<PAGE>
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, 1999
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
(State or other jurisdiction of incorporation or organization)
75-2421863
(I.R.S. Employer 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, 1999:
42,432,058
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31
----------------------
1999 1998
---------- ---------
(In thousands except
per share amounts)
<S> <C> <C>
Revenues:
Natural gas............................................. $ 23,026 $ 45,538
Oil, condensate and natural gas liquids................. 14,720 16,430
Cogeneration operations................................. 2,289 2,464
Other................................................... (480) 81
-------- --------
Total................................................ 39,555 64,513
-------- --------
Costs and Expenses:
Production and operating................................ 9,202 11,087
Exploration............................................. 12,699 12,323
Depreciation and amortization........................... 20,470 31,612
(Gain) Loss on sales of property, plant and equipment... (4) 6,027
Cogeneration operations................................. 2,190 2,015
General, administrative and other....................... 5,504 6,725
Taxes, other than income................................ 1,501 3,893
-------- --------
Total................................................ 51,562 73,682
-------- --------
Operating (Loss)......................................... (12,007) (9,169)
Other Income (Expense) - Net............................. (67) 41
Interest Income.......................................... 1,527 91
Interest and Other Financing Costs....................... (3,981) (5,225)
-------- --------
(Loss) Before Income Taxes............................... (14,528) (14,262)
Income Taxes............................................. 985 1,001
Minority Interest........................................ - 3,764
-------- --------
Net (Loss)............................................... (15,513) (19,027)
Preferred Stock Dividends................................ 2,767 -
-------- --------
Net (Loss) Applicable to Common Shareholders............. $(18,280) $(19,027)
======== ========
Basic and Diluted Net (Loss) Per Share................... $(0.43) $(0.45)
======== ========
Weighted Average Shares Outstanding...................... 42,200 42,214
======== ========
</TABLE>
See accompanying notes.
1
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EEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net (Loss)...................................................... $(15,513) $(19,027)
Dry hole cost................................................... 5,832 2,752
Depreciation and amortization................................... 20,470 31,612
Deferred income tax expense..................................... 500 -
(Gain) Loss on sale of property, plant and equipment............ (4) 6,027
Other........................................................... 6,420 (5,426)
Changes in current operating assets and liabilities:
Accounts receivable............................................ 14,756 (4,578)
Other current assets........................................... (517) (4,581)
Accounts payable............................................... (18,250) (9,287)
Other current liabilities...................................... (2,601) (3,488)
-------- --------
Net cash flows provided by (used in) operating activities...... 11,093 (5,996)
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment...................... (25,540) (69,216)
Proceeds from disposition of property, plant and equipment...... 4 20,353
Other (changes in accruals)..................................... (2,205) (5,703)
-------- --------
Net cash flows used in investing activities.................... (27,741) (54,566)
-------- --------
FINANCING ACTIVITIES
Issuance of preferred stock and common stock warrants........... 150,000 -
Borrowings under bank revolving credit agreement................ 20,000 95,000
Repayment of borrowings under bank revolving credit agreement... (20,000) (35,000)
Borrowings under short-term financing agreement................. - 77,500
Repayment of borrowings under short-term financing agreement.... - (69,500)
Payments of capital lease obligations........................... (9,198) (7,299)
-------- --------
Net cash flows provided by financing activities................ 140,802 60,701
-------- --------
Net Increase in Cash and Cash Equivalents........................ 124,154 139
Cash and Cash Equivalents at Beginning of Period................. 15,588 3,790
-------- --------
Cash and Cash Equivalents at End of Period....................... $139,742 $ 3,929
======== ========
</TABLE>
See accompanying notes.
2
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EEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
----------- ------------
(In thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents......................................... $ 139,742 $ 15,588
Accounts receivable-trade (net of allowance of $645 and $2,504)... 27,774 42,530
Other............................................................. 14,757 14,240
---------- ----------
Total current assets............................................ 182,273 72,358
---------- ----------
Property, Plant and Equipment (at cost):
Oil and gas properties (successful efforts method)................ 1,122,125 1,106,274
Other............................................................. 20,737 19,998
---------- ----------
Total........................................................... 1,142,862 1,126,272
Less accumulated depletion, depreciation and amortization......... 692,267 674,887
---------- ----------
Net property, plant and equipment............................... 450,595 451,385
---------- ----------
Deferred Income Tax Assets......................................... 28,326 28,826
Other Assets....................................................... 2,341 12,501
---------- ----------
Total........................................................... $ 663,535 $ 565,070
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade.......................................... $ 25,073 $ 45,528
Short-term borrowings............................................. - -
Current portion of capital lease obligations...................... 11,154 10,874
Other............................................................. 2,589 5,190
---------- ----------
Total current liabilities....................................... 38,816 61,592
---------- ----------
Bank Revolving Credit Agreement.................................... - -
---------- ----------
Capital Lease Obligations.......................................... 212,966 222,444
---------- ----------
Other Liabilities.................................................. 43,543 46,734
---------- ----------
Shareholders' Equity:
Preferred stock (10,000 shares authorized; 1,528 and 0 shares
issued; liquidation preference of $152,767 and $0)............... 15 -
Common stock (150,000 shares authorized;
42,440 and 42,387 shares issued)................................. 424 424
Paid in capital................................................... 721,559 569,268
Retained earnings (deficit)....................................... (352,978) (334,698)
Unamortized restricted stock compensation......................... (322) (206)
Treasury stock.................................................... (488) (488)
---------- ----------
Total shareholders' equity...................................... 368,210 234,300
---------- ----------
Total........................................................... $ 663,535 $ 565,070
========== ==========
</TABLE>
See accompanying notes.
3
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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. On December 22, 1998, EEX entered into a Purchase Agreement ("Agreement")
that provided the Company would receive $150 million and issue to the
purchaser 1,500,000 shares of Series B 8% Cumulative Perpetual Preferred
Stock (the "Preferred Stock") and Warrants to acquire 21 million shares of
the Company's common stock. On January 8, 1999, the transaction was closed
and EEX issued the Preferred Stock and Warrants in exchange for $150
million.
Each share of 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 the
earlier occurrence of certain events including a change of control (as
defined in the Agreement). 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. The Preferred Stock is
entitled to a liquidation preference of $100 per share plus accrued and
unpaid dividends. The Preferred Stock may be redeemed, in whole but not in
part, by the Company at any time for cash at the stated value plus accrued
and unpaid dividends. Until any adjustment of the dividend rate, holders of
the Preferred Stock will be entitled to cast an aggregate of eight million
votes on matters voted upon by the common stock holders, and to a separate
class vote on certain matters affecting the Preferred Stock. EEX has entered
into a Registration Rights Agreement to register under the Securities Act of
1933, and maintain the effectiveness of such registration of, the resale of
the Preferred Shares, the Warrants and any common stock acquired by the
purchaser pursuant to the Warrants. Under the terms of the Agreement, the
purchaser has the right to add a member to the Company's Board of Directors
and did so in January 1999. The purchaser may continue the representation on
the Company's Board of Directors if certain conditions are maintained. In the
event of a Change of Control, as defined in the Agreement, occurring prior to
the sixth anniversary of the closing of the transaction, the Purchaser has
the right to exchange all or part of the Preferred Stock and Warrants for
shares of common stock at the rate of 18.6047 shares of common stock for each
share of Preferred Stock and a proportionate number of Warrants, provided
that the Company may, under certain circumstances, pay a portion of the
exchange in cash. The exercise price of the Warrants and the exchange formula
related to a Change of Control may be adjusted upon
4
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the occurrence of certain events described in the anti-dilution provisions of
the Warrants.
The Warrants were issued in three series, each exercisable at any time
beginning August 31, 1999 for $12 per share of common stock: (a) Series A
Warrants to acquire 10.5 million shares, exercisable for ten years; (b)
Series B Warrants to acquire 2.5 million shares, exercisable for seven years,
and (c) Series C Warrants to acquire 8 million shares, exercisable for seven
years. Until approved by the shareholders of the Company at the 1999 annual
meeting, the Warrants will be exercisable only in the form of a stock
appreciation right (entitled to receive the cash difference between the
exercise price and the market price of the common stock on the trading day
prior to the date of exercise). If approved by the shareholders, the Series A
and Series B Warrants will be exercisable for cash or by utilizing shares of
Preferred Stock at the stated value on a gross or net basis. The Series C
Warrants will be exercisable only as a stock appreciation right unless the
Company, prior to July 30, 2002, elects to allow the Series C Warrants to be
exercised for cash or by utilizing shares of Preferred Stock at the stated
value on a gross or net basis.
On March 31, 1999, EEX paid dividends on the Preferred Stock of $2.8 million
by issuing 27,667 additional Preferred Stock.
3. Early in 1998, EEX entered into two forward purchase facilities to repurchase
shares of its common stock. EEX has 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, 1999, transactions under these
facilities covered approximately $8.8 million or 796,533 shares of EEX's
common stock, with an average forward purchase price of $10.99 per share. If
the agreements were settled on a net basis on the March 31, 1999 market price
of EEX's common stock ($4.88 per share), EEX would be obligated to pay
approximately $4.9 million in cash or deliver approximately 997,020 shares.
4. 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, on August 3, 1998, EEX, several of its current and/or former
officers and directors, Texas Utilities Company ("TUC") and TUC's Chief
Executive Officer were named in a class action lawsuit filed in the Northern
District of Texas that was designated as Gracy Fund L.P. v. EEX Corporation,
et al., ("Gracy Fund"). The Gracy Fund complaint
5
<PAGE>
alleged violations of the Securities Act of 1933 ("33 Act") and the Securities
Exchange Act of 1934 ("34 Act") against various defendants.
Additionally, on August 3, 1998, EEX, several of its current and/or former
officers and directors, and two additional companies (ENSERCH Corporation and
DeGolyer & MacNaughton) were named in a class action lawsuit filed in the
Southern District of Texas that was designated as Stan C. Thorne v. EEX Corp.,
et al ("Thorne"). The Thorne complaint alleged violations of the 34 Act and
common law-based negligent misrepresentations and fraud claims.
On October 5, 1998, the Thorne defendants filed a motion to transfer the
Thorne action to the Northern District of Texas. On November 20, 1998, the
Thorne action was transferred to the Northern District of Texas and
consolidated with the Gracy Fund action.
On January 22, 1999, plaintiffs filed an amended class action complaint in the
consolidated Gracy Fund action against EEX, several of its current and/or
former officers and directors and another company, ENSERCH Corporation
("Consolidated Complaint"). The Consolidated Complaint alleges violations of
Sections 11, 12(a)(2) and 15 of the 33 Act and violations of Sections 10(b),
14(a) and 20(a) of the 34 Act against various defendants. The Consolidated
Complaint alleges the Sections 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").
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 and induced the EEX Subclass to acquire stock pursuant to the
Registration Statement and Proxy/Prospectus issued regarding this merger.
While the Company intends to contest this action vigorously and has filed a
motion to dismiss the Consolidated Complaint, the Company cannot predict the
outcome of this matter at this time. All discovery is stayed pending the
determination of the motion to dismiss.
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. These uncertainties are part of a number of
items that EEX has taken and will continue to take into account in
periodically establishing accounting reserves.
6
<PAGE>
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 1999, EEX reported a net loss of $18 million ($0.43 per
share), versus a net loss of $19 million ($0.45 per share) for the same period
in 1998. The first quarter 1998 loss includes losses on asset sales ($6
million) and additional depreciation expense associated with the disposition of
properties in East Texas ($5 million).
For the first quarter of 1999, total revenues were $40 million, or 39% lower
than 1998. Natural gas revenues, 49% lower than 1998, were impacted by both a
19% decrease in average prices and a 37% decrease in production primarily due to
property sales. The average natural gas sales price per thousand cubic feet
("Mcf") was $1.97 in 1999, compared with $2.43 in 1998. Natural gas production
for 1999 was 12 billion cubic feet ("Bcf"), compared with 19 Bcf in 1998. Oil
revenue decreased 10% from the same period in 1998 due to a drop in price from
$15.95 to $11.17 per barrel, offset by an increase in oil production primarily
from the Mudi Field in Indonesia.
Costs and expenses for the first quarter of 1999 were $52 million, compared with
$74 million in 1998. Operating expenses (production and operating, general and
administrative and taxes other than income and payroll) were $16 million in
1999, 25% lower than 1998, as a result of asset sales and the favorable impact
from cost reduction measures. Exploration expense increased 3% during the first
quarter of 1999. Exploration expense in the first quarter of 1999 includes
approximately $6 million associated with a dry hole at Vermillion Block 37.
Depreciation and amortization was $20 million, $11 million lower than 1998 due
to lower production volumes and additional depreciation expense in 1998
associated with the disposition of properties in East Texas.
Total interest and other financing costs for the first quarter of 1999,
including minority interest and preferred stock dividends, were $7 million, a $2
million decrease from 1998. Reduced debt and redemption of the outstanding
preferred securities of a subsidiary were the primary reasons for the decrease.
This decrease was partially offset by the dividends associated with the newly
issued preferred shares.
7
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EEX CORPORATION
SUMMARY OF SELECTED OPERATING DATA
FOR OIL & GAS PRODUCING ACTIVITIES
(UNAUDITED)
Three Months Ended
March 31
------------------
1999 1998
------- --------
Sales Volumes
Natural gas (Bcf)........................ 11.7 18.7
Oil and condensate (MMBbls) (a).......... 1.3 1.0
Total volumes (MMBoe) (b)................ 3.3 4.2
Average Sales Price (c)
Natural gas (per Mcf).................... $ 1.97 $ 2.43
Oil and condensate (per Bbl) (a)......... 11.17 15.95
Total product revenue (per Boe) (b)... 11.57 14.91
Average Cost and Expenses (per Boe) (b)
Production and operating (c)............. $ 2.82 $ 2.67
Exploration.............................. 3.89 2.97
Depreciation and amortization............ 6.27 7.61
General, administration and other........ 1.69 1.62
Taxes, other than income................. 0.46 0.94
(a) Oil and condensate volumes and average sales price includes amounts for
natural gas liquids.
(b) Natural gas is converted to barrels of oil equivalents (Boe) on the basis of
six Mcf equals one Boe.
(c) Before related production, severance and ad valorem taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operating activities during the first quarter of 1999
were $11 million, compared to net cash flows used in operating activities of $6
million in 1998. The increase in operating cash flow was largely due to reduced
working capital requirements in 1999.
Net cash flows used in investing activities in the first quarter of 1999 were
$28 million, a $27 million decrease from 1998. In 1998, the Company purchased
additional interest in the Tuban Production Sharing Contract for approximately
$42 million and realized $20 million in proceeds from property sales.
On December 22, 1998, EEX entered into a Purchase Agreement which provides that
the Company would receive $150 million and issue to the purchaser 1,500,000
shares of Series B 8% Cumulative Perpetual Preferred Stock and Warrants to
acquire 21 million shares of the Company's common stock. The transaction closed
on January 8, 1999 when EEX issued the Preferred Stock and Warrants in exchange
for $150 million.
EEX intends to utilize substantially all of its internally generated cash flows
for growth of the business and expects to fund its business plans using
available cash flow from operations, proceeds from the issuance of Preferred
Stock, asset sales, and borrowings under credit facilities.
8
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EEX has a $350 million revolving credit line with a group of banks that matures
on June 27, 2002, of which none was used at March 31, 1999. 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. A portion of the funds available under the
revolving credit line may be borrowed on a short-term basis at current money
market rates.
At March 31, 1999, debt, including both capital and operating leases as defined
in loan agreements, represented 38% of total capitalization, compared to 57% at
March 31, 1998.
YEAR 2000 ISSUE
During the first quarter of 1999, EEX completed an inventory, assessment and
risk analysis of its Information Technology systems which includes the Company's
business and financial software applications, geological and geophysical
software applications, operating systems, hardware and the interfaces and
interdependencies between these systems. A testing plan has been developed for
the Accounting and Human Resources system software. The Accounting system
software was recently upgraded to a version certified by the vendor to be Year
2000 compliant and will be tested in accordance with the plan.
An Onshore and Offshore embedded chip inventory, assessment, and risk analysis
was also completed. This program found 185 non-compliant and indeterminate
components that require replacement or other remediation. Planning for
corrective actions is underway; corrective actions are expected to be
substantially completed by the end of the third quarter of 1999.
At the end of the first quarter, adequate responses had been received from 70%
of the critical and important external agents (third parties upon whom the
Company relies for goods and services in order to conduct its day to day
business). Efforts are underway to obtain responses from the remaining external
agents.
Contingency plans for each of the three areas above will be developed beginning
in the second quarter to assess the impact to the Company where risk has not
been adequately minimized. To date, EEX has spent approximately $0.7 million of
a budgeted $1.5 million in addressing the Year 2000 issue.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
no assurances can be given that business interruptions arising from the Year
2000 issue will not occur. However,
9
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the Company believes that implementation of its Year 2000 readiness program will
reduce the potential for material adverse consequences to occur.
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 have inherent and historically high risk. EEX is
focusing on exploration opportunities in offshore and international areas which
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 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. 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.
10
<PAGE>
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.
Capital Funding--EEX's access to public or private equity or debt markets may be
limited by general conditions in or volatility of the markets or conditions
affecting the oil and gas industry. No assurances can be given that the Company
will be able to secure funds in these markets, or that such funds will be
obtained on terms favorable to the Company.
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. See "Business--
Government Regulation" and "Environmental Matters," in the Company's Annual
Report on Form 10-K. 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, currency restrictions and exchange
rate fluctuations, loss of revenue, 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.
11
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the first quarter of 1999, EEX realized a net gain on hedging activities,
before the effect of taxes, of $1.5 million. The table below provides
information about EEX's hedging techniques for oil and natural gas as of March
31, 1999. The Notional Amount is equal to the net volumetric hedge position of
EEX during the periods. The fair values of the hedging techniques are based on
the difference between the strike price and the New York Mercantile Exchange
future prices for the applicable trading month of 1999 and 2000.
Average Fair Value at
Notional Strike Price March 31, 1999
Amount ($ per unit) (in thousands)
-------- ------------ --------------
Gas (billions of BTU):
April 1999 - June 1999.............. 5,170 $ 1.89 $ (253)
July 1999 - September 1999.......... 770 $ 1.82 (196)
October 1999 - December 1999........ 460 $ 2.05 (247)
January 2000 - March 2000........... 900 $ 2.16 (236)
April 2000 - June 2000.............. 920 $ 2.16 (9)
July 2000 - September 2000.......... 920 $ 2.16 (19)
October 2000 - December 2000........ 920 $ 2.16 (165)
------ -------
Total............................ 10,050 $(1,127)
====== =======
Weighted Average Fair Value at
Notional Strike Price March 31, 1999
Amount ($ per unit) (in thousands)
------ ---------------- --------------
Crude Oil (thousands of barrels): Floor Ceiling
------ ------
April 1999 - June 1999.............. 182 $12.60 $14.30 $ (433)
July 1999 - September 1999.......... 184 $12.81 $14.51 (377)
--- -------
Total.............................. 366 $ (770)
=== =======
EEX has a contractual requirement to purchase gas for delivery to a Co-
generation plant in East Texas. The below hedges were placed during the first
quarter of 1999 on those delivery volumes and are not included in the above gas
hedging table. The Notional Amount is equal to the net volumetric position of
EEX during the period. The fair values of the hedging techniques are based on
the difference between the strike price and the New York Mercantile Exchange
future prices for the applicable trading month of 1999 and 2000.
Average Fair Value at
Notional Strike Price March 31, 1999
Amount ($ per unit) (in thousands)
-------- ------------- ---------------
Gas (billions of BTU):
April 1999 - June 1999......... 1,215 $1.93 $ 67
July 1999 - September 1999..... 1,380 $1.98 138
October 1999 - December 1999... 1,380 $2.19 127
January 2000 - March 2000...... 1,350 $2.31 151
April 2000 - June 2000......... 1,365 $2.14 44
July 2000 - September 2000..... 1,380 $2.16 32
October 2000 - December 2000... 1,380 $2.32 33
----- ----
Total....................... 9,450 $591
===== ====
12
<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On January 8, 1999, pursuant to a Purchase Agreement ("Agreement") dated
December 22, 1998, the Company issued to Warburg, Pincus Equity Partners, L.P.,
Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands
Equity Partners II, C.V., and Warburg, Pincus Netherlands Equity Partners III,
C.V. (the "Purchasers") 1.5 million shares of Series B 8% Cumulative Perpetual
Preferred Stock (the "Preferred Stock") and Warrants to acquire 21 million
shares of the Company's common stock in exchange for $150 million. There were
no underwriting discounts or commissions. The securities were exempt from
registration under Section 4(2) of the Securities Act of 1933.
Each share of 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 the earlier occurrence
of certain events including a change of control (as defined in the Agreement).
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. The Preferred Stock is entitled to a liquidation
preference of $100 per share plus accrued and unpaid dividends. The Preferred
Stock may be redeemed, in whole but not in part, by the Company at any time for
cash at the stated value plus accrued and unpaid dividends. Until any adjustment
of the dividend rate, holders of the Preferred Stock will be entitled to cast an
aggregate of eight million votes on matters voted upon by the common stock
holders, and to a separate class vote on certain matters affecting the Preferred
Stock. EEX has entered into a Registration Rights Agreement to register under
the Securities Act of 1933, and maintain the effectiveness of such registration
of, the resale of the Preferred Shares, the Warrants and any common stock
acquired by Purchasers pursuant to the Warrants. Under the terms of the
Agreement, the Purchasers have the right to add a member to the Company's Board
of Directors and did so in January 1999. The Purchasers may continue the
representation on the Company's Board of Directors if certain conditions are
maintained. In the event of a Change of Control, as defined in the Agreement,
occurring prior to the sixth anniversary of the closing of the transaction, the
Purchasers have the right to exchange all or part of the Preferred Stock and
Warrants for shares of EEX common stock at the rate of 18.6047 shares of common
stock for each share of Preferred Stock and proportionate number of Warrants,
provided that the Company may, under certain circumstances, pay a portion of the
exchange in cash. The exercise price of the Warrants and the exchange formula
related to a Change of Control may be adjusted upon the occurrence of certain
events described in the anti-dilution provisions of the Warrants.
The Warrants were issued in three series, each exercisable at any time beginning
August 31, 1999 for $12 per share of common stock: (a) Series A
13
<PAGE>
Warrants to acquire 10.5 million shares, exercisable for ten years; (b) Series B
Warrants to acquire 2.5 million shares, exercisable for seven years, and (c)
Series C Warrants to acquire 8 million shares, exercisable for seven years.
Until approved by the shareholders of the Company at the 1999 annual meeting,
the Warrants will be exercisable only in the form of a stock appreciation right
(entitled to receive the cash difference between the exercise price and the
market price of the common stock on the trading day prior to the date of
exercise). If approved by the shareholders, the Series A and Series B Warrants
will be exercisable for cash or by utilizing shares of Preferred Stock at the
stated value on a gross or net basis. The Series C Warrants will be exercisable
only as a stock appreciation right unless the Company, prior to July 30, 2002,
elects to allow the Series C Warrants to be exercised for cash or by utilizing
shares of Preferred Stock at the stated value on a gross or net basis.
The Purchasers have agreed to standstill provisions for ten years that restrict
their purchases of additional shares of common stock, prohibit sales by the
Purchasers of common stock or Warrants to any person or group that would
beneficially own more than 10% (5% in the case of a competitor of the Company)
of the outstanding common stock after the sale, prohibits the Purchasers from
proposing business combinations involving the Company or soliciting proxies, and
limits the Purchasers' aggregate voting rights to one vote less than 20% of the
aggregate number of votes entitled to be cast on any matter by holders of common
stock or any other class of capital stock. If the Purchasers would otherwise be
entitled to cast votes in excess of the standstill agreement's limit, such
additional votes will be cast in the same proportion as the votes cast by all
other shareholders.
In the Agreement, the Company agreed to use the proceeds from the sale of the
Securities for the purposes of funding exploration and production appraisal and
development activities, for working capital and for general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT (27) - Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K filed January 4, 1999 and dated December 30,
1998. (News release dated December 30, 1998: EEX adds to shelf production
and updates deepwater activities.)
Current Report on Form 8-K filed January 14, 1999 and dated January 11,
1999. (News release dated January 11, 1999: Howard H. Newman added to EEX
Board and news release dated January 12, 1999: EEX obtains partner for
deepwater prospect.)
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EEX CORPORATION
(Registrant)
Dated: May 6, 1999 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 139,742
<SECURITIES> 0
<RECEIVABLES> 27,774
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 182,273
<PP&E> 1,142,862
<DEPRECIATION> (692,267)
<TOTAL-ASSETS> 663,535
<CURRENT-LIABILITIES> 38,816
<BONDS> 212,966
0
15
<COMMON> 424
<OTHER-SE> 367,771
<TOTAL-LIABILITY-AND-EQUITY> 663,535
<SALES> 0
<TOTAL-REVENUES> 39,555
<CGS> 0
<TOTAL-COSTS> 51,562
<OTHER-EXPENSES> (67)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,981
<INCOME-PRETAX> (14,528)
<INCOME-TAX> 985
<INCOME-CONTINUING> (18,280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,280)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
