From date of acquisition on June 8, 1995.
(b) Oil and natural gas liquids are converted to Mcf equivalents (Mcfe) on the basis of one barrel equals
6.0 Mcfe.
(c) Excludes related production, severance and ad valorem taxes.
(d) 1994 amounts are restated to give effect to the acquisition of 1% general partners interest in EPO, the
international gas and oil operations and the SACROC operations accounted for in a manner similar to a pooling-
of-interests.
</TABLE>
-14-
<PAGE>
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15 Letter of Deloitte & Touche LLP dated
October 30, 1995, regarding unaudited
interim financial statements.
23.1 Consent of Deloitte & Touche LLP
(included in Exhibit 15.)
(b) Reports on Form 8-K
Current Report on Form 8-K dated August 9, 1995. (Closing of
transaction in which a Mobil Corporation affiliate exercised
its option to acquire a 40% working interest in the Garden
Banks project of Enserch Exploration, Inc.)
-15-
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENSERCH EXPLORATION, INC.
(Registrant)
Dated November 13, 1995 By /s/ J. Philip McCormick
------------------------------
J. Philip McCormick
Senior Vice President and
Chief Financial Officer
Dated November 13, 1995 By /s/ J. W. Pinkerton
-------------------------------
J. W. Pinkerton
Vice President and Controller
-16-
EXHIBIT (15)
Enserch Exploration, Inc:
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited interim
condensed consolidated financial information of Enserch Exploration, Inc.
for the period ended September 30, 1995, as indicated in our report dated
October 30, 1995; because we did not perform an audit, we expressed no opinion
on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, is
incorporated by reference in Registration Statements No. 33-57715 and
No. 33-60587, each on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that
Act.
DELOITTE & TOUCHE LLP
Dallas, Texas
November 13, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ENSERCH
EXPLORATION, INC. FORM 10-Q FOR THE PERIOD ENDING SEPTEMBER 30, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000931006
<NAME> ENSERCH EXPLORATION, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 1,349
<SECURITIES> 0
<RECEIVABLES> 45,226
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 59,422
<PP&E> 2,613,429
<DEPRECIATION> (930,978)
<TOTAL-ASSETS> 1,764,032
<CURRENT-LIABILITIES> 126,827
<BONDS> 0
<COMMON> 934,019
150,000
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,764,032
<SALES> 0
<TOTAL-REVENUES> 156,455
<CGS> 0
<TOTAL-COSTS> 157,916
<OTHER-EXPENSES> (135)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,297
<INCOME-PRETAX> (11,597)
<INCOME-TAX> (4,448)
<INCOME-CONTINUING> (7,149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,149)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
