<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
ENSERCH EXPLORATION INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
ENSERCH EXPLORATION INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
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Notes:
<PAGE>
LOGO
ENERGY SQUARE II
4849 GREENVILLE AVENUE
DALLAS, TEXAS 75206
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of Enserch Exploration, Inc.:
The Annual Meeting of the Shareholders of Enserch Exploration, Inc. will be
held at 301 South Harwood Street, Dallas, Texas, on Tuesday, May 14, 1996, at
2:00 p.m., for the following purposes:
1. To elect a Board of Directors;
2. To consider and act upon such other business as may be properly
presented to the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business March 15, 1996, as
the record date for determination of the shareholders of Common Stock entitled
to notice of and to vote at the meeting or any adjournment thereof.
A form of Proxy, a Proxy Statement, and the Company's 1995 Annual Report to
Shareholders accompany this Notice of Annual Meeting.
IF YOU DO NOT EXPECT TO BE PRESENT AT THE ANNUAL MEETING IN PERSON, PLEASE
PROMPTLY SIGN THE ACCOMPANYING PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
By Order of the Board of Directors,
Michael G. Fortado
Vice President and Corporate
Secretary
March 29, 1996
<PAGE>
LOGO
PROXY STATEMENT
GENERAL INFORMATION
At year end 1994, pursuant to a plan for the reorganization of Enserch
Exploration Partners, Ltd. ("EP")(a publicly held master limited partnership),
Enserch Exploration, Inc. (the "Company"), through a series of transactions,
acquired all of the operating properties of EP in exchange for shares of
Common Stock of the Company (the "Reorganization"). The information in this
Proxy Statement relates to the first meeting of shareholders since the
Company's Common Stock began trading publicly on January 3, 1995.
This Proxy Statement is being mailed on or about March 29, 1996, to
shareholders in connection with the solicitation of proxies on behalf of the
Board of Directors of the Company for use at the Annual Meeting of
Shareholders to be held on May 14, 1996, at 301 South Harwood Street, Dallas,
Texas. The persons named as proxies were selected by the Board of Directors of
the Company. The enclosed proxy may be revoked at any time before it is
exercised by filing with the Corporate Secretary an instrument revoking it; by
submitting a subsequently dated proxy; or by appearing at the meeting and
voting in person.
If you do not expect to be present at the Annual Meeting in person, please
promptly sign the accompanying proxy and return it in the enclosed envelope.
The cost of preparing, assembling and mailing the Notice of Annual Meeting,
Proxy Statement, and Proxy, and the cost of further solicitation are to be
borne by the Company. Solicitations may further be made by directors,
officers, and regular employees of the Company, without additional
compensation, by use of the mails, telephone, facsimile transmission, or by
personal interview.
Holders of the Company's Common Stock of record at the close of business on
March 15, 1996, (the "Record Date") are entitled to vote at the meeting. On
the Record Date, the Company had outstanding 125,927,727 shares of Common
Stock having a par value of $1.00 per share. Each share of Common Stock is
entitled to vote at the forthcoming Annual Meeting of Shareholders.
The holders of a majority of the shares issued and outstanding and entitled
to vote, present in person or represented by proxy, will constitute a quorum
for the transaction of business at the Annual Meeting. A plurality of the
votes cast at this meeting is required for the election of directors. Other
than a matter for which a specified portion of the shares entitled to vote is
required by statute, any other matter submitted for approval would require the
affirmative vote of the holders of a majority of the shares entitled to vote
at the meeting, and voted for or against. The inspectors of election will
treat shares represented by proxies that reflect abstentions as shares that
are present and entitled to vote for purposes of determining the presence of a
quorum but not for the purposes of determining the outcome of any matter
submitted to the shareholders for a vote. The inspectors of election will
treat broker non-votes on any matter as to which the broker has indicated on
the proxy that it does not have discretionary authority to vote as shares not
entitled to vote with respect to that matter. However, such shares will be
considered present and entitled to vote for quorum purposes so long as they
are entitled to vote on other matters.
The Company had outstanding on the Record Date fifteen (15) shares of
Adjustable Rate Cumulative Preferred Stock, Series A. The holders of the
Preferred Stock do not have voting rights except under certain conditions
which are not now present.
1
<PAGE>
ELECTION OF DIRECTORS
Directors are elected to hold office until the next annual election and
until their successors shall have been duly elected and shall qualify. It is
intended that the votes of the persons designated as proxies in the
accompanying proxy will be cast for the nominees named below unless contrary
instructions are set forth on the proxy. In the event any nominee for director
is not available for election as contemplated due to circumstances not now
known, it is the intention of the proxies named in the enclosed proxy to vote
for such other person as the Board of Directors may nominate. In accordance
with the Company's Bylaws, the Board of Directors has fixed the number of
directors of the Company to be four.
The following biographical information sets forth the name, age, principal
occupation or employment during the past five years, Board committee
membership, certain other directorships held by each nominee for director, and
the period during which he has served as a director of the Company.
D. W. BIEGLER
Chairman and Chief Executive Officer, ENSERCH Corporation and Enserch
Exploration, Inc.
Mr. Biegler, age 49, is Chairman and Chief Executive Officer of the Company
and ENSERCH Corporation ("ENSERCH"). Prior to his election to his present
position with ENSERCH in 1993, 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
previously served as Chairman and Chief Executive Officer of the managing
general partner of EP from 1992 until its conversion into the Company
beginning in 1995. He served as Chairman and Chief Executive Officer of the
Company from its formation in September of 1994 until June 20, 1995, and was
reelected to such position as of February 1, 1996. Mr. Biegler is a Director
of ENSERCH, Texas Commerce Bank National Association, and Trinity Industries,
Inc. He has been a Director of the Company since its formation in late 1994.
FREDERICK S. ADDY
Retired Executive Vice President, Amoco Corporation
Mr. Addy, age 64, is retired Executive Vice President, Chief Financial
Officer, and Director of Amoco Corporation, an international integrated oil
and gas company. Mr. Addy has been a Director of the Company since 1995 and is
Chairman of the Compensation Committee and a member of the Audit Committee. He
is a Director of ENSERCH; Baker, Fentress & Company; and The Pierpont Funds.
B. A. BRIDGEWATER, JR.
Chairman, President and Chief Executive Officer, Brown Group, Inc.
Mr. Bridgewater, age 62, is Chairman, President and Chief Executive Officer,
and Director, Brown Group, Inc., a footwear company. Mr. Bridgewater has been
a Director of the Company since 1995 and serves as Chairman of the Audit
Committee and is a member of the Compensation Committee. He is a Director of
ENSERCH, Boatmen's Bancshares, Inc., FMC Corporation, and McDonnell Douglas
Corporation.
GARY J. JUNCO
President and Chief Operating Officer, Enserch Exploration, Inc.
Mr. Junco, age 46, has been President and Chief Operating Officer of the
Company since its formation in September 1994. He previously served as
President and Chief Operating Officer of the managing general partner of EP
from January 1991 until its conversion into the Company at the beginning of
1995. He has been a director of the Company since its formation in late 1994.
2
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Company is aware of the following beneficial owners, as of December 31,
1995, of more than 5% of its Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT
OF BENEFICIAL OWNER(/1/) BENEFICIALLY OWNED OF CLASS
------------------------ ------------------ --------
<S> <C> <C>
ENS Holdings Limited Partnership(/2/) 53,336,434 42.4%
Enserch Exploration Holdings, Inc.(/3/) 13,883,529 11.0
ENSERCH Corporation(/4/) 37,795,365 30.0
</TABLE>
- ----------
(1) The address for each party is 300 South St. Paul, Dallas, Texas 75201.
(2) ENS Holdings Limited Partnership, a Texas limited partnership, is trustee
(the "Trustee") of the ENS Holding 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 a general partner of the Trustee.
(3) Enserch Exploration Holdings, Inc. ("EEH") is 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 if 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 owned beneficially, directly or indirectly,
105,015,328 shares of Common Stock.
ENSERCH intends to cause its shares to be voted in favor of the nominees for
election to the Board of Directors listed herein. Since the holders of Common
Stock do not have cumulative voting rights and since the shares of ENSERCH and
its affiliates represent more than 50% of the outstanding shares of Common
Stock entitled to be voted at the meeting, ENSERCH will be able to elect the
entire Board of Directors.
STOCK OWNERSHIP OF MANAGEMENT AND BOARD OF DIRECTORS
Each director, the named executive officers, and all directors and executive
officers as a group, reported beneficial ownership as of the Record Date of
Common Stock of the Company and ENSERCH Corporation as follows:
<TABLE>
<CAPTION>
ENSERCH EXPLORATION, INC. ENSERCH CORPORATION
------------------------- -------------------
NUMBER OF NUMBER OF
SHARES SHARES PERCENT
BENEFICIALLY PERCENT BENEFICIALLY OF
NAME OWNED(/1/) OF CLASS OWNED(/2/) CLASS
---- ------------ ---------- ------------ -------
<S> <C> <C> <C> <C>
D. W. Biegler 29,816(/3/)(/5/) * 293,029(/4/) *
Frederick S. Addy 2,000 * 4,143 *
B. A. Bridgewater, Jr. 1,000 * 4,643 *
G. J. Junco 41,956(/3/) * 91,627(/4/) *
J. T. Williams 62,500(/3/) * 54(/4/) *
R. L. Kincheloe 3,500(/3/) * 65,516(/4/) *
B. K. Irani 3,500(/3/) * 30,404(/4/) *
J. P. McCormick 2,000 * 21,637(/4/) *
All Directors and Execu-
tive Officers
as a Group 147,834(/3/) * 511,065(/4/) *
</TABLE>
3
<PAGE>
- --------
* Less than 1%.
(1) The number of shares owned includes shares held in the ENSERCH Corporation
Employee Stock Purchase and Savings Plan and restricted shares awarded
under the Enserch Exploration, Inc. 1994 Stock Incentive Plan, where
applicable.
(2) The number of shares owned includes shares held in the ENSERCH Corporation
Employee Stock Purchase and Savings Plan and restricted shares awarded
under the ENSERCH Corporation 1991 Stock Incentive Plan, where applicable.
(3) The totals include shares of Common Stock of the Company subject to stock
options exercisable within 60 days of the Record Date: D. W. Biegler 3,750
shares; G. J. Junco 6,250 shares; J. T. Williams 35,000 shares; R. L.
Kincheloe 1,000 shares; B. K. Irani 2,500 shares; and all directors and
executive officers as a group 48,500 shares.
(4) The totals include shares of Common Stock of ENSERCH subject to stock
options exercisable within 60 days of the Record Date: D. W. Biegler
201,250 shares; G. J. Junco 73,250 shares; R. L. Kincheloe 53,150 shares;
B. K. Irani 22,350 shares; J. P. McCormick 20,375 shares; and all
directors and executive officers as a group 370,375 shares.
(5) Does not include 105,015,328 shares beneficially owned by ENSERCH and its
affiliates in which Mr. Biegler, as authorized by the Board of Directors
of ENSERCH, has sole voting power.
BOARD COMMITTEES
The standing committees of the Board of Directors are the Audit Committee
and Compensation Committee. The Board of Directors does not have a Nominating
Committee. Nominees for directors are designated by the full Board.
The functions of the Audit Committee 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 which
pertain to the scope of the annual audit and certain special audit and non-
audit work which may be required or suggested by the independent auditors;
receiving and reviewing information pertaining to internal audits; directing
and supervising special investigations; and performing any other functions
deemed appropriate by the Board of Directors. The Audit Committee met once
during 1995.
The function of the Compensation Committee is to establish, approve, or
recommend to the Board of Directors, in those instances where its approval is
required, the compensation and major items related to compensation of
directors and of officers and other employees whose annual base compensation
exceeds a certain amount as determined by the Board of Directors. The
Committee also administers the Company's 1994 Stock Incentive Plan. The
Compensation Committee met two times in 1995.
During 1995, the Board of Directors met five times. No director attended
fewer than 75 percent of the aggregate of the total number of Board meetings
and meetings of a committee on which he served.
4
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth annual compensation, long-term compensation, and
all other compensation paid by the Company and its subsidiaries for services
rendered during the periods shown for each individual serving as the chief
executive officer and each of the other four most highly compensated executive
officers in 1995 (the "named executive officers"). The information presented
does not include periods prior to 1995 since EP, as a partnership, did not
have employees and no compensation was paid to any of the named executive
officers by the Company prior to January 1, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- --------------------------------
AWARDS PAYOUTS
--------------------- ----------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LONG-TERM ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK OPTIONS INCENTIVE COMPENSATION
POSITION(1) YEAR SALARY($) BONUS($) ($) AWARDS (#) (#) PAYOUTS($) ($)(3)
------------------ ---- --------- -------- ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
D. W. Biegler 1995 0 0 0 (2) 15,000 0 0
Chairman and Chief Ex-
ecutive Officer
G. J. Junco 1995 300,000 163,125 0 (2) 25,000 0 3,125
President and Chief Op-
erating Officer
B. K. Irani 1995 191,042 81,755 0 0 10,000 0 3,125
Senior Vice President,
Production and
Engineering Division
R. L. Kincheloe 1995 240,000 900 0 0 4,000 0 33,365
Senior Vice President,
Offshore and
International
J. P. McCormick 1995 113,750 57,642 0 0 0 0 1,125
Senior Vice President
and Chief Financial
Officer
J. T. Williams 1995 227,323 124,564 0 (2) 35,000 0 72,759
Vice Chairman and Chief
Executive
Officer
</TABLE>
- ---------
(1) D. W. Biegler's principal employment is Chairman and Chief Executive
Officer of ENSERCH. He served as Chairman and Chief Executive Officer of
the Company from September, 1994 through June 20, 1995, when J. T.
Williams was elected as Vice Chairman and Chief Executive Officer
effective June 20, 1995. Mr. Williams resigned as Vice Chairman and Chief
Executive Officer of the Company effective February 1, 1996, and D. W.
Biegler was reelected Chief Executive Officer effective February 1, 1996.
In 1995, Mr. Biegler received no compensation from the Company other than
awards of performance-based restricted stock and stock options as reported
herein and no allocation or other charge was made to the Company for his
services. Mr. McCormick was employed by the Company on June 1, 1995.
(2) The performance-based restricted stock awards to named executive officers
under the 1994 Stock Incentive Plan are subject to performance based
criteria. Performance-based restricted stock awards in 1995 to the named
executive officers are reported under the "Long-Term Incentive Plan
Awards" table, and reference is made to such table for information on the
number of restricted shares awarded in 1995. At December 31, 1995, the
number and value of the aggregate restricted stock holding for each of the
persons named above were as follows: D. W. Biegler: 10,000 shares,
$116,250; G. J. Junco: 15,000 shares, $174,375; and J. T. Williams 25,000
shares, $290,625. Dividends are payable on restricted shares at the same
rate as would be paid to all shareholders.
(3) Consists of Company contributions to the Employee Stock Purchase and
Savings Plan. Also includes accruals for deferred compensation payable
upon retirement, death or disability retirement pursuant to a Special
Supplemental Compensation Plan of ENSERCH for Mr. Kincheloe of $28,865.
Also includes the amount payable to Mr. Williams for credited service in
1995 for a special executive retirement payment ("SERP") pursuant to his
employment contract.
5
<PAGE>
OPTION GRANTS TABLE
The table below shows, for each of the named executive officers, certain
information with respect to options granted in 1995 under the 1994 Stock
Incentive Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE PRICE GRANT DATE
OPTIONS IN FISCAL PER EXPIRATION PRESENT
NAME GRANTED(1)(#) YEAR SHARE($/SH)(2) DATE VALUE(3)
---- ------------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
D. W. Biegler 15,000 8.67% $ 9.75 02/14/05 $87,604
G. J. Junco 25,000 14.45% 9.75 02/14/05 146,006
B. K. Irani 10,000 5.78% 9.75 02/14/05 58,403
R. L. Kincheloe 4,000 2.31% 9.75 02/14/05 23,361
J. P. McCormick 0 0.00% -- -- --
J. T. Williams(4) 35,000 20.23% 14.50 06/20/05 289,275
</TABLE>
- ----------
(1) Options are exercisable in stages of 25% on the first through the fourth
anniversaries of the grant. Options become fully vested in the event of a
change in control as defined in the plan.
(2) Fair market value on the date of grant.
(3) Represents the hypothetical present value of the option determined using
Black-Scholes Option Valuation Method based upon the terms of the option
grant and the Company's stock price as of the date of the grant. The
actual value, if any, an executive may realize will depend on the excess
of the stock price over the exercise price on the date the option is
exercised and there is no assurance that the value ultimately realized
will be at or near the value estimated by the Black-Scholes Option
Valuation Method. The assumptions used to arrive at the values shown are
as follows: Risk Free Interest Rate of 7.78% (6.63% for Mr. Williams)
based on the ten year Treasury bond rate on the date of the grant, Stock
Price Volatility of 27.80% (29.10% for Mr. Williams) based on the
historical return volatility using weekly stock prices over the prior
three years, no dividend yield, and Date of Exercise on the expiration
date of February 14, 2005 (June 20, 2005, for Mr. Williams).
(4) The stock option agreement covering the options granted to Mr. Williams
have provisions specified in his employment agreement that vary from the
others listed. The options held by Mr. Williams became fully vested
following his resignation on February 1, 1996.
6
<PAGE>
AGGREGATED OPTION EXERCISE TABLE
The table below shows, for each of the named executive officers, the
information specified with respect to exercised, exercisable and unexercisable
options under all existing stock option plans.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1995 DECEMBER 31, 1995
ACQUIRED VALUE (#) ($)
ON EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
D. W. Biegler 0 0 0 15,000 0 $28,125
G. J. Junco 0 0 0 25,000 0 46,875
B. K. Irani 0 0 0 10,000 0 18,750
R. L. Kincheloe 0 0 0 4,000 0 7,500
J. P. McCormick 0 0 0 0 0 0
J. T. Williams 0 0 0 35,000 0 0
</TABLE>
LONG-TERM INCENTIVE PLAN ("LTIP") AWARDS TABLE
The table below shows for each of the named executive officers, certain
information with respect to awards of performance-based restricted stock made
pursuant to the Company's 1994 Stock Incentive Plan.
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE NON-STOCK PRICE BASED PLANS(/1/)
PERIOD ---------------------------------------
NUMBER OF UNTIL MATURATION THRESHOLD(/2/) TARGET(/2/) MAXIMUM(/2/)
NAME SHARES OR PAYOUT(/3/) (#) (#) (#)
---- --------- ----------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
D. W. Biegler 10,000 01/01/95-12/31/97 500 10,000 10,000
G. J. Junco 15,000 01/01/95-12/31/97 750 15,000 15,000
B. K. Irani 0 0 0 0
R. L. Kincheloe 0 0 0 0
J. P. McCormick 0 0 0 0
J. T. Williams(4) 25,000 07/01/95-06/30/98 1,250 25,000 25,000
</TABLE>
- ----------
(1) Performance-based restricted shares have been awarded and will be earned
at the end of a three-year performance period based upon the three year
total shareholder return of the Company compared to the weighted average
of the total shareholder return of the Dow Jones Oil-Secondary Index.
Regular cash dividends are paid on the restricted shares prior to vesting
at the same rate as paid to all shareholders. All restrictions are lifted
in the event of a "change in control" and are subject to allocation in the
event of retirement, disability or death during the performance period.
(2) All shares are earned if at the end of the performance term the Company's
total shareholder return is at or above 110% of the weighted average of
the peer group. For each percentage point that the Company's total
shareholder return is below 110% of the weighted average of the peer group
but above 100%, 2.5% of the shares will be forfeited and for each
percentage point below 100%, 5% of the shares will be forfeited with no
shares earned below 85%.
(3) Shares earned at the end of the three-year performance period will remain
restricted, subject to continued employment for two additional years.
(4) The restricted stock agreement covering the performance-based restricted
shares issued to Mr. Williams have provisions specified in his employment
agreement that vary from the others listed in the table. His resignation
on February 1, 1996 resulted in the restrictions being lifted and the
shares delivered to him.
7
<PAGE>
PENSION PLAN TABLE
Employees of the Company participate in The Retirement and Death Benefit
Program of ENSERCH Corporation and Participating Subsidiaries (the "Program")
and the ENSERCH Income Restoration Plan (the "Restoration Plan"). The table
below illustrates the amount of annual compensation benefit 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 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 $ 69,272 $ 92,362 $115,453 $138,543 $161,634 $168,509 $175,384
350,000 88,959 118,612 148,265 177,918 207,571 216,321 225,071
425,000 108,647 144,862 181,078 217,293 253,509 264,134 274,759
500,000 128,334 171,112 213,890 256,668 299,446 311,946 324,446
575,000 148,022 197,362 246,703 296,043 345,384 359,759 374,134
650,000 167,709 223,612 279,515 335,418 391,321 407,571 423,821
725,000 187,397 249,862 312,328 374,793 437,259 455,384 473,509
800,000 207,084 276,112 345,140 414,168 483,196 503,196 523,196
</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 February 29, 1996, for Messrs. Junco, Irani, Kincheloe, McCormick, and
Williams are 18.8, 21.1, 37.5, 4.6, and 0.6 years, respectively, and the
highest average covered compensation during any consecutive five-year period
for each of them is $344,364, $190,174, $236,984, $191,095, and $620,000,
respectively. In 1995, the Company did not make any contribution or incur any
charge regarding the retirement of Mr. Biegler, as a non-compensated executive
officer of the Company. 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.
COMPENSATION OF DIRECTORS
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 $1,800 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 Board Committee, with an additional $750 per annum
paid to the Chairman of a Board Committee. Directors who are also officers of
the Company do not receive fees.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Messrs. Junco, Irani and McCormick have executed change in control
agreements with the Company that provide certain benefits in the event their
employment is terminated subsequent to a change in control of the Company (as
defined in the Agreements). The Agreements are for continuous three-year terms
until terminated by the Company upon specified notice and continue for three
years following a change in control of the Company. The Agreements provide
that if the officer is terminated or if the officer elects to terminate
employment under certain circumstances, within three years following a change
in control of the Company, the officer shall be entitled to a lump-sum
severance payment of three times the sum of the officer's base salary and
target bonus (but not in excess of the aggregate base salary that could be
earned up to the officer's normal retirement date), a prorated bonus in the
year of termination, the value over exercise price of certain unexercised
stock options, a three-year continuation of employee benefits, the equivalent
of two years of service credit under the retirement program, and reimbursement
of certain legal fees, expenses, and any excise taxes. Mr. Kincheloe has
executed a similar agreement but with a reduced amount payable because he has
passed his normal retirement date.
8
<PAGE>
Mr. Kincheloe is a participant in a Special Supplemental Compensation Plan
of ENSERCH Corporation providing upon retirement for deferred compensation
over a 10-year period equal to 150% of his salary at the time of retirement.
In connection with the Company's acquisition of DALEN Corporation in June
1995, Mr. Williams entered into an employment contract with the Company
providing for his employment as Vice Chairman and Chief Executive Officer for
a term of five years with a minimum annual salary of $400,000 plus an annual
incentive bonus reasonably expected to equal 55% of his minimum annual salary,
and provisions relating to the grant of stock options and award of
performance-based restricted stock. The contract also provided for a SERP
equal to the sum of his minimum annual salary plus one-half of incentive cash
compensation paid for the three-year period prior to retirement multiplied by
2.5% multiplied by the years of credited service with the Company (with
credited service credited monthly on the basis of two months of credit for
each one month of employment during the first five years and one month for
each one month of employment thereafter). The contract contains termination
provisions pursuant to which Mr. Williams' resignation of employment on
February 1, 1996, resulted in a lump sum payment equal to the minimum salary,
bonus and SERP payable for the remaining term of the contract plus maintenance
of certain other employee benefits. Such payment will be reported as
compensation in the proxy statement covering the year 1996.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT
The Board of Directors delegates responsibility for executive compensation
to the Compensation Committee. No member of the Committee is a former officer
or employee of the Company or any of its subsidiaries and no member of the
Committee participates in the compensation described in the following report.
The Committee retains its own consultant to advise on matters related to
executive compensation. The following is the Committee's report on executive
compensation for 1995.
In determining executive compensation, the Committee is guided by three
primary objectives:
. Offer incentive for business success by putting a significant portion of
each executive's total pay at risk, based on company performance
observing in the short term desirable operating results and, in the long
term, total shareholder return.
. Attract and keep outstanding executives by providing compensation
opportunities consistent with those observed in the Company's industry
for similar positions.
. Encourage career service by providing retirement income consistent with
industry practice.
Other than the award of stock options and Performance-Based restricted stock
as described in the tables, Mr. Biegler was not compensated by the Company in
1995. Mr. Biegler's cash compensation was from ENSERCH Corporation, owner of
83.4% of the Company, with no allocation or other charge in 1995 for his
services made to the Company. Mr. J. T. Williams was employed as Vice Chairman
and Chief Executive Officer at mid-year, in association with the Company's
acquisition of DALEN Corporation of which he served as Chief Executive
Officer, and his compensation was negotiated as part of an employment contract
concluded at the time of the purchase. Mr. Williams resigned from the Company
in 1996.
Salary levels for the other named executive officers are based upon
assessment of each individual's performance, experience and value in attaining
corporate financial and strategic objectives and are set within salary ranges
based on surveys of prevailing practice with the mid-point targeted for the
expected level of performance, experience and value. The Committee, in its
salary decisions, is guided by these comparative data, and by the annual rate
of salary movement in industries in which the Company competes for executives.
The
9
<PAGE>
Company compares its annual cash payments (both salary and annual incentive)
for named executive officers to recognized annual surveys of practice both in
its industry and in industry generally. General industry practice is observed
from Management Compensation Service's (MCS) annual survey of executive
compensation (385 companies participated in 1995). Gas and petroleum industry
practice is observed from surveys conducted by the American Gas Association
and by a major national consulting firm. Together they constitute a
statistically valid data base for this purpose and the Committee is guided by
it. Many of the companies in the MCS survey are in the S&P 500; the industry
specific surveys used include many of those companies found in the performance
graph's Dow Jones Oil-Secondary Index. The sole use of the smaller number of
companies in that peer group would produce pay data comparisons that are not
statistically meaningful or useful for the purpose of salary comparisons, nor
does the group of companies in that peer group include necessarily all of the
companies that are the most direct competitors for executive talent.
During 1995, the aggregate salaries of the named executive officers summed
to an amount equal to 16.6% above the sum of the size-adjusted median survey
salaries for their positions. Two of the named executive officers received
salary increases during 1995, which, on an annualized basis, amounted to 6.2%
of the named executive officers' aggregate salaries.
It is the practice of the Company, which is endorsed and effected by the
Committee, to encourage both desirable annual operating results and long term
total shareholder return by annual incentive opportunities that put an
important portion of total pay at risk subject to the achievement of financial
and operating goals. The portion of compensation at risk is intentionally
higher at higher levels in the Company. Consequently much of a named executive
officer's compensation is at risk, with potential annual and long-term
incentives, at target levels, placing up to 50% of total compensation
opportunity at risk. The Committee also considers comparative data when
determining the potential size of both annual and long-term incentive awards.
The named executive officers, other than Mr. Biegler, participate in the
Company's Performance Incentive Plan. The level of this opportunity is
designed to be consistent with industry practice. The target awards in 1995
ranged from 30% to 55% of salary. In 1995, Plan awards required the
achievement of goals set by our Committee at the beginning of the year
including operating income attainment and reserve finding-cost effectiveness.
Funding, based on results, could have ranged from zero to 150% of the target
awards.
Named executive officers, other than Messrs. Biegler and Kincheloe, received
incentive awards for 1995 for meeting certain goals established by the
Company. Because the operating income goal was not met, no payment was made
for that goal. Achievement of the goal for the cost of reserve additions
resulted in partial awards for Messrs. Junco and Irani that ranged up to 50%
of target. Total annualized cash payments (salary plus annual incentive) for
the named executives summed to 87% of the median survey observations.
The Company in 1995 offered additional incentive for stock price growth and
total shareholder return through the award of Performance-Based restricted
stock under the 1994 Stock Incentive Plan, in which Messrs. Biegler, Williams
and Junco participated, and stock options under the 1994 Stock Incentive Plan,
in which all named executive officers participated. Performance-Based
restricted stock and stock option awards to them in 1995 and options held at
year end are described in the Tables. The awards of Performance-Based
restricted stock are subject to forfeiture in whole or in part unless specific
goals which have been determined by the Compensation Committee are achieved.
The goals compare the three year total shareholder return of the Company to
the Dow Jones Oil-Secondary Index used in the performance graph in the Proxy
Statement. In addition, after the three year goals are met, the restricted
stock is subject to a requirement of continued employment for two more years.
Awards in 1995 were made to achieve the earlier stated objective of causing a
significant portion of each executive's total pay to be at risk and dependent
on total shareholder return primarily through stock price growth as well as
the objective of keeping outstanding executives by providing compensation
opportunities similar to those provided in the Company's industry. The Company
had not made any previous awards of stock options or Performance-Based
restricted stock. The Committee considered the objective that the executive
have an important incentive for stock price gain. In determining the size of
Performance-Based
10
<PAGE>
restricted stock and stock option awards, the Committee used its discretion
and was not bound by any pre-adopted formulas.
The Company encourages career employment and it is endorsed by our
Committee. Its retirement benefits are an essential part of that policy. They
are described, for the named executive officers, in the Pension Plan Table.
The Committee periodically reviews executive retirement benefits to ensure
that they continue to meet the Company's needs and are consistent with good
corporate practice.
No formal policy has been adopted by the Company with respect to qualifying
compensation paid to its executive officers for deductibility under Section
162(m) of the Internal Revenue Code. In the event that any new compensation
programs are proposed in the future, it is expected that they will be
structured with a view toward qualifying for deductibility just as was the
1994 Stock Incentive Plan. The Committee does not anticipate that current
compensation levels will result in loss of any tax deductibility.
Mr. Biegler served as Chief Executive Officer from September 30, 1994 to
June 20, 1995. Mr. Biegler received no cash compensation in 1995 from the
Company. Mr. Biegler received a Performance-Based restricted stock award and
an award of stock options. The size of both awards was based on comparative
data. Mr. Williams served as Chief Executive Officer from June 20, 1995 to
February 1, 1996. Mr. Williams' salary was not increased during 1995. It was
18% above the market median observed for that position. Mr. Williams' annual
incentive award for 1995 was determined by his contract and he received a
Performance-Based restricted stock award and stock option award pursuant to
his contract. The size of both awards was based on comparative data. Neither
Mr. Biegler nor Mr. Williams exercised options in 1995 or realized any option
gain.
Compensation Committee
Frederick S. Addy, Chairman
B. A. Bridgewater, Jr.
11
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total shareholder return on the Company's Common Stock against the
cumulative total return of the S&P 500 Composite Stock Index and the Dow Jones
Oil-Secondary Index since the Company's stock first began trading. The graph
assumes that the value of the investment in the Company's Common Stock and
each index was $100 at January 3, 1995, the date the Company's stock first
began trading, and that all dividends are reinvested. The publicly traded
units of EP for the period prior to 1995 are not included in the performance
graph because such partnership interest was valued on a different basis from
the Common Stock currently traded and any comparisons would be inappropriate.
COMPARISON OF CUMULATIVE TOTAL RETURN
LOGO
<TABLE>
<CAPTION>
JANUARY 3, 1995 DECEMBER 31, 1995
-------------------------------------------------------------------
<S> <C> <C>
Enserch Exploration, Inc. 100 115
S&P 500 100 138
Dow Jones Oil-Secondary Index 100 115
</TABLE>
12
<PAGE>
SUPPLEMENTAL INFORMATION REGARDING THE
ENSERCH EXPLORATION, INC. 1994 STOCK INCENTIVE PLAN
Prior to the distribution of shares of Common Stock following the
Reorganization, the 1994 Stock Incentive Plan of Enserch Exploration, Inc.
(the "1994 Plan") was adopted by the written consent of the Company's sole
shareholder. Pursuant to Rule 16b-3(b) under the Securities Exchange Act of
1934, substantially the same information concerning such plan is being
furnished below as would be required to be disclosed by the rules and
regulations in effect under Section 14(a) of said Act.
Description of 1994 Plan
The purpose of the 1994 Plan is to promote the long-term success of the
Company by providing a means through which the Company and its subsidiaries
can create incentives for performance which benefit shareholders and also
attract and retain key employees who can contribute materially to that
success. This purpose will be accomplished under the 1994 Plan by the grant of
non-qualified stock options ("Options") to purchase shares of Common Stock
($1.00 par value) of the Company ("Shares") and the award of Shares which are
subject to vesting based on the achievement of performance criteria or the
lapse of time ("Restricted Stock").
The 1994 Plan is administered by the Board of Directors acting through its
Compensation Committee.
Under the 1994 Plan, grants of Options and awards of Restricted Stock shall
be confined to those persons whom the Committee, in its sole discretion,
select who can make a meaningful contribution to the Company's success and who
are (a) officers of the Company, whether or not such officers are directly
compensated by the Company for their services (including an officer who may
also be a director of the Company), or (b) persons in managerial or other key
positions in the Company. There currently are 14 officers and 21 other persons
participating in the 1994 Plan. Non-employee directors are not eligible to
participate in the 1994 Plan.
A maximum of 2,000,000 shares of the Company's Common Stock, subject to
adjustment in the event of certain changes in the capital structure of the
Company, are authorized to be issued under the 1994 Plan. Such Shares may be
authorized but unissued Shares or Shares held in the Company's treasury. If an
Option or an award of Restricted Stock is forfeited (where the forfeiting
participant received no benefits of stock ownership), expires or terminates
before being exercised, the Shares covered thereby will be available for
subsequent Options or Restricted Stock awards within the maximum number stated
above.
The maximum number of Options that can be granted to any one individual
during any calendar year shall not exceed 80,000 shares, subject to adjustment
as provided in the 1994 Plan.
The purchase price of Shares acquired upon exercise of an Option under the
1994 Plan may not be less than the fair market value of the Common Stock on
the date the Option is granted.
The term of an Option granted under the 1994 Plan is ten years, except in
the case of termination of employment in which event, unless otherwise
determined by the Compensation Committee, the 1994 Plan provisions specify an
earlier expiration date of the Option depending upon the circumstances of
termination. Each Option may only be exercised to the extent that such Option
is vested. Optionees vest separately in each Option granted in accordance with
a schedule determined by the Compensation Committee, which unless otherwise
determined by the Committee is as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS EMPLOYED PERCENT
FOLLOWING THE GRANT OF THE OPTIONS VESTED
---------------------------------- -------
<S> <C>
Under one......................................................... 0%
At least one but less than two.................................... 25%
At least two but less than three.................................. 50%
At least three but less than four................................. 75%
Four or more...................................................... 100%
</TABLE>
13
<PAGE>
Notwithstanding the above schedule, an Optionee becomes 100% vested in each
Option upon termination of employment by reason of death, disability, or by
retirement at or after age 60; upon the sale of a subsidiary to an
unaffiliated company such that the Optionee no longer is employed by the
Company or a subsidiary; or if the Compensation Committee determines, in its
sole discretion, that acceleration of the Option vesting schedule would be
desirable for the Company. Options can also become 100% vested in certain
circumstances of merger or consolidation and in the event of a "change in
control" as defined by the 1994 Plan.
Options may be exercised with cash or by the surrender of shares of Common
Stock previously acquired by the Optionee and held for at least six months.
Any applicable federal, state or local tax withholding requirements may be
satisfied in cash or by the retention of Shares by the Company in amounts and
in the manner determined by the Compensation Committee. No Optionee shall have
any rights as a shareholder of the Company with respect to any Shares prior to
the date of issuance of the certificate or certificates for such Shares.
An award of Restricted Stock may be granted under the 1994 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. 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.
Performance-based Restricted Stock awards to Executive Officers must provide
for such objective performance goals as the Compensation Committee shall
establish based on total shareholder return, total shareholder return compared
to a peer group specified by the Compensation Committee, earnings per share,
operating unit income, or reserve finding effectiveness. The maximum number of
Shares that may be awarded to any Executive Officer with respect to all
performance periods beginning in any calendar year shall not exceed 50,000
Shares, subject to adjustment as provided in the 1994 Plan. In the event of a
merger or "change in control" of the Company, all restrictions on the
Restricted Stock are automatically lifted.
The 1994 Plan will terminate on November 5, 2004. The Plan provisions will
continue after termination for the purpose of governing Options theretofore
granted and to govern all awards of Restricted Stock until all restrictions
have lapsed or such Shares have been forfeited. All Options granted under the
1994 Plan are not transferable by the Optionee during the Optionee's lifetime.
The Board of Directors may amend or terminate the 1994 Plan at any time
except that no amendment shall, without the approval of shareholders, (i)
increase the maximum number of shares with respect to which Options may be
granted or awards of Restricted Stock may be made or increase the limitations
on the amount of individual Option grants and Restricted Stock awards, except
to recognize changes in capitalization of the Company, (ii) reduce the Option
price below the fair market value of the Shares on the date of grant, or (iii)
change the eligibility provisions of the 1994 Plan. The Board may not, without
the consent of the holder of an Option or a holder of a Restricted Stock
award, alter or impair any Option previously granted or any Restricted Stock
previously awarded except as authorized in the 1994 Plan.
Since its adoption, awards of performance-based Restricted Stock and grants
of Options have been made to certain key persons. The following table sets
forth as to performance-based Restricted Stock the dollar value and the total
number of shares of performance-based Restricted Stock that have been awarded
to date and the number of Options granted and Exercise Price for each of the
years 1995 and 1996 to (i) each named executive officer, (ii) all current
executive officers as a group and (iii) all employees (including all current
officers who are not executive officers) as a group. The dollar value of the
shares of performance-based Restricted Stock is based on the per share market
price of the Common Stock at the beginning of the performance period relating
to each award of the performance-based Restricted Stock. All future awards of
Restricted Stock and grant of Options are at the sole discretion of the
Committee and presently are not determinable. Non-employee directors are not
eligible to participate in the 1994 Plan.
14
<PAGE>
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
PERFORMANCE-
BASED OPTIONS
RESTRICTED -----------------------------------
STOCK 1995 1996
--------------- ---------------- ----------------
NUMBER
DOLLAR OF NUMBER EXERCISE NUMBER EXERCISE
VALUE SHARES GRANTED PRICE GRANTED PRICE
NAME AND POSITION -------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
D. W. Biegler................ $275,625 25,000 15,000 $9.75 20,000 $9.75
Chairman and Chief Executive
Officer
G. J. Junco.................. 384,375 35,000 25,000 9.75 50,000 9.75
President and Chief
Operating Officer
B. K. Irani.................. -- -- 10,000 9.75 30,000 9.75
Senior Vice President,
Production and Engineering
Division
R. L. Kincheloe.............. -- -- 4,000 9.75 5,000 9.75
Senior Vice President,
Offshore and International
J. P. McCormick.............. -- -- 0 -- 20,000 9.75
Senior Vice President and
Chief Financial Officer
J. T. Williams............... 337,500 25,000 35,000 14.50 0 --
Vice Chairman and Chief
Executive Officer
Executive Group.............. 997,500 85,000 89,000 11.62(1) 135,000 9.75
Non-Executive Officer
Employee Group.............. 143,250 13,000 84,000 10.17(1) 141,500 9.75
</TABLE>
- --------
(1)Weighted average exercise price.
The closing price of the Company's Common Stock on March 20, 1996, was
$10.25 per share.
Tax Consequences
The Company has been advised by counsel that, under existing law, the
material federal income tax consequences of the issuance and exercise of
Options and the grant of Restricted Stock under the 1994 Plan may be
summarized as follows:
No income will be recognized by an Optionee who has been granted an Option,
and no deduction will be allowed to the Company at the time the Option is
granted. Upon the exercise of an Option with cash, the Optionee generally will
recognize ordinary income equal to the excess of the fair market value as of
the date of exercise of the Shares purchased over the Option price. Upon the
exercise of an Option by tendering previously acquired Common Stock, the
Optionee generally will recognize income equal to the fair market value as of
the date of exercise of the number of acquired Shares exceeding the number of
Shares of Common Stock tendered (the "Excess Shares").
If the Optionee pays the Option price in cash, the tax basis of the acquired
Shares will be their fair market value on the date of exercise. If the
Optionee pays the Option price by the exchange of previously acquired Common
Stock, the tax basis of the acquired Shares will be (1) to the extent of the
number of shares of Common Stock exchanged, the same as the Optionee's
adjusted tax basis in the exchanged shares and (2) to the extent of the Excess
Shares, the fair market value of those Shares on the date of exercise.
If a participant in the Plan receives a grant of Restricted Stock, the
federal income tax consequences will depend on the nature of the restrictions.
In general, the fair market value of the Shares will not be taxable to the
recipient until the year in which the Shares are freely transferable or are no
longer subject to a substantial risk of forfeiture. At that time, the current
fair market value of the Shares is treated as ordinary income to the
recipient. The recipient may elect, however, to recognize income when the
Shares are received, rather than when the Shares
15
<PAGE>
are freely transferable or are no longer subject to a substantial risk of
forfeiture. If the recipient makes this election, the amount taxed to the
recipient as ordinary income is determined as of the date of receipt of the
Restricted Stock. After the recipient recognizes ordinary income on the
Restricted Stock, the tax basis of the Shares will be their fair market value
on the date the ordinary income was recognized. If an individual disposes of
Shares acquired either by the exercise of an Option for cash or previously
acquired Common Stock or as a result of a grant of Restricted Stock, the
individual will recognize gain (or, under certain conditions, loss) in the
year of such disposition equal to the difference between (a) any amount
realized on the disposition and (b) the adjusted tax basis in the Shares
disposed of. The gain (or loss) will be a long-term capital gain (or loss) if
more than one year has elapsed between the date income was recognized and the
date of disposition and if the Shares were capital assets in the hands of the
individual.
In general, when an individual recognizes ordinary income with respect to
shares acquired by the exercise of an Option or as a result of a grant of
Restricted Stock, the Company will be entitled to an income tax deduction in
an amount equal to the ordinary income recognized by the individual, provided
that all applicable federal income tax withholding requirements are satisfied
and that the amount qualifies as an ordinary and necessary business expense to
the Company.
The Company may not deduct compensation of more than $1 million that is paid
in a taxable year to an individual who, on the last day of the taxable year,
is the Company's chief executive officer or one of its four highest-paid
officers for that year. The deduction limit, however, does not apply to
certain types of compensation, including qualified performance-based
compensation. The Company believes that compensation attributable to Options
and performance-based Restricted Stock will be treated as qualified
performance-based compensation and therefore will not be subject to the
deduction limit.
The vesting of Options and Restricted Stock as a result of a Change in
Control (as defined in the Plan) can under certain circumstances be determined
to be "parachute payments" under the federal income tax laws. In general, if
the present value of all "parachute payments" to a qualified individual (any
one of a limited class of shareholders, officers, and highly compensated
employees) equals or exceeds three times the individual's "base amount"
(annualized compensation over a five-year period), the individual is subject
to a 20% excise tax on the excess of the "parachute payments" over the "base
amount," and the Company is denied a deduction for such excess except to the
extent it is established that the excess is reasonable compensation for
services actually rendered. Payments to an individual outside the Plan also
may be "parachute payments."
CERTAIN TRANSACTIONS
Mr. Biegler is a Director and Executive Officer, and Messrs. Addy and
Bridgewater are each Directors of ENSERCH. The Company and ENSERCH, including
its affiliates, have in the past entered into significant arrangements with
respect to their businesses and expect to do so in the future to the extent
authorized by the Restated Articles of Incorporation of the Company.
In the ordinary course of business, the Company engages in various
transactions with ENSERCH companies. The Company is charged for direct costs
incurred by ENSERCH companies including the general and administrative staff
costs incurred by ENSERCH in performing accounting, treasury, internal audit,
income tax planning and compliance, legal, information systems, human
resources and other functions, but not including any of Mr. Biegler's
compensation during 1995. Costs are determined on a basis that reasonably
reflects the actual costs of services performed for the Company and may
include allocations based on such factors as net capital employed, the number
of employees or the percentage of time spent on projects or services. The
Company believes that the method used is reasonable and approximates costs
that would have been incurred if the Company had operated as an unaffiliated
entity. ENSERCH charges for all indirect costs amounted to $2,725,000 in 1995.
16
<PAGE>
In 1995, the Company also had the following transactions with ENSERCH
companies: sales of natural gas and gas liquids that aggregated $87,002,000;
interest costs on borrowings of $3,389,000; interest income on notes
receivable of $1,027,000; capital lease payments totaling $13,723,000; and
allocated share of rental expenses incurred under noncancellable long-term
leases of $6,468,000.
In addition, the Company acquired the international gas and oil operations
of ENSERCH in exchange for 1,240,000 shares of the Company's common stock
valued at the actual net proceeds per share of $10.45 received by the Company
in the September 1995 public offering and $2.6 million in cash and acquired
the SACROC operations of ENSERCH for $1.65 million in cash. Both transactions
were based on the value of the underlying properties as determined by
independent petroleum engineers. ENSERCH's historical carrying value of the
assets acquired and liabilities assumed has been recorded by the Company.
The Company and ENSERCH have entered into a tax-sharing agreement with
respect to the Company's share of the consolidated federal income tax
liability of ENSERCH and its subsidiaries. Under the agreement, the Company
and ENSERCH make payments between them generally calculated so that the amount
of taxes to be paid by the Company with respect to any period will be
determined as though the Company and its subsidiaries filed a separate
consolidated federal income tax return. The agreement provides that ENSERCH is
the sole and exclusive agent for the Company in any and all matters relating
to the income tax liability of the Company and its subsidiaries, has sole and
exclusive responsibility for the preparation and filing of consolidated
federal income tax returns for the consolidated group, and has 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 the Company and its subsidiaries. Each member of any 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 the Company 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.
SECTION 16 MATTERS
Section 16(a) of the Securities Exchange Act of 1934 requires the officers
and directors of the Company, and persons who own more than 10% of a
registered class of the equity securities of the Company, to file reports of
beneficial ownership and changes in beneficial ownership with the SEC and the
New York Stock Exchange. Based solely on its review of the copies of such
reports received by it, or written representations from certain reporting
persons that no Forms 5 were required for those persons, the Company believes
that during 1995, its officers, directors and greater than 10% shareholders
complied with all applicable filing requirements except for the following: One
report covering two transactions was filed approximately 20 days late by Mr.
Frederick Addy, a Director of the Company.
SHAREHOLDER PROPOSALS
In order to be considered for inclusion in the Company's proxy statement
relating to the 1997 Annual Meeting of Shareholders, a shareholder proposal
must be received by the Company no later than November 28, 1996. The date of
the 1996 Annual Meeting of Shareholders will be May 13, 1997.
The Company's Bylaws provide that in addition to any other applicable
requirements, in order for a shareholder to properly bring business before the
annual meeting or nominate a person for election to the Board, the shareholder
must give timely written notice to the Corporate Secretary and provide certain
specified information. Details regarding the procedural requirements for
presenting a matter before a shareholders meeting are available upon written
request to the Corporate Secretary.
17
<PAGE>
OTHER MATTERS
The Board of Directors does not intend to bring any other business before
the meeting and has no reason to believe any will be presented to the meeting.
If, however, any other business should be properly presented at the meeting,
the proxies named in the enclosed form of proxy will vote the proxy in
accordance with their best judgment.
By Order of the Board of Directors,
Michael G. Fortado
Vice President and Corporate
Secretary
Dallas, Texas
March 29, 1996
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K TO THE SECURITIES AND
EXCHANGE COMMISSION, EXCLUDING CERTAIN OF THE EXHIBITS THERETO, MAY BE
OBTAINED WITHOUT CHARGE BY WRITING TO MICHAEL G. FORTADO, VICE PRESIDENT AND
CORPORATE SECRETARY, ENSERCH EXPLORATION, INC., ENSERCH CENTER, 300 SOUTH ST.
PAUL STREET, DALLAS, TEXAS 75201-5598.
18
<PAGE>
PROXY PROXY
[LOGO OF ENSERCH EXPLORATION, INC.]
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
THE CORPORATION FOR ANNUAL MEETING MAY 14, 1996
The undersigned hereby appoints D. W. Biegler and F.S. Addy, or either of
them, the attorneys and proxies of the undersigned, each with full power of
substitution, to vote on behalf of the undersigned at the Annual Meeting of
Shareholders of Enserch Exploration, Inc., to be held at 301 South Harwood
Street, Dallas, Texas, on Tuesday, May 14, 1996, at 2:00 p.m., and at any
adjournments of said meeting, all the shares of Common Stock of said
Corporation in the name of the undersigned or which the undersigned may be
entitled to vote; hereby revoking any proxy or proxies heretofore given by the
undersigned.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1 AND 2. IT IS REVOCABLE AT ANY TIME BEFORE IT IS
EXERCISED.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
(Continued and to be signed on reverse side.)
<PAGE>
ENSERCH EXPLORATION, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [X]
1. Election of Directors--Nominees:
D. W. Biegler, F. S. Addy, B. A. Bridgewater, Jr.,
and G.J. Junco.
FOR WITHHELD FOR ALL EXCEPT NOMINEE(S) LISTED BELOW:
[_] [_] [_]
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2. In their discretion, upon such other matters as may properly come before the
meeting.
Dated: _____________________, 1996
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Signature of Shareholder(s)
THIS PROXY MUST BE SIGNED EXACTLY AS NAME
APPEARS HEREON. EXECUTORS, ADMINISTRATORS,
TRUSTEES, ETC., SHOULD GIVE FULL TITLE AS
SUCH. IF THE SIGNER IS A CORPORATION, PLEASE
SIGN FULL CORPORATE NAME BY DULY AUTHORIZED
OFFICER.
