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 JUNE 30, 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 July 31, 2000:
43,043,455
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ---------------------------
2000 1999 2000 1999
----------- ------------- ------------- -----------
(In thousands, except per share amounts)
Revenues:
Natural gas............................................... $ 40,637 $ 22,262 $ 78,195 $ 45,288
Oil, condensate and natural gas liquids................... 18,705 19,088 39,480 33,808
Cogeneration operations................................... 2,339 2,652 4,251 4,941
Other..................................................... 598 (19) 1,221 (499)
--------- --------- --------- ---------
Total.................................................. 62,279 43,983 123,147 83,538
--------- --------- --------- ---------
Costs and Expenses:
Production and operating.................................. 8,784 10,255 19,326 19,457
Exploration............................................... 9,506 32,786 14,254 45,485
Depletion, depreciation and amortization.................. 25,162 17,821 46,249 38,291
Impairment of producing oil and gas properties............ 12,200 -- 12,200 --
Loss (Gain) on sales of property, plant and equipment..... 1,729 (507) 2,289 (511)
Cogeneration operations................................... 2,034 2,349 3,388 4,539
General, administrative and other......................... 4,865 7,790 10,916 13,294
Taxes, other than income.................................. 2,208 474 3,991 1,975
--------- --------- --------- ---------
Total.................................................. 66,488 70,968 112,613 122,530
--------- --------- --------- ---------
Operating Income (Loss)..................................... (4,209) (26,985) 10,534 (38,992)
Other Income (Expense)--Net................................. 22 (97) 121 (164)
Interest Income............................................. 149 1,533 341 3,060
Interest and Other Financing Costs.......................... (8,278) (4,284) (15,958) (8,265)
--------- --------- --------- ---------
(Loss) Before Income Taxes.................................. (12,316) (29,833) (4,962) (44,361)
Income Taxes................................................ -- 235 2,300 1,220
Minority Interest Third Party............................... 563 -- 1,388 --
--------- --------- --------- ---------
Net (Loss).................................................. (12,879) (30,068) (8,650) (45,581)
Preferred Stock Dividends................................... 3,308 3,055 6,550 5,822
--------- --------- --------- ---------
Net (Loss) Applicable to Common Shareholders................ $(16,187) $(33,123) $(15,200) $(51,403)
========= ========= ========= =========
Net (Loss) Per Share Available to Common Shareholders:
Basic..................................................... $ (0.38) $ (0.79) $ (0.36) $ (1.22)
========= ========= ========= =========
Diluted................................................... $ (0.38) $ (0.79) $ (0.36) $ (1.22)
========= ========= ========= =========
Weighted Average Shares Outstanding:
Basic..................................................... 42,202 42,200 42,202 42,200
========= ========= ========= =========
Diluted................................................... 42,202 42,200 42,202 42,200
========= ========= ========= =========
See accompanying notes.
2
EEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30 December 31
2000 1999
--------------- --------------
(In thousands)
ASSETS
------
Current Assets:
Cash and cash equivalents.................................................... $ 10,581 $ 15,053
Restricted cash.............................................................. 7,632 5,000
Accounts receivable--trade (net of allowance of $2,182 and $1,791)........... 44,327 28,248
Other........................................................................ 12,474 12,737
------------ -----------
Total current assets..................................................... 75,014 61,038
------------ -----------
Property, Plant and Equipment (at cost):
Oil and gas properties (successful efforts method)........................... 1,209,301 1,259,364
Other........................................................................ 8,030 8,047
------------ -----------
Total.................................................................... 1,217,331 1,267,411
Less accumulated depletion, depreciation and amortization.................... 530,482 576,914
------------ -----------
Net property, plant and equipment........................................ 686,849 690,497
------------ -----------
Deferred Income Tax Assets...................................................... 20,509 22,809
Other Assets.................................................................... 8,509 6,440
------------ -----------
Total.................................................................... $ 790,881 $ 780,784
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable--trade...................................................... $ 47,165 $ 72,518
Current portion of capital lease obligations................................. 14,376 16,810
Other........................................................................ 3,747 2,580
------------ -----------
Total current liabilities................................................ 65,288 91,908
------------ -----------
Bank Revolving Credit Agreement................................................. 90,000 --
Capital Lease Obligations....................................................... 197,829 205,634
Gas Sales Obligation............................................................ 94,308 105,000
Other Liabilities............................................................... 52,578 80,329
Minority Interest Third Party................................................... 4,438 3,050
Shareholders' Equity:
Preferred stock (10,000 shares authorized; 1,687 and 1,621 shares issued;
Liquidation preference of $168,667 and $162,117)......................... 17 16
Common stock ($0.01 par value; 150,000 shares authorized; 43,041 and
42,483 shares issued).................................................... 430 424
Paid in capital.............................................................. 738,079 729,925
Retained (deficit)........................................................... (449,948) (434,748)
Unamortized restricted stock compensation.................................... (1,827) (443)
Treasury stock, at cost (14 shares).......................................... (311) (311)
------------ -----------
Total shareholders' equity............................................... 286,440 294,863
------------ -----------
Total.................................................................... $ 790,881 $ 780,784
============ ===========
See accompanying notes.
3
EEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30
-------------------------------------
2000 1999
--------------- ---------------
(In thousands)
OPERATING ACTIVITIES
Net (Loss).................................................................... $ (8,650) $(45,581)
Dry hole cost................................................................. 554 22,174
Depletion, depreciation and amortization...................................... 46,249 38,291
Impairment of producing oil and gas properties................................ 12,200 --
Impairment of undeveloped leasehold........................................... 2,753 2,907
Deferred income taxes......................................................... 2,300 1,000
Loss (Gain) on sales of property, plant and equipment......................... 2,289 (511)
Other......................................................................... (18,479) 6,503
Changes in current operating assets and liabilities:
Accounts receivable.......................................................... (16,079) 13,865
Other current assets......................................................... 263 615
Restricted cash.............................................................. (2,632) --
Accounts payable............................................................. (7,037) (9,349)
Other current liabilities.................................................... 1,167 (2,990)
---------- ----------
Net cash flows provided by operating activities............................ 14,898 26,924
---------- ----------
INVESTING ACTIVITIES
Additions of property, plant and equipment.................................... (83,271) (53,527)
Proceeds from dispositions of property, plant and equipment................... 11,760 --
Other (changes in accruals)................................................... (18,316) 585
---------- ----------
Net cash flows used in investing activities................................ (89,827) (52,942)
---------- ----------
FINANCING ACTIVITIES
Issuance of preferred stock and common stock warrants......................... -- 150,000
Borrowings under bank revolving credit agreement.............................. 170,000 45,000
Repayment of borrowings under bank revolving credit agreement................. (80,000) (45,000)
Borrowings under short-term financing agreement............................... 35,000 --
Repayment of borrowings under short-term financing agreement.................. (35,000) --
Deliveries under the gas sales obligation..................................... (10,692) --
Minority interest third party................................................. 1,388 --
Payments of capital lease obligations......................................... (10,239) (10,004)
---------- ----------
Net cash flows provided by financing activities............................ 70,457 139,996
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents............................ (4,472) 113,978
Cash and Cash Equivalents at Beginning of Period................................ 15,053 15,588
---------- ----------
Cash and Cash Equivalents at End of Period...................................... $ 10,581 $129,566
========== ==========
See accompanying notes.
4
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.
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, EEX may, at its 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.
In 2000, 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
June 30, 2000 $3.3 33,071
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
paying cash in exchange for physical delivery of the shares to EEX, or on a
net basis in either shares of EEX common stock or in cash. Pursuant to 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, EEX
pays (receives) the net differential. As of June 30, 2000, transactions
under these facilities covered approximately $9.1 million, or 796,533 shares
of EEX's common stock, with an average forward purchase price of $11.44 per
share. If the agreements were settled on a net basis on the June 30, 2000
market price of EEX's common stock ($5.3125 per share), EEX would be
obligated to pay approximately $4.9 million in cash, or deliver
approximately 918,275 shares. Under the terms of two facilities, EEX
deposited $7.6 million in cash collateral accounts. On August 1, 2000, EEX
elected to settle one of the facilities by paying cash for physical delivery
of the shares to EEX. On or before August 25, 2000, EEX will purchase
approximately 500,899 shares for $4.2 million. The other facility terminates
in the third quarter of 2000.
4. Payments under the gas sales obligation are amortized on the interest method
through final pay out. Payments made during the second quarter related to
this obligation were $6.0 million. 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 the class action securities lawsuit, Gracy Fund, et al. v. EEX
Corporation, et al., EEX, its insurers and co-defendants have reached an
agreement with counsel for plaintiffs to settle the case for a total amount
of $25 million, of which EEX would contribute $1.25 million. Counsel for the
parties have executed a Memorandum of Understanding ("MOU") dated as of June
22, 2000, setting out the basic terms of the settlement. The settlement
described in the MOU is subject to certain terms and conditions, including,
but not limited to, (i) reaching agreement on definitive terms of
settlement, (ii) notifying the class members, (iii) confirmatory discovery
by plaintiffs, (iv) cancellation if greater than a specified number of class
members opt out of the settlement, and (v) the court's final approval. The
settlement amount was paid into an escrow account on July 21, 2000.
On July 31, 2000, EEX filed EEX Corporation v. Cal Dive International, Inc.,
et al. in the 11th District Court, Harris County, Texas. The suit claims a
breach of fiduciary duty by a former employee involving, and damages from, a
series of transactions with the defendants. Certain of the defendants in the
above suit filed on August 1, 2000, Cal Dive International , Inc., et al. v.
EEX Corporation in Federal District Court, Southern District of Texas,
alleging breach of purchase and sale and other agreements and seeking a
declaratory judgment that Cal Dive is not liable to EEX in the transactions
that are the subject of EEX's suit. Because of the stage of the litigation,
no estimate of the claim or liability can be made at this time.
5
EEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 EEX 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, EEX closed a stock purchase of certain affiliates of
Tesoro Petroleum Corporation that indirectly own oil and gas properties and
pipeline assets. 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. 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 EEX'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 EEX's 1999 Annual Report on Form 10-K). EEX's
reportable segments are consistent with its 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 JUNE 30, 2000:
- ---------------------------------
Total Revenues............................. $ -- $ -- $ 50,538 $ 12,815 $ (1,074) $ 62,279
Production and operating costs............. -- 51 4,197 4,536 -- 8,784
Exploration costs.......................... 2,078 -- 6,829 599 -- 9,506
Depletion, depreciation and amortization... -- 1,146 15,159 8,429 428 25,162
Impairment of producing oil and gas
properties............................... -- -- 200 12,000 -- 12,200
Other costs................................ -- -- 2,797 (b) -- 8,039 10,836
--------- --------- -------- -------- -------- --------
Operating Income (Loss).................... (2,078) (1,197) 21,356 (12,749) (9,541) (4,209)
Interest Income and other.................. -- -- -- -- 171 171
Interest and other financing costs......... -- (3,539) (2,540) -- (2,199) (8,278)
--------- --------- -------- -------- -------- --------
Income (Loss) before income taxes.......... $ (2,078) $ (4,736) $ 18,816 $(12,749) $(11,569) $(12,316)
========= ========= ======== ======== ======== ========
Long-Lived Assets.......................... $ 61,909 $149,312 $428,963 $ 41,597 $ 5,068 $686,849
========= ========= ======== ======== ======== ========
Additions to Long-Lived Assets............. $ 6,917 $ 2,611 $ 27,395 $ 1,465 $ 87 $ 38,475
========= ========= ======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 1999:
- ---------------------------------
Total Revenues............................. $ -- $ -- $ 25,746 $ 14,280 $ 3,957 $ 43,983
Production and operating costs............. -- -- 6,002 4,253 -- 10,255
Exploration costs.......................... 31,081 -- 817 888 -- 32,786
Depletion, depreciation and amortization... -- 1,800 12,790 2,891 340 17,821
Other costs................................ -- -- 1,294 (b) -- 8,812 10,106
--------- --------- -------- -------- -------- --------
Operating Income (Loss).................... (31,081) (1,800) 4,843 6,248 (5,195) (26,985)
Interest Income and other.................. -- -- -- -- 1,436 1,436
Interest and other financing costs......... -- (3,497) (196) -- (591) (4,284)
--------- --------- -------- -------- -------- --------
Income (Loss) before income taxes.......... $ (31,081) $ (5,297) $ 4,647 $ 6,248 $ (4,350) $(29,833)
========= ========= ======== ======== ======== ========
Long-Lived Assets.......................... $ 40,521 $137,461 $199,916 $ 57,232 $ 5,581 $440,711
========= ========= ======== ======== ======== ========
Additions to Long-Lived Assets............. $ 14,649 $ 1,030 $ 10,384 $ 2,210 $ 332 $ 28,605
========= ========= ======== ======== ======== ========
6
EEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DEEPWATER
--------------------------------
OPERATIONS FPS/PIPELINES ONSHORE/SHELF INTERNATIONAL OTHER(a) TOTAL
-------------- ---------------- -------------- --------------- ---------- -------
SIX MONTHS ENDED JUNE 30, 2000:
- -------------------------------
Total Revenues............................. $ -- $ -- $ 93,687 $ 27,159 $ 2,301 $123,147
Production and operating costs............. -- 249 11,206 7,871 -- 19,326
Exploration costs.......................... 4,166 -- 8,869 1,219 -- 14,254
Depletion, depreciation and amortization... -- 2,046 32,147 11,200 856 46,249
Impairment of producing oil and gas
properties............................... -- -- 200 12,000 -- 12,200
Other costs................................ -- -- 4,574 (b) -- 16,010 20,584
--------- --------- -------- -------- --------- --------
Operating Income (Loss).................... (4,166) (2,295) 36,691 (5,131) (14,565) 10,534
Interest Income and other.................. -- -- -- -- 462 462
Interest and other financing costs......... -- (7,028) (5,244) -- (3,686) (15,958)
--------- --------- -------- -------- --------- --------
Income (Loss) before income taxes.......... $ (4,166) $ (9,323) $ 31,447 $ (5,131) $ (17,789) $ (4,962)
========= ========= ======== ======== ========= ========
Long-Lived Assets.......................... $ 61,909 $ 149,312 $428,963 $ 41,597 $ 5,068 $686,849
========= ========= ======== ======== ========= ========
Additions to Long-Lived Assets............. $ 14,532 $ 7,208 $ 49,608 $ 4,234 $ 805 $ 76,387
========= ========= ======== ======== ========= ========
SIX MONTHS ENDED JUNE 30, 1999:
- -------------------------------
Total Revenues............................. $ -- $ -- $ 54,488 $ 24,800 $ 4,250 $ 83,538
Production and operating costs............. -- -- 12,307 7,150 -- 19,457
Exploration costs.......................... 36,019 -- 7,051 2,415 -- 45,485
Depletion, depreciation and amortization... -- 3,600 28,191 5,779 721 38,291
Other costs................................ -- -- 2,795 (b) -- 16,502 19,297
--------- --------- -------- -------- --------- --------
Operating Income (Loss).................... (36,019) (3,600) 4,144 9,456 (12,973) (38,992)
Interest Income and other.................. -- -- -- -- 2,896 2,896
Interest and other financing costs......... -- (6,957) (408) -- (900) (8,265)
--------- --------- -------- -------- --------- --------
Income (Loss) before income taxes.......... $ (36,019) $ (10,557) $ 3,736 $ 9,456 $ (10,977) $(44,361)
========= ========= ======== ======== ========= ========
Long-Lived Assets.......................... $ 40,521 $ 137,461 $199,916 $ 57,232 $ 5,581 $440,711
========= ========= ======== ======== ========= ========
Additions to Long-Lived Assets............. $ 21,298 $ 1,030 $ 24,191 $ 7,202 $ 767 $ 54,488
========= ========= ======== ======== ========= ========
- ------------------
(a) Includes primarily Cogeneration Plant Operations, General and Administrative
and gains/losses on hedging and sale of assets.
(b) Includes taxes other than income.
7
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."
UPDATE AND RECENT EVENTS
Llano Well No. 3 and Deepwater* Gulf of Mexico Exploration
The Llano No. 3 located at Garden Banks Block 386 has been drilled to its
planned total depth of approximately 25,500 feet, encountering hydrocarbons in
the Lower Pliocene and Miocene-age sands. Based upon log analysis, the well
encountered approximately 340 feet of hydrocarbon-bearing sands. This compares
to approximately 200 feet of hydrocarbon-bearing sands encountered in the
discovery well. This second appraisal well is located approximately one mile to
the northwest of the discovery well. EEX believes the field should be
commercial with potential gross reserves estimated to be in the range of 200 to
250 million barrels of oil equivalent. These estimates do not constitute proved
reserves at this time.
EEX and the other participants in the Llano leases are in discussions on a plan
of development for Llano, as well as on further exploration in the Llano area.
A plan of development would normally include additional wells, production and
transportation facilities, and will require regulatory approvals. EEX has
recommended using the Pipelines (defined below) as part of a plan of
development. No assurances can be given that an agreement will be reached among
the parties regarding a plan of development or further actions in the Llano
area.
EEX has entered into an agreement with Murphy Oil Corporation to farmout its 40%
working interest in the Mason Prospect in return for a carried 18% working
interest (up to 110% of the approved estimated cost of the well or to the
objective depth, whichever comes first) in the initial exploration well on the
prospect. The Mason Prospect on Garden Banks Block 562 is located approximately
ten miles south of the Llano area. The well will be operated by Murphy Oil
Corporation and targets potential hydrocarbon accumulations in both Lower
Pliocene and Miocene-age sands. Drilling is expected to commence by the end of
the third quarter.
The Llano No. 3 was drilled using the Arctic I drilling rig that EEX has under a
contract that expires July 2002. After the rig completes its work on Llano No.
3, the rig is expected to move to another Llano area prospect. Depending on the
willingness of certain Llano area partners to participate in this and subsequent
wells, EEX may seek the participation of new joint venture partners to share in
the expense of the next and subsequent well(s), elect to bear 100% of the costs
or decide to "stack" the rig and take it out of operation at a rate of
approximately $130,000 per day.
Gulf of Mexico Shelf
In March 2000, EEX completed a sale of certain properties on the Gulf of Mexico
Continental Shelf ("Shelf"). Primarily as the result of a decision to shift
capital spending from the Shelf to higher potential onshore programs, the
remaining Shelf properties are continuing to experience production declines. In
certain instances, EEX is conducting remedial work on wells in order to restore
a portion of these production volumes. There can be no assurances that the
remedial work will improve production rates or reverse production declines. As
previously announced, EEX is considering the sale of its remaining Shelf
properties, and has engaged a consultant to evaluate the properties and advise
EEX concerning a possible sale. EEX has not made a final decision to sell these
properties at this time. If the properties are sold, there can be no assurances
that the purchase price will be equal to or greater than the carrying value of
the assets.
- ------------------
* "Deepwater" means areas of the Gulf of Mexico where water depths are greater
than 600 feet.
8
Cooper Floating Production System ("FPS") and Pipelines
The FPS and Pipelines (two pipelines and associated facilities from the Cooper
project) have a carrying value of approximately $149 million net to EEX at June
30, 2000, generally reflecting the highest valued use of the assets. EEX has
continued its efforts to place into service the FPS that completed refurbishment
and became ready for service in the first half of 2000. Previously reported
discussions with an operator for a disposition of the FPS have terminated. EEX
recently completed a new marketing evaluation that indicated a number of
potential uses for the FPS. The study indicated that the highest value use of
the FPS is as a production facility in a project that requires such capability
in the near term (rather than experiencing delays associated with design and
fabrication). Because of the uniqueness of the FPS and the characteristics of
its markets, it is difficult to assess its ultimate market value. The 40% co-
owner shared the cost of the evaluation and has indicated its desire to proceed
with a joint marketing effort. Management believes that a disposition of the FPS
is not likely until late in 2000 at the earliest, and therefore, will not
appreciably affect this year's cash flows.
The Pipelines are also not in use. Recent internal engineering estimates
indicate that the daily capacity for pipeline quality products is approximately
70,000 barrels of oil and 140 million cubic feet of gas. EEX continues to
believe that the Pipelines have utility as support infrastructure for
anticipated development at Llano and the greater Llano area. EEX currently
estimates potential gross Llano reserves in the range of 200 to 250 million
barrels of oil equivalent, however, it has yet to record proved reserves at
Llano or in the Llano area.
While management believes that it can realize the value of the FPS and
Pipelines, there can be no assurance that this can be accomplished in the near
term, or on favorable financial terms.
International Exploration and Development
As previously reported, production from the Mudi Field in Indonesia has declined
to a level below that forecast at year-end 1999. EEX is continuing studies of
the reservoir and is participating in drilling and other operations intended to
improve production rates. The results of the studies and drilling are not
complete. However, after a preliminary evaluation of the field and its
production, EEX determined that the carrying value of the asset should be
reduced by $12 million, and the depreciation, depletion and amortization rate
should be increased from $5 to $15 per barrel. Higher oil prices and the
mechanism of the production sharing agreement contributed to these changes by
lowering the number of barrels necessary to recover costs. EEX continues to
consider the sale of this asset but no final determination has been made
concerning a sale. If the property is sold, there can be no assurances that the
purchase price will be equal to or greater than the carrying value of the asset.
Onshore U.S. Business
EEX has continued its strategy to grow its U.S. onshore business. During the
first six months, 21 of 25 U.S. onshore wells in which EEX participated were
successful. At the end of the second quarter, five wells were in the process of
completion and seven wells were drilling. Seven significant workovers also
contributed to increased production. Onshore natural gas volumes increased by 8%
from January to June 2000. The assets acquired from Tesoro Corporation during
the fourth quarter of 1999 are performing at or better than forecast. Operations
for all of EEX's onshore assets are now being managed from its San Antonio
office.
RESULTS OF OPERATIONS
For the second quarter of 2000, EEX reported a net loss applicable to common
shareholders of approximately $16 million ($0.38 per share), versus a net loss
applicable to common shareholders of $33 million ($0.79 per share) for the same
period in 1999.
QUARTERS ENDED JUNE 30, 2000 AND 1999
For the second quarter of 2000, total revenues were $62 million, 42% higher than
total revenues in the second quarter of 1999. Natural gas revenues for the
second quarter of 2000 were 83% higher than the same quarter of 1999. This
increase was due to a 39% increase in average prices and a 31% increase in
production. The increase in production is primarily a result of the Tesoro
acquisition, but was partially offset by asset sales and production declines on
other properties. The average natural gas sales price per thousand cubic feet
("Mcf") was $2.94 in the second quarter of 2000, compared with $2.11 in the same
period of 1999. Natural gas production for the second quarter of 2000 was 14
billion cubic feet ("Bcf"), compared with 11 Bcf in the same period of 1999. Oil
revenues remained constant from quarter to quarter. The average oil price during
the second quarter of 2000 increased to $27.56 from $14.93, offset by a 47%
decrease in production, primarily due to production declines at the Mudi Field.
9
Production from the Mudi Field in Indonesia during the first six months of 2000
was lower than forecast at year-end 1999. EEX reevaluated this asset at the end
of the second quarter and reduced the carrying value by $12 million per SFAS
121.
Costs and expenses for the second quarter of 2000 were $66 million, compared
with $71 million in 1999. Operating expenses (production and operating, general
and administrative and taxes other than income) were $16 million in the current
quarter, 14% lower than the same period of 1999, primarily as a result of
property sales, which were offset by the Tesoro acquisition. Exploration
expenses for the second quarter of 2000 decreased to $10 million, compared to
$33 million for the same period of 1999. The second quarter of 1999 included $19
million of exploration expenses associated with the George Prospect dry hole in
Mississippi Canyon Block 442. Depletion, depreciation and amortization for the
second quarter of 2000 was $25 million, $7 million higher than the same period
of 1999, primarily due to an increased rate on the Mudi Field due to higher oil
prices and the mechanism of the production sharing agreement, and the addition
of properties from the Tesoro acquisition, which were offset somewhat by
property sales and production declines.
Total interest and other financing costs for the second quarter of 2000,
including interest income, preferred stock dividends and other income, were $11
million, a $6 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.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
For the six months ended June 30, 2000, total revenues were $123 million, 47%
higher than total revenues for the six months ended June 30, 1999. Natural gas
revenues for the first six months of 2000 were 73% higher than the first six
months of 1999. This increase was due to a 28% increase in production and a 35%
increase in average prices. The average natural gas sales price per thousand
cubic feet ("Mcf") was $2.75 for the first six months of 2000, compared with
$2.03 in the same period of 1999. Natural gas production for the first six
months of 2000 was 28 billion cubic feet ("Bcf"), compared with 22 Bcf in the
same period of 1999. The increase in production is primarily due to the Tesoro
acquisition, which was offset by property sales and production declines. Oil
revenues increased 16%, primarily due to increased average prices, offset by a
45% decrease in production, primarily due to production declines associated with
the Mudi Field. The average oil price during the first six months of 2000
increased to $27.40 from $13.02.
Production from the Mudi Field in Indonesia during the first six months of 2000
was lower than forecast at year-end 1999. EEX reevaluated this asset at the end
of the second quarter and reduced the carrying value by $12 million per SFAS
121.
Costs and expenses for the first six months of 2000 were $113 million, compared
with $123 million in 1999. Operating expenses (production and operating, general
and administrative and taxes other than income) remained flat from period to
period. Exploration expenses for the first six months of 2000 decreased to $14
million, compared to $46 million for the same period of 1999. The first six
months of 1999 included $19 million of exploration expenses associated with the
George Prospect dry hole in Mississippi Canyon Block 442. Depletion,
depreciation and amortization for the first six months of 2000 was $46 million,
$8 million higher than the same period of 1999, primarily due to an increased
rate on the Mudi Field due to higher oil prices and the mechanism of the
production sharing agreement, and the addition of properties from the Tesoro
acquisition, which were offset somewhat by property sales and production
declines.
Total interest and other financing costs for the first six months of 2000,
including interest income, preferred stock dividends and other income, were $22
million, an $11 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 first six months of 2000 due to a lower cash balance.
10
EEX CORPORATION
SUMMARY OF SELECTED OPERATING DATA
FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Sales volume
Natural gas (Bcf) (a).................................. 13.8 10.6 28.5 22.2
Oil, condensate and natural gas liquids (MMBbls) (d)... 0.7 1.3 1.5 2.6
Total volumes (Bcfe) (a)............................. 17.9 18.2 37.2 37.8
Average sales price (b)
Natural gas (per Mcf) (c).............................. $ 2.94 $ 2.11 $ 2.75 $ 2.03
Oil, condensate and natural gas liquids (per Bbl)...... 27.23 14.91 27.17 13.02
Total (per Mcfe) (c)................................. 3.31 2.27 3.17 2.09
Average costs and expenses (per Mcfe) (c)
Production and operating (b)........................... $ 0.49 $ 0.56 $ 0.52 $ 0.51
Exploration............................................ 0.53 1.80 0.38 1.20
Depletion, depreciation and amortization............... 1.40 0.98 1.24 1.01
General, administrative and other...................... 0.27 0.43 0.29 0.35
Taxes, other than income............................... 0.12 0.03 0.11 0.05
- --------------------
(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 six months ended June
30, 2000 were $15 million, a decrease of $12 million over the same period of
1999, largely due to changes in current operating assets and liabilities. Net
cash flows used in investing activities for the six months ended June 30, 2000
were $90 million, a $37 million increase from cash flows used in investing
activities for the same period of 1999. The increase in investing activities is
primarily due to increased capital spending related to onshore operations
arising from the Tesoro acquisition, Llano No. 3, and the refurbishment of the
FPS. Net cash flows provided by financing activities for the six months ended
June 30, 2000 were $70 million, compared to $140 million for the same period of
1999. As of June 30, 2000, EEX had $90 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
Currently forecasted 2000 capital expenditures are approximately $150 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 second quarter of 2000 were $39 million and for the
first six months of 2000 were $83 million. Remaining 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. EEX 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 order to continue
its anticipated capital program, including Llano area development, EEX will
require additional capital resources. EEX may seek additional funds from public
and private equity markets, debt markets and/or sell additional assets.
11
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 EEX will be able to secure funds in these markets when necessary, or
that such funds will be obtained on terms favorable to it. If EEX were unable
to secure funds when required for its activities, its liquidity and ability to
make capital investments would become impaired.
Liquidity
EEX has a $350 million revolving credit line with a group of banks that matures
on June 27, 2002, of which $90 million was outstanding at June 30, 2000. The
revolving credit agreement limits, at all times, total debt, as defined in the
credit agreement, to the lesser of 60% of capitalization, as defined, or $1
billion, and prohibits liens on property except under certain circumstances. As
described in EEX'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 June 30, 2000,
the debt to capital ratio under the revolving credit agreement was 52% and
unused available credit was approximately $120 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.
Early in 1998, EEX entered into two forward purchase facilities to repurchase
shares of its common stock. These facilities expire in August and September
2000. On August 1, 2000, EEX elected to settle one of the facilities by physical
delivery of the shares to EEX in exchange for cash. On or before August 25,
2000, EEX will purchase 500,899 shares for $4.2 million. The shares will become
treasury shares, and the capitalization for the debt to capital ratio under the
revolving credit agreement will be reduced by the amount of the purchase price
of the treasury shares. The remaining facility terminates in the third quarter
of 2000. See Note 3 to the Condensed Consolidated Financial Statements.
EEX'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
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 delays in development, or adverse
economic conditions, may reduce the capitalization used in computing the debt
to capital ratio which would decrease the amount of funds available to EEX to
borrow under its revolving credit agreement.
. Sale of the FPS and/or Pipelines would result in a significant change in
EEX's debt structure due to the termination of the capital lease obligation
associated with those assets. EEX would also incur substantial early
termination costs that would adversely affect net income and reduce borrowing
capacity. 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 EEX to borrow under its revolving credit agreement. However,
there can be no assurance that such a potential sale and related 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 EEX's 1999 Annual
Report on Form 10-K and the discussion above under "Update and Recent Events
--Llano Well No. 3 and Deepwater Gulf of Mexico Exploration") has been
assumed, for planning purposes, to be funded by EEX's joint venture partners
in its Llano development and Llano area 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 and be exposed to potentially higher dry
hole cost. If the rig were stacked, the daily cost would increase exploration
expense adversely affecting net income or loss. EEX currently has no
commitment from joint venture partners for the use of the rig after the Llano
No. 3 well.
. Any decreases in capitalization through losses incurred from dry hole
expense, asset write-downs, loss on sales or other reasons, or increases in
borrowings or debt (as defined in the revolving credit agreement) will
increase the debt to capital ratio and further limit available borrowings. If
EEX is unable to secure additional equity and capital expenditures continue
at currently planned levels, available borrowings under the revolving credit
agreement may become severely limited or unavailable.
. If a significant adverse financial impact results from the occurrence of any
or all of the above-mentioned factors prior to EEX obtaining additional
equity, EEX's liquidity would be severely impacted.
12
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.
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.
Capital Liquidity and Funding Risk--See the discussion above under "Liquidity
and Capital Resources - Capital Budget."
FPS and Pipeline Marketing Risk--See the discussion above under "Update and
Recent Events - Cooper Floating Production System ("FPS") and Pipelines."
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 it 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.
13
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 EEX'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 EEX'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 EEX's international operations. EEX'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, EEX 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.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Hedging activity for the second quarter ended June 30, 2000, resulted in a loss
of $1.7 million for natural gas and break-even for crude oil which totals to a
combined loss of $1.7 million. The total net hedging loss for natural gas
includes a gain of $1.8 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. For the six
months ended June 30, 2000, the combined hedging activity was approximately
break-even. The tables below provide information about EEX's hedging instruments
as of June 30, 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 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 JUNE 30, 2000
(BBTU)(1) (PER MMBTU)(2) (IN THOUSANDS)
------------ -------------------- -----------------
Natural Gas Swaps:
July 2000 - September 2000.............................. 2,730 (3) $2.62 $ (684)
October 2000 - December 2000............................ 2,060 (3) 2.68 (859)
January 2001 - March 2001............................... 383 2.75 (569)
April 2001 - June 2001.................................. 398 2.48 (424)
July 2001 - September 2001.............................. 414 2.49 (384)
October 2001 - December 2001............................ 391 2.69 (314)
January 2002 - March 2002............................... 439 2.74 (291)
April 2002 - June 2002.................................. 445 2.51 (216)
July 2002 - September 2002.............................. 455 2.51 (186)
October 2002 - December 2002............................ 426 2.69 (140)
January 2003 - March 2003............................... 290 2.76 18
April 2003 - June 2003.................................. 315 2.54 (90)
July 2003 - September 2003.............................. 311 2.54 (90)
October 2003 - December 2003 303 2.72 (34)
January 2004 - March 2004............................... 315 2.80 13
April 2004 - June 2004.................................. 310 2.58 (55)
July 2004 - September 2004.............................. 335 2.57 (63)
October 2004 - December 2004............................ 319 2.76
------- -------
Total................................................ 10,639 $(4,368)
======= =======
- --------------
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.
(3) The notional amount represents the total volumetric hedge position during
the period July through December 2000, which includes "Buy" swaps to offset
and manage existing hedge positions. The notional amount of the "Buy" swaps
for July through September 2000 is 1,380 BBtu's and for October through
December 2000 is 1,075 BBtu's. As a result, EEX is a net purchaser of 30
BBtu's for the July through September 2000 period and 90 BBtu's for the
October through December 2000 period.
NOTIONAL AVERAGE FAIR VALUE AT
AMOUNT STRIKE PRICE JUNE 30, 2000
(BBTU)(1) (PER MMBTU)(2) (IN THOUSANDS)
----------------- --------------------------- ------------------
FLOOR CEILING
------------- ------------
Natural Gas Collars:
July 2000 - September 2000.......................... 3,680 $2.321 $2.650 $ (6,757)
October 2000 - December 2000........................ 3,680 2.509 2.838 (6,011)
January 2001 - March 2001........................... 3,150 2.532 3.719 (1,862)
April 2001 - June 2001.............................. 3,185 2.456 3.107 (1,366)
July 2001 - September 2001.......................... 3,220 2.454 3.110 (986)
October 2001 - December 2001 3,220 2.506 3.378 (352)
------- --------
Total............................................ 20,135 $(17,334)
======= ========
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.
15
EEX has a contractual requirement to deliver gas to a co-generation plant in
Texas. EEX 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 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 JUNE 30, 2000
(BBTU)(1) (PER MMBTU)(2) (IN THOUSANDS)
--------------- ------------------ ----------------
Natural Gas:
July 2000 - September 2000.......................... 1,380 $ 2.16 $3,197
October 2000 - December 2000........................ 1,380 2.32 2,973
--------- -------
Total............................................ 2,760 $6,170
========= =========
- -----------------
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the previously reported lawsuit, Gracy Fund, et al. v. EEX Corporation, et
al., EEX, its insurers and co-defendants have reached an agreement with counsel
for plaintiffs to settle the case for a total amount of $25 million, of which
EEX would contribute $1.25 million. Counsel for the parties have executed a
Memorandum of Understanding ("MOU") dated as of June 22, 2000, setting out the
basic terms of the settlement. The settlement described in the MOU is subject
to certain terms and conditions, including, but not limited to, (i) reaching
agreement on definitive terms of settlement, (ii) notifying the class members,
(iii) confirmatory discovery by plaintiffs, (iv) cancellation if greater than a
specified number of class members opt out of the settlement, and (v) the court's
final approval. The settlement amount was paid into an escrow account on July
21, 2000. EEX entered into the MOU to avoid the uncertainty and expense of
litigation. EEX and the individual defendants continue to deny all the
allegations of the suit.
On July 31, 2000, EEX filed EEX Corporation v. Cal Dive International, Inc., et
al. in the 11th District Court, Harris County, Texas. The suit claims a breach
of fiduciary duty by a former employee involving, and damages from, a series of
transactions with the defendants. Certain of the defendants in the above suit
filed on August 1, 2000, Cal Dive International , Inc., et al. v. EEX
Corporation in Federal District Court, Southern District of Texas, alleging
breach of purchase and sale and other agreements and seeking a declaratory
judgment that Cal Dive is not liable to EEX in the transactions that are the
subject of EEX's suit. Because of the stage of the litigation, no estimate of
the claim or liability can be made at this time.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on May 9, 2000, the shareholders
elected two directors for terms expiring at the annual meeting in 2003, and
ratified the appointment of Ernst & Young LLP as Independent Auditors for fiscal
year 2000. In addition to the two directors elected at the meeting, T. M
Hamilton, F. S. Addy, H. H. Newman and F. M. Lowther continued their respective
terms of office after the meeting. Below is the result of the vote.
Election of Directors:
Abstentions and
Name Votes for Withheld Broker Non-Votes
------------------------------------------------------------------------------
B. A. Bridgewater, Jr. 43,647,662 848,559 --
Michael P. Mallardi 43,649,747 846,474 --
Appointment of Ernst & Young LLP as Independent Auditors:
Abstentions and
For Against Broker Non-Votes
- --------------------------------------------------------------------
44,100,520 90,759 304,942
17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 First Amendment to Natural Gas Prepaid Forward Sale
Contract, effective May 16, 2000, between EEX E&P
Company, L.P. and Bob West Treasure L.L.C., amending
the Natural Gas Prepaid Forward Sale Contract filed
as Exhibit 99.5 to Registrant's Form 8-K dated
December 17, 1999.
Exhibit 10.2 Amended and Restated Call Agreement, dated May 16,
2000, between EEX Capital, Inc. and Bob West
Treasure L.L.C., amending the Call Agreement filed
as Exhibit 99.6 to Registrant's Form 8-K dated
December 17, 1999.
Exhibit 10.3 Settlement Agreement, dated June 26, 2000, between
EEX Corporation and Janice Hartrick.
Exhibit 10.4 Employment Agreement, dated July 3, 2000, between
EEX Corporation and Richard L. Edmonson.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
18
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: August 10, 2000 By: /s/ R.S. Langdon
------------------------
R. S. Langdon
Executive Vice President,
Finance and Administration,
and Chief Financial Officer
19
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.1 First Amendment to Natural Gas Prepaid Forward Sale Contract,
effective May 16, 2000, between EEX E&P Company, L.P. and Bob West
Treasure L.L.C., amending the Natural Gas Prepaid Forward Sale
Contract filed as Exhibit 99.5 to Registrant's Form 8-K dated
December 17, 1999.
10.2 Amended and Restated Call Agreement, dated May 16, 2000, between EEX
Capital, Inc. and Bob West Treasure L.L.C., amending the Call
Agreement filed as Exhibit 99.6 to Registrant's Form 8-K dated
December 17, 1999.
10.3 Settlement Agreement, dated June 26, 2000, between EEX Corporation
and Janice Hartrick.
10.4 Employment Agreement, dated July 3, 2000, between EEX Corporation
and Richard L. Edmonson.
27 Financial Data Schedule
20