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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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 NO. 1-12905
EEX CORPORATION
(Exact name of Registrant as specified in its charter)
TEXAS 75-2421863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 CITYWEST BLVD.
SUITE 1400
HOUSTON, TEXAS 77042
(Address of principal executive office) (Zip Code)
(713) 243-3100
(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 April 30, 2000:
42,966,387
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31
----------------------
2000 1999
-------- ---------
(In thousands, except
per share amounts)
Revenues:
Natural gas.................................................................. $37,558 $ 23,026
Oil, condensate and natural gas liquids...................................... 20,775 14,720
Cogeneration operations...................................................... 1,912 2,289
Other........................................................................ 623 (480)
------- --------
Total.................................................................... 60,868 39,555
------- --------
Costs and Expenses:
Production and operating..................................................... 10,542 9,202
Exploration.................................................................. 4,748 12,699
Depletion, depreciation and amortization..................................... 21,087 20,470
(Gain) Loss on sales of property, plant and equipment........................ 560 (4)
Cogeneration operations...................................................... 1,354 2,190
General, administrative and other............................................ 6,051 5,504
Taxes, other than income..................................................... 1,783 1,501
------- --------
Total.................................................................... 46,125 51,562
------- --------
Operating Income (Loss)......................................................... 14,743 (12,007)
Other Income (Expense)--Net..................................................... 99 (67)
Interest Income................................................................. 192 1,527
Interest and Other Financing Costs.............................................. (7,680) (3,981)
------- --------
Income (Loss) Before Income Taxes............................................... 7,354 (14,528)
Income Taxes.................................................................... 2,300 985
Minority Interest Third Party................................................... 825 --
------- --------
Net Income (Loss)............................................................... 4,229 (15,513)
Preferred Stock Dividends....................................................... 3,242 2,767
------- --------
Net Income (Loss) Applicable to Common Shareholders............................. $ 987 $(18,280)
======= ========
Net Income (Loss) Per Share Available to Common Shareholders:
Basic........................................................................ $ 0.02 $ (0.43)
======= ========
Diluted...................................................................... $ 0.02 $ (0.43)
======= ========
Weighted Average Shares Outstanding:
Basic........................................................................ 42,202 42,200
======= ========
Diluted...................................................................... 42,236 42,200
======= =======
See accompanying notes.
1
EEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31 December 31
2000 1999
-------- ----------
(In thousands)
ASSETS
------
Current Assets:
Cash and cash equivalents.................................................... $ 10,526 $ 15,053
Restricted cash.............................................................. 5,000 5,000
Accounts receivable--trade (net of allowance of $2,129 and $1,791)........... 32,697 28,248
Other........................................................................ 12,494 12,737
---------- ----------
Total current assets..................................................... 60,717 61,038
---------- ---------
Property, Plant and Equipment (at cost):
Oil and gas properties (successful efforts method)........................... 1,215,178 1,259,364
Other........................................................................ 8,055 8,047
---------- ----------
Total.................................................................... 1,223,233 1,267,411
Less accumulated depletion, depreciation and amortization.................... 527,849 576,914
---------- ----------
Net property, plant and equipment........................................ 695,384 690,497
---------- ----------
Deferred Income Tax Assets...................................................... 20,509 22,809
Other Assets.................................................................... 5,321 6,440
---------- ----------
Total.................................................................... $ 781,931 $ 780,784
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable--trade...................................................... $ 47,860 $ 72,518
Current portion of capital lease obligations................................. 15,137 16,810
Other........................................................................ 2,952 2,580
---------- ----------
Total current liabilities................................................ 65,949 91,908
---------- ----------
Bank Revolving Credit Agreement................................................. 65,000 --
Capital Lease Obligations....................................................... 197,829 205,634
Gas Sales Obligation............................................................ 100,296 105,000
Other Liabilities............................................................... 49,780 80,329
Minority Interest Third Party................................................... 3,875 3,050
Shareholders' Equity:
Preferred stock (10,000 shares authorized; 1,654 and 1,621 shares issued;
Liquidation preference of $165,360 and $162,117)......................... 17 16
Common stock ($0.01 par value; 150,000 shares authorized; 42,967 and
42,483 shares issued).................................................... 429 424
Paid in capital.............................................................. 734,600 729,925
Retained earnings (deficit).................................................. (433,761) (434,748)
Unamortized restricted stock compensation.................................... (1,772) (443)
Treasury stock, at cost (14 shares).......................................... (311) (311)
---------- ----------
Total shareholders' equity............................................... 299,202 294,863
---------- ----------
Total.................................................................... $ 781,931 $ 780,784
========== ==========
See accompanying notes.
2
EEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31
-------------------------------
2000 1999
--------- ---------
(In thousands)
OPERATING ACTIVITIES
Net Income (Loss)............................................................. $ 4,229 $(15,513)
Dry hole cost................................................................. (883) 5,832
Depletion, depreciation and amortization...................................... 21,087 20,470
Impairment of undeveloped leasehold........................................... 1,200 --
Deferred income taxes......................................................... 2,300 500
(Gain) Loss on sales of property, plant and equipment......................... 560 (4)
Other......................................................................... (17,557) 6,420
Changes in current operating assets and liabilities:
Accounts receivable.......................................................... (4,449) 14,756
Other current assets......................................................... 243 (517)
Accounts payable............................................................. (3,018) (18,250)
Other current liabilities.................................................... 372 (2,601)
-------- --------
Net cash flows provided by operating activities............................ 4,084 11,093
-------- --------
INVESTING ACTIVITIES
Additions of property, plant and equipment.................................... (44,256) (25,540)
Proceeds from dispositions of property, plant and equipment................... 5,642 4
Other (changes in accruals)................................................... (21,640) (2,205)
-------- --------
Net cash flows used in investing activities................................ (60,254) (27,741)
-------- --------
FINANCING ACTIVITIES
Issuance of preferred stock and common stock warrants......................... -- 150,000
Borrowings under bank revolving credit agreement.............................. 120,000 20,000
Repayment of borrowings under bank revolving credit agreement................. (55,000) (20,000)
Borrowings under short-term financing agreement............................... 15,000 --
Repayment of borrowings under short-term financing agreement.................. (15,000) --
Deliveries under the gas sales obligation..................................... (4,704) --
Minority interest third party................................................. 825 --
Payments of capital lease obligations......................................... (9,478) (9,198)
-------- --------
Net cash flows provided by financing activities............................ 51,643 140,802
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents............................ (4,527) 124,154
Cash and Cash Equivalents at Beginning of Period................................ 15,053 15,588
-------- --------
Cash and Cash Equivalents at End of Period...................................... $ 10,526 $139,742
======== ========
See accompanying notes.
3
EEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
included herein have been made. Certain items in prior periods have been
reclassified to be consistent with the current presentation.
2. The preferred stock has a stated value of $100 and a current dividend rate
of 8% per year, payable quarterly. The 8% dividend rate will be adjusted to
a market rate, not to exceed 18%, after seven years or earlier occurrence of
certain events including a change of control. Prior to any adjustment of the
dividend rate, the Company may, at the Company's option, accrue dividends or
pay them in cash, shares of preferred stock or shares of common stock. After
any adjustment of the dividend rate, dividends must be paid in cash.
EEX paid dividends in-kind on the preferred stock as follows:
Amount of Dividends Number of Preferred
Date (In millions) Shares Issued
- -------------------------------------- -------------------------------- --------------------------------
March 31, 2000 $3.2 32,423
3. Early in 1998, EEX entered into two forward purchase facilities to
repurchase shares of its common stock. EEX initiated several transactions
under these facilities, which allow for settlement, at EEX's option, by
physical delivery of the shares to EEX in exchange for cash or on a net
basis in either shares of EEX common stock or in cash. For a net basis
settlement, to the extent that the market price of EEX's common stock on a
settlement date is higher (lower) than the forward purchase price, the net
differential is received (paid) by EEX. As of March 31, 2000, transactions
under these facilities covered approximately $9.0 million or 796,533 shares
of EEX's common stock, with an average forward purchase price of $11.34 per
share. If the agreements were settled on a net basis on the March 31, 2000
market price of EEX's common stock ($3.375 per share), EEX would be
obligated to pay approximately $6.4 million in cash, or deliver
approximately 1,879,440 shares. Under the terms of one of the facilities,
EEX deposited in a cash collateral account the amount of $5 million and may
be required to settle the transactions under one of the above-described
options prior to the expiration dates of August and September 2000.
Subsequent to March 31, 2000, EEX deposited $2.6 million in a cash
collateral account for the other facility.
4. Payments under the gas sales obligation were amortized on the interest
method through final pay out. Payments made during the first quarter related
to this obligation were $4.7 million.
5. EEX is involved in a number of legal and administrative proceedings incident
to the ordinary course of its business. In the opinion of management, based
on the advice of counsel and current assessment, any liability to EEX
relative to these ordinary course proceedings will not have a material
adverse effect on EEX's operations or financial condition.
In addition, EEX is a defendant in Gracy Fund L.P. v. EEX Corporation, et
al., ("Gracy Fund"), a class action in Federal District Court for the
Northern District of Texas. Gracy Fund is a consolidated case combining two
actions filed against EEX in August 1998. In January 1999, plaintiffs in
Gracy Fund filed an amended class action complaint against EEX, several of
its current and/or former officers and directors and another company,
ENSERCH Corporation (the "Consolidated Complaint"). The Consolidated
Complaint alleges violations of Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 and violations of Sections 10(b), 14(a) and 20(a) of
the Securities Exchange Act of 1934 against various defendants. The
Consolidated Complaint also alleges Section 10(b), 15 and 20(a) claims on
behalf of a class of plaintiffs who acquired EEX's stock pursuant to an
October 1996 Registration Statement and Proxy/Prospectus ("EEX Subclass").
4
EEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Plaintiffs allege that during the class period, defendants made materially
false and misleading statements, and failed to disclose material facts,
regarding the value and volume of EEX's proved reserves from its East Texas
operations. According to plaintiffs, these purported misrepresentations
artificially inflated the price of EEX's common stock throughout the class
period, induced the EEX Subclass to approve the merger that spun EEX off
from ENSERCH Corporation and induced the EEX Subclass to acquire stock
pursuant to the Registration Statement and Proxy/Prospectus issued regarding
this merger.
The Company is vigorously contesting this action and filed a motion to
dismiss the Consolidated Complaint on March 8, 1999. The motion has been
fully briefed and under submission to the court since June 23, 1999. All
discovery is stayed pending the determination of the motion to dismiss.
Since it has not yet been determined whether, or to what extent, the
plaintiffs have pled a viable complaint, the Company cannot predict the
outcome of this matter at this time.
The operations and financial position of EEX continue to be affected from
time to time in varying degrees by domestic and foreign political
developments as well as legislation and regulations pertaining to
restrictions on oil and gas production, imports and exports, natural gas
regulation, tax increases, environmental regulations and cancellation of
contract rights. Both the likelihood of such occurrences and their overall
effect on the Company vary greatly and are not predictable.
EEX has taken and will continue to take into account uncertainties and
potential exposures in legal and administrative proceedings in periodically
establishing accounting reserves.
6. On December 17, 1999, the Company closed a stock purchase of certain oil and
gas properties and pipeline assets of Tesoro Corporation. The purchase price
was allocated to the assets purchased and liabilities assumed based upon
preliminary estimates of fair value on the date of acquisition.
7. Earnings Per Share - The reconciliation between basic and diluted earnings
per common share is as follows:
Three Months Ended
March 31
--------------------------------
2000 1999
-------- ---------
(In thousands, except
per share amounts)
Net income (loss) from continuing operations................................... $ 4,229 $(15,513)
Preferred stock dividends...................................................... 3,242 2,767
------- --------
Net income (loss) from continuing operations applicable to common
shareholders for basic earnings per share..................................... 987 (18,280)
Effect of dilutive securities.................................................. -- --
------- --------
Net income (loss) from continuing operations applicable to common
shareholders for diluted earnings per share................................... $ 987 $(18,280)
======= ========
Basic weighted average shares outstanding...................................... 42,202 42,200
Effect of dilutive securities:
Stock options............................................................... 34 --
------- --------
Diluted weighted average shares outstanding.................................... 42,236 42,200
======= ========
Net income (loss) per share available to common shareholders:
Basic....................................................................... $ 0.02 $ (0.43)
------- --------
Diluted..................................................................... $ 0.02 $ (0.43)
======= ========
5
EEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Segment information has been prepared in accordance with Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information. EEX has determined that its reportable
segments are those that are based on the Company's method of internal
reporting. EEX has four reportable segments, which are primarily in the
business of natural gas and crude oil exploration and production: Deepwater
Operations, Deepwater FPS/Pipelines, Onshore/Shelf and International. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (See Note 2 to the Consolidated
Financial Statements in Item 8 of the Company's 1999 Annual Report on Form
10-K). EEX's reportable segments are consistent with the Company's business
strategy. Financial information by operating segment is presented below (in
thousands):
Deepwater
---------------------------
Operations FPS/Pipelines Onshore/Shelf International Other(a) Total
------------ ------------- ------------- ------------- -------- --------
THREE MONTHS ENDED MARCH 31, 2000:
- ----------------------------------
Total Revenues............................. $ -- $ -- $ 43,149 $14,344 $ 3,375 $ 60,868
Production and operating costs............. -- 198 7,009 3,335 -- 10,542
Exploration costs.......................... 2,088 -- 2,040 620 -- 4,748
Depletion, depreciation and amortization... -- 900 16,988 2,771 428 21,087
Other costs................................ -- -- 1,777 (b) -- 7,971 9,748
-------- --------- -------- -------- -------- --------
Operating Income (Loss).................... (2,088) (1,098) 15,335 7,618 (5,024) 14,743
Interest Income............................ -- -- -- -- 291 291
Interest and other financing costs......... -- (3,489) (2,704) -- (1,487) (7,680)
-------- --------- -------- -------- -------- --------
Income (Loss) before income taxes.......... $(2,088) $ (4,587) $ 12,631 $ 7,618 $(6,220) $ 7,354
======== ========= ======== ======== ======== ========
Long-Lived Assets.......................... $52,410 $147,847 $428,953 $60,636 $ 5,538 $695,384
======== ========= ======== ======== ======== ========
Additions to Long-Lived Assets............. $ 7,615 $ 4,597 $ 22,213 $ 2,769 $ 718 $ 37,912
======== ========= ======== ======== ======== ========
THREE MONTHS ENDED MARCH 31, 1999:
- ----------------------------------
Total Revenues............................. $ -- $ -- $ 28,742 $10,520 $ 293 $ 39,555
Production and operating costs............. -- -- 6,305 2,897 -- 9,202
Exploration costs.......................... 4,938 -- 6,234 1,527 -- 12,699
Depletion, depreciation and amortization... -- 1,800 15,401 2,888 381 20,470
Other costs................................ -- -- 1,501 (b) -- 7,690 9,191
-------- --------- -------- -------- -------- --------
Operating Income (Loss).................... (4,938) (1,800) (699) 3,208 (7,778) (12,007)
Interest Income............................ -- -- -- -- 1,460 1,460
Interest and other financing costs......... -- (3,460) (212) -- (309) (3,981)
-------- --------- -------- -------- -------- --------
Income (Loss) before income taxes.......... $(4,938) $ (5,260) $ (911) $ 3,208 $(6,627) $(14,528)
======== ========= ======== ======== ======== ========
Long-Lived Assets.......................... $48,531 $138,087 $199,645 $57,903 $ 6,429 $450,595
======== ========= ======== ======== ======== ========
Additions to Long-Lived Assets............. $ 6,649 $ -- $ 13,807 $ 4,992 $ 435 $ 25,883
======== ========= ======== ======== ======== ========
- ------------
(a) Includes primarily Cogeneration Plant Operations, General and Administrative and gains/loss on hedging and sale of assets.
(b) Includes taxes other than income.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this report, including statements of EEX's and
management's expectations, intentions, plans and beliefs, are "forward-looking
statements," within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, that are subject to certain events, risks and uncertainties
that may be outside EEX's control. See "Forward-Looking Statements--
Uncertainties and Risks."
RESULTS OF OPERATIONS
For the first quarter of 2000, EEX reported net income applicable to common
shareholders of approximately $1 million ($0.02 per share), versus a net loss
applicable to common shareholders of $18 million ($0.43 per share) for the same
period in 1999.
For the first quarter of 2000, total revenues were $61 million, 54% higher than
total revenues in the first quarter of 1999. Natural gas revenues for the first
quarter of 2000 were 63% higher than the same quarter of 1999. This increase
was impacted by a 30% increase in average prices and a 25% increase in
production. The increase in production is primarily due to the Tesoro
acquisition, offset by property sales and production decline. The average
natural gas sales price per thousand cubic feet ("Mcf") was $2.57 in the first
quarter of 2000, compared with $1.97 in the same period of 1999. Natural gas
production for the first quarter of 2000 was 15 billion cubic feet ("Bcf"),
compared with 12 Bcf in the same period of 1999. Oil revenues increased 41%
from the same period in 1999 due to an increase in the average price to $27.26
from $11.17, offset by a 42% decrease in production, primarily due to production
decline associated with the Mudi Field.
Production from the Mudi Field in Indonesia during the quarter was lower than
was forecast at year-end 1999. The Company has initiated studies of the
reservoir and is participating in drilling and other operations intended to
improve production rates. Based upon the results of these studies and
operations, the Company plans to reevaluate its interest in the Mudi Field,
including the property's carrying value.
Costs and expenses for the first quarter of 2000 were $46 million, compared with
$52 million in 1999. Operating expenses (production and operating, general and
administrative and taxes other than income) were $18 million in the current
quarter, 13% higher than the same period of 1999, primarily as a result of the
Tesoro acquisition, offset by property sales. Exploration expenses for the
first quarter of 2000 decreased to $5 million, compared to $13 million for the
same period of 1999. The first quarter of 1999 includes $6 million of dry hole
costs associated with Vermilion Block 37. Depletion, depreciation and
amortization for the first quarter of 2000 was $21 million, $1 million higher
than the same period of 1999, primarily due to the addition of properties from
the Tesoro acquisition, offset by property sales and production decline.
Total interest and other financing costs for the first quarter of 2000,
including interest income, preferred stock dividends and other income, were $11
million, a $5 million increase from the same period of 1999. This increase was
primarily due to increased interest expense associated with borrowings under the
revolving credit agreement and the gas sales obligation. Interest income also
decreased during the current quarter due to a lower cash balance.
7
EEX CORPORATION
SUMMARY OF SELECTED OPERATING DATA
FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Three Months Ended
March 31
----------------------
2000 1999
----- -----
Sales volume
Natural gas (Bcf) (a)........................................................ 14.6 11.7
Oil, condensate and natural gas liquids (MMBbls) (d)......................... 0.8 1.3
Total volumes (Bcfe) (a)................................................. 19.2 19.6
Average sales price (b)
Natural gas (per Mcf) (c).................................................... $ 2.57 $ 1.97
Oil, condensate and natural gas liquids (per Bbl)............................ 27.12 11.17
Total (per Mcfe) (c)..................................................... 3.03 1.93
Average costs and expenses (per Mcfe) (c)
Production and operating (b)................................................. $ 0.55 $ 0.47
Exploration ................................................................. 0.25 0.65
Depletion, depreciation and amortization..................................... 1.10 1.05
General, administrative and other............................................ 0.31 0.28
Taxes, other than income..................................................... 0.09 0.08
- ----------
(a) Billion cubic feet or billion cubic feet equivalent, as applicable. Ratio
of six Mcf of natural gas to one barrel of crude oil, condensate or natural
gas liquids.
(b) Before related production, severance and ad valorem taxes.
(c) One thousand cubic feet or one thousand cubic feet equivalent, as
applicable. Ratio of six Mcf of natural gas to one barrel of crude oil,
condensate or natural gas liquids.
(d) One million barrels of crude oil or other liquid hydrocarbons.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash flows provided by operating activities for the first quarter of 2000
were $4 million, a decrease of $7 million over the first quarter of 1999,
largely due to changes in current operating assets and liabilities. Net cash
flows used in investing activities for the first quarter of 2000 were $60
million, a $33 million increase from cash flows used in investing activities in
the first quarter of 1999. The increase in investing activities is primarily
due to increased capital spending related to onshore (Tesoro acquisition), Llano
#3, and the refurbishment of the Cooper Floating Production System ("FPS"). Net
cash flows provided by financing activities in the first quarter of 2000 were
$52 million, compared to $141 million in the first quarter of 1999. As of March
31, 2000, EEX had $65 million outstanding under the revolving credit agreement.
During the first quarter of 1999, EEX received $150 million from the issuance of
preferred stock and warrants.
Capital Budget
Planned 2000 capital expenditures are approximately $140 million, compared with
actual expenditures of $388 million in 1999 (including $215 million for the
acquisition of Tesoro oil and gas properties and pipelines). Capital
expenditures for the first quarter of 2000 were $44 million. Planned 2000
capital expenditures exclude approximately $14 million of carried working
interest expenses resulting from joint venture arrangements and any significant
costs which may be incurred for the acquisition of producing properties. The
Company expects to fund these capital expenditures by operating cash flows,
proceeds from property sales, investment costs carried under joint venture
arrangements and increased borrowings under the revolving credit agreement. In
addition, the Company may seek additional funds from public and private equity
and debt markets.
8
Liquidity
EEX has a $350 million revolving credit line with a group of banks that matures
on June 27, 2002, of which $65 million was outstanding at March 31, 2000. The
amount borrowed during the first quarter reflects a reduction in current and
other liabilities. The revolving credit agreement limits, at all times, total
debt, as defined, to the lesser of 60% of capitalization, as defined, or $1
billion, and prohibits liens on property except under certain circumstances. As
described in the Company's 1999 Annual Report on Form 10-K, the gas sales
obligation is not included in the definition of debt for purposes of determining
the debt to capital ratio under the bank revolving credit agreement. As of March
31, 2000, the debt to capital ratio under the revolving credit agreement was 49%
and unused available credit was approximately $165 million. The interest rate
ranges from the London Inter-Bank Offered Rate (LIBOR) plus 0.55% to 1.30% per
annum, plus a facility fee of 0.20% to 0.45% per annum, depending upon the debt
to capital ratio.
The Company's ability to fund its capital budget and its liquidity can be
affected by any of the following:
. The value of EEX's investment in the Llano area, the Pipelines and a portion
of its plan to realize the value of its deferred tax asset is dependent upon
successful appraisal and development of its Llano discovery or other
exploration success on its Llano area leases. A reduction in value of these
assets due to adverse drilling results, limited development plans, or an
adverse economic assessment would decrease the amount of funds available to
the Company to borrow under its revolving credit agreement through a
reduction in the capitalization used in computing the debt to capital ratio.
. Sale of the FPS and/or Pipeline assets would result in a significant change
in EEX's debt structure due to the termination of the capital lease
obligation associated with those assets. The Company would also incur
substantial early termination costs. A disposition of the capital lease would
reduce the debt used in computing the debt to capital ratio and increase the
amount of funds available to the Company to borrow under its revolving credit
agreement. There can be no assurance that such debt structure changes can be
accomplished on favorable terms.
. The majority of the commitment associated with the Arctic I rig (See Note 19
to the Consolidated Financial Statements in Item 8 of the Company's 1999
Annual Report on Form 10-K) has been assumed, for budget purposes, to be
funded by EEX's joint venture partners in its Deepwater Exploration program.
If the joint venture partners elect not to participate in these projects, and
EEX cannot find other participants to share the costs of drilling, EEX would
incur expenditures greater than forecast, which could result in increased
exploration expense.
. Any decreases in capitalization through losses incurred from dry hole
expense, asset write-downs, loss on sales or other reasons, or increases in
debt as defined in the revolving credit agreement will increase the debt to
capital ratio and further limit available borrowings.
New Accounting Standard
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which is effective for fiscal years
beginning after June 15, 2000, with earlier adoption encouraged. FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. EEX has not yet
determined what the effect, if any, of SFAS No. 133 will be on results of
operations and financial position. EEX will adopt this accounting standard as
required by January 1, 2001.
9
FORWARD-LOOKING STATEMENTS--UNCERTAINTIES AND RISKS
Certain statements in this report, including statements of EEX's and
management's expectations, intentions, plans and beliefs, are "forward-looking
statements," within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and are subject to certain events, risks and uncertainties
that may be outside EEX's control. These forward-looking statements include
statements of management's plans and objectives for EEX's future operations and
statements of future economic performance; information regarding drilling
schedules, expected or planned production, future production levels of
international and domestic fields, EEX's capital budget and future capital
requirements, EEX's meeting its future capital needs, the level of future
expenditures for environmental costs and the outcome of regulatory and
litigation matters; and the assumptions underlying such forward-looking
statements. Actual results and developments could differ materially from those
expressed in or implied by such statements due to a number of factors,
including, without limitation, those described in the context of such forward-
looking statements and the risk factors set forth below and described from time
to time in EEX's other documents and reports filed with the Securities and
Exchange Commission.
Exploration Risk--Exploration for oil and gas in the Deepwater Gulf of Mexico
and unexplored frontier areas has inherent and historically high risk. EEX is
focusing on exploration opportunities in offshore and international areas that
will increase associated exploration risk. Future reserve increases and
production will be dependent on EEX's success in these exploration efforts and
no assurances can be given of such success. Exploration may involve unprofitable
efforts, not only with respect to dry wells, but also with respect to wells that
are productive but do not produce sufficient net revenues to return a profit
after drilling, operating and other costs.
Operational Risks and Hazards--EEX's operations are subject to the risks and
uncertainties associated with finding, acquiring and developing oil and gas
properties, and producing, transporting and selling oil and gas. Operations may
be materially curtailed, delayed or canceled as a result of numerous factors,
such as accidents, weather conditions, compliance with governmental requirements
and shortages or delays in the delivery of equipment. Operating hazards such as
fires, explosions, blow-outs, equipment failures, abnormally pressured
formations and environmental accidents may have a material adverse effect on
EEX's operations or financial condition. EEX's ability to sell its oil and gas
production is dependent on the availability and capacity of gathering systems,
pipelines and other forms of transportation.
Offshore Risks--EEX's Gulf of Mexico oil and gas reserves and exploration
prospects include properties located in water depths of 20 to greater than 7,000
feet where operations are by their nature more difficult than drilling
operations conducted on land in established producing areas. Deepwater drilling
and operations require the application of more advanced technologies that
involve a higher risk of mechanical failure and can result in significantly
higher drilling and operating costs which, in turn, can require greater capital
investment than anticipated and materially change the expected future value of
offshore development projects. The size of oil and gas reserves determined
through exploration and confirmation drilling operations must ultimately be
significant enough to justify the additional capital required to construct and
install production and transportation systems and drill development wells.
Development of any discoveries made pursuant to EEX's Deepwater exploration
program may not return any profit to the Company and could result in an economic
loss. Furthermore, offshore operations require a significant amount of time
between the discovery and the time the gas or oil is actually marketed,
increasing the market risk involved with such operations.
Capital Funding and Liquidity--EEX's access to public or private equity or debt
markets may be limited by general conditions in or volatility of the markets,
general conditions affecting the oil and gas industry, or by EEX's financial
condition. No assurances can be given that the Company will be able to secure
funds in these markets when necessary, or that such funds will be obtained on
terms favorable to the Company. If the Company is unable to secure funds when
required for its activities, its liquidity and ability to make capital
investments may become impaired. See the discussion under "Liquidity" above for
factors that may affect the Company's liquidity.
10
FPS and Pipeline Marketing Risk--The FPS and Pipelines have a carrying value of
approximately $148 million net to EEX at March 31, 2000 and currently do not
generate any cash returns to the Company. The FPS is a unique asset. A
successful marketing program for this asset will require finding a prospective
purchaser with the need for such a facility, successfully negotiating a
transaction and obtaining agreement from EEX's partner in the facility. The
utility of the Pipelines depend primarily on the future reserve potential of the
Llano area or other discoveries not yet made which would require use of these
Pipelines. Until such reserves are proved or other discoveries are made, the
risk to a prospective pipeline purchaser will likely be reflected in its
assessment of value. While management believes that it can realize the value of
the FPS and Pipelines, there can be no assurance that it can do so in the near
term or on favorable financial terms.
Volatility of Oil and Gas Markets--EEX's operations are highly dependent upon
the prices of, and demand for, oil and gas. These prices have been, and are
likely to continue to be, volatile. Prices are subject to fluctuations in
response to a variety of factors that are beyond the control of EEX, such as
worldwide economic and political conditions as they affect actions of OPEC and
Middle East and other producing countries, and the price and availability of
alternative fuels. EEX's hedging activities with respect to some of its
projected oil and gas production, which are designed to protect against price
declines, may prevent EEX from realizing the benefits of price increases above
the levels of the hedges.
Estimating Reserves and Future Net Cash Flows--Uncertainties are inherent in
estimating quantities and values of reserves and in projecting rates of
production, net revenues and the timing of development expenditures. Reserve
data represent estimates only of the recovery of hydrocarbons from underground
accumulations and are often different from the quantities ultimately recovered.
Downward adjustment in reserve estimates could adversely affect EEX. Also, any
substantial decline in projected net revenues resulting from production of
reserves could have a material adverse effect on the Company's financial
position and results of operations.
Government Regulation--EEX's business is subject to certain federal, state and
local laws and regulations relating to the drilling for and the production of
oil and gas, as well as environmental and safety matters. Enforcement of or
changes to these regulations could have a material impact on the Company's
operations, financial condition and results of operations.
International Operations--EEX's interests in properties in countries outside the
United States are subject to the various risks inherent in foreign operations.
These risks may include, among other things, property and equipment as a result
of expropriation, nationalization, war, insurrection and other political risks,
risks of increases in taxes and governmental royalties, renegotiations of
contracts with governmental entities, changes in laws and policies governing
operations of foreign-based companies and other uncertainties arising out of
foreign government sovereignty over the Company's international operations. The
Company's international operations may also be adversely affected by laws and
policies of the United States affecting foreign trade, taxation and investment.
In addition, in the event of a dispute arising from foreign operations, the
Company may be subject to the exclusive jurisdiction of foreign courts or may
not be successful in subjecting foreign persons to the jurisdiction of the
courts of the United States.
RECENT EVENTS
Deepwater Gulf of Mexico - Garden Banks Block 386 (Llano, EEX 30%)--The Glomar-
Artic 1 semi-submersible rig moved into the Garden Banks area and began drilling
the second appraisal well at Llano in late September 1999. This well, Llano #3,
is located approximately one mile northwest of the discovery well and will test
the western extent of this reservoir and is expected to be drilled to
approximately 26,000 feet into the Lower Pliocene and Miocene sands encountered
in the discovery well.
In late April 2000, the well reached a total depth of 23,090 feet before
conditioning and logging tools became stuck in the well bore. Efforts to free
the tools were unsuccessful, and the Company intends to commence a side track
and resume drilling as soon as repairs to the blow-out prevention equipment are
completed. Before the tools became stuck, the Company observed hydrocarbon-
bearing sands that appear to correlate to, be thicker than, and be structurally
high to the uppermost pay sands observed in the Llano #1 well.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Hedging activity for the first quarter ended March 31, 2000, resulted in a gain
of $1.7 million for natural gas and a loss of $0.1 million for crude oil that
totals to a combined gain of $1.6 million. The total net hedging gain for
natural gas includes a gain of $0.2 million related to hedging activities
associated with the contractual requirement to purchase gas for delivery to a
co-generation plant in Texas. This gain is recorded as oil and gas properties.
The tables below provide information about EEX's hedging instruments as of March
31, 2000. Since essentially all of the hedging done by EEX utilized either
"swap" or "collar" instruments, the tables have been separated to show the
volumes hedged utilizing each instrument. The Notional Amount is equal to the
net volumetric hedge position of EEX during the periods. The fair values of the
hedging instruments are based on the difference between the applicable strike
price and the New York Mercantile Exchange future prices for the applicable
trading months. EEX follows hedge accounting for these positions and
accordingly, the fair values presented below, which represent unrealized gains
(losses), have not been recognized in the financial statements.
Notional Average Fair Value at
Amount Strike Price March 31, 2000
(BBtu) (1) (Per MMBtu) (2) (In thousands)
---------- --------------- --------------
Natural Gas Swaps:
April 2000 - June 2000.............................. 1,040 $2.53 $ (432)
July 2000 - September 2000.......................... 1,041 2.55 (438)
October 2000 - December 2000........................ 994 2.70 (382)
January 2001 - March 2001........................... 383 2.75 (126)
April 2001 - June 2001.............................. 398 2.48 (90)
July 2001 - September 2001.......................... 414 2.49 (93)
October 2001 - December 2001........................ 391 2.69 (66)
January 2002 - March 2002........................... 439 2.74 (54)
April 2002 - June 2002.............................. 445 2.51 (46)
July 2002 - September 2002.......................... 455 2.51 (55)
October 2002 - December 2002........................ 426 2.69 (45)
January 2003 - March 2003........................... 290 2.76 (24)
April 2003 - June 2003.............................. 315 2.54 (32)
July 2003 - September 2003.......................... 311 2.54 (38)
October 2003 - December 2003 303 2.72 (33)
January 2004 - March 2004........................... 315 2.80 (28)
April 2004 - June 2004.............................. 310 2.58 (33)
July 2004 - September 2004.......................... 335 2.57 (42)
October 2004 - December 2004........................ 319 2.76 (36)
----- -------
Total............................................ 8,924 $(2,093)
===== =======
- --------
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.
Notional Average Fair Value at
Amount Strike Price March 31, 2000
(BBtu) (1) (Per MMBtu) (2) (In thousands)
----------- --------------------------- -----------------
Floor Ceiling
-------- --------
Natural Gas Collars:
April 2000 - June 2000.............................. 4,095 $2.364 $2.682 $(1,052)
July 2000 - September 2000.......................... 3,220 2.318 2.648 (1,048)
October 2000 - December 2000........................ 3,525 2.506 2.835 (879)
January 2001 - March 2001........................... 900 2.584 2.889 (135)
April 2001 - June 2001.............................. 910 2.320 2.625 (80)
July 2001 - September 2001.......................... 920 2.315 2.620 (86)
October 2001 - December 2001 920 2.495 2.800 (77)
------ --------
Total............................................ 14,490 $(3,357)
====== =======
Note: Includes the cost of "puts" which was included in the averages
calculated for this table.
- ---------
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.
12
EEX has a contractual requirement to deliver gas to a co-generation plant in
Texas. The Company has been meeting the requirements for gas delivery by
purchasing gas in the open market and has entered into the following hedge
transactions. These volumes are not included in the above natural gas hedging
table. The Notional Amount is equal to the net volumetric position of EEX
during the period. The fair values of the hedging instruments are based on the
difference between the strike price and the New York Mercantile Exchange future
prices for the applicable trading month. EEX follows hedge accounting for these
positions and accordingly, the fair values presented below, which represent
unrealized gains (losses), have not been recognized in the financial statements.
Notional Average Fair Value at
Amount Strike Price March 31, 2000
(BBtu) (1) (Per MMBtu) (2) (In thousands)
------------- --------------- ---------------
Natural Gas:
April 2000 - June 2000.............................. 1,365 $2.14 $1,122
July 2000 - September 2000.......................... 1,380 2.16 1,140
October 2000 - December 2000........................ 1,380 2.32 1,055
----- ------
Total............................................ 4,125 $3,317
===== ======
- --------------
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EEX CORPORATION
(Registrant)
Dated: May 11, 2000 By: /s/ R. S. Langdon
-----------------------------
R. S. Langdon
Executive Vice President,
Finance and Administration,
and Chief Financial Officer
The above officer of Registrant
has signed this report as its duly
authorized representative and as
its principal financial officer.
15