<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 June 30, 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 July 31, 1999:
42,471,069
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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
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands except per share amounts)
Revenues:
Natural gas................. $ 22,262 $ 32,319 $ 45,288 $ 77,857
Oil, condensate and natural
gas liquids................ 19,088 22,467 33,808 38,897
Cogeneration operations..... 2,652 3,500 4,941 5,964
Other....................... (19) 275 (499) 356
-------- -------- -------- --------
Total...................... 43,983 58,561 83,538 123,074
-------- -------- -------- --------
Costs and Expenses:
Production and operating.... 10,255 12,467 19,457 23,554
Exploration................. 32,786 13,932 45,485 26,255
Depletion, depreciation and
amortization............... 17,821 24,032 38,291 55,644
(Gain) Loss on sales of
property, plant and
equipment.................. (507) (1,761) (511) 4,266
Cogeneration operations 2,349 2,785 4,539 4,800
General, administrative and
other...................... 7,790 6,092 13,294 12,817
Taxes, other than income.... 474 3,498 1,975 7,391
-------- -------- -------- --------
Total...................... 70,968 61,045 122,530 134,727
-------- -------- -------- --------
Operating (Loss)............. (26,985) (2,484) (38,992) (11,653)
Other (Expense) - Net........ (97) (55) (164) (14)
Interest Income.............. 1,533 271 3,060 362
Interest and Other Financing
Costs....................... (4,284) (4,799) (8,265) (10,024)
-------- -------- -------- --------
(Loss) Before Income Taxes... (29,833) (7,067) (44,361) (21,329)
Income Taxes................. 235 571 1,220 1,572
Minority Interest............ - 2,768 - 6,532
-------- -------- -------- --------
Net (Loss)................... (30,068) (10,406) (45,581) (29,433)
Preferred Stock Dividends.... 3,055 - 5,822 -
-------- -------- -------- --------
Net (Loss) Applicable to
Common Shareholders......... $(33,123) $(10,406) $(51,403) $(29,433)
======== ======== ======== ========
Basic and Diluted Net (Loss)
Per Share................... $(0.79) $(0.25) $(1.22) $(0.70)
======== ======== ======== ========
Weighted Average Shares
Outstanding................. 42,200 42,214 42,200 42,214
======== ======== ======== ========
See accompanying notes.
2
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EEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 129,566 $ 15,588
Accounts receivable-trade (net of allowance of $311 and $2,504)... 29,404 42,530
Other............................................................. 13,625 14,240
---------- ----------
Total current assets............................................. 172,595 72,358
---------- ----------
Property, Plant and Equipment (at cost):
Oil and gas properties (successful efforts method)................ 1,129,863 1,106,274
Other............................................................. 7,474 19,998
---------- ----------
Total............................................................ 1,137,337 1,126,272
Less accumulated depletion, depreciation and amortization......... 696,626 674,887
---------- ----------
Net property, plant and equipment................................ 440,711 451,385
---------- ----------
Deferred Income Tax Assets......................................... 27,826 28,826
Other Assets....................................................... 2,415 12,501
---------- ----------
Total............................................................ $ 643,547 $ 565,070
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade............................................ $ 36,181 $ 45,528
Short-term borrowings............................................. - -
Current portion of capital lease obligations...................... 11,110 10,874
Other............................................................. 2,200 5,190
---------- ----------
Total current liabilities........................................ 49,491 61,592
---------- ----------
Bank Revolving Credit Agreement.................................... - -
---------- ----------
Capital Lease Obligations.......................................... 212,204 222,444
---------- ----------
Other Liabilities.................................................. 44,894 46,734
---------- ----------
Shareholders' Equity:
Preferred stock (10,000 shares authorized; 1,558 and 0 shares
issued; liquidation preference of $155,822 and $0)............... 16 -
Common stock ($0.01 par value; 150,000 shares authorized;
42,475 and 42,387 shares issued)................................. 425 424
Paid in capital................................................... 723,633 569,268
Retained earnings (deficit)....................................... (386,101) (334,698)
Unamortized restricted stock compensation......................... (527) (206)
Treasury stock, at cost (22 shares)............................... (488) (488)
---------- ----------
Total shareholders' equity....................................... 336,958 234,300
---------- ----------
Total............................................................ $ 643,547 $ 565,070
========== ==========
</TABLE>
See accompanying notes.
3
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EEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-------------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss)...................................................... $(45,581) $ (29,433)
Impairment of undeveloped leasehold............................. 2,907 -
Dry hole cost................................................... 22,174 10,316
Depletion, depreciation and amortization........................ 38,291 55,644
Deferred income taxes........................................... 1,000 -
(Gain) Loss on sales of property, plant and equipment........... (511) 4,266
Other........................................................... 6,503 302
Changes in current operating assets and liabilities:
Accounts receivable............................................ 13,865 (1,058)
Other current assets........................................... 615 (2,975)
Accounts payable............................................... (9,349) (51,035)
Other current liabilities...................................... (2,990) (3,507)
-------- ---------
Net cash flows provided by (used in) operating activities...... 26,924 (17,480)
-------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment...................... (53,527) (96,134)
Proceeds from disposition of property, plant and equipment...... - 236,481
Other (changes in accruals)..................................... 585 8,542
-------- ---------
Net cash flows provided by (used in) investing activities...... (52,942) 148,889
-------- ---------
FINANCING ACTIVITIES
Issuance of preferred stock and common stock warrants........... 150,000 -
Borrowings under bank revolving credit agreement................ 45,000 138,000
Repayment of borrowings under bank revolving credit agreement... (45,000) (155,000)
Borrowings under short-term financing agreement................. - 101,500
Repayment of borrowings under short-term financing agreement.... - (106,500)
Redemption of minority interest in preferred
securities of subsidiary....................................... - (100,000)
Payments of capital lease obligations........................... (10,004) (7,667)
-------- ---------
Net cash flows provided by (used in) financing activities...... 139,996 (129,667)
-------- ---------
Net Increase in Cash and Cash Equivalents........................ 113,978 1,742
Cash and Cash Equivalents at Beginning of Period................. 15,588 3,790
-------- ---------
Cash and Cash Equivalents at End of Period....................... $129,566 $ 5,532
======== =========
</TABLE>
See accompanying notes.
4
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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 designate 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
5
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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 after
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.
The Series A and Series B Warrants are 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
(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) 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 June 30, 1999, EEX paid dividends on the Preferred Stock of $3.0 million
by issuing 30,554 additional shares of Preferred Stock. On March 31, 1999,
EEX paid dividends on the Preferred Stock of $2.8 million by issuing 27,667
additional shares of 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 June 30, 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 $11.09 per
share. If the agreements were settled on a net basis on the June 30, 1999
market price of EEX's common stock ($6.9375 per share), EEX would be
obligated to pay approximately $3.3 million in cash or deliver approximately
476,770 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 and
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.
6
<PAGE>
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 alleged violations of the
Securities Act of 1933 ("33 Act") and the Securities Exchange Act of 1934
("34 Act") against various defendants.
Also, 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 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.
7
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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.
8
<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 second quarter of 1999, EEX reported a net loss of $33.1 million ($0.79
per share), versus a net loss of $10.4 million ($0.25 per share) for the same
period in 1998. For the six months ended June 30, 1999, EEX reported a net loss
of $51.4 million ($1.22 per share), versus a net loss of $29.4 million ($0.70
per share) for the same period in 1998.
QUARTERS ENDED JUNE 30, 1999 AND 1998
For the second quarter of 1999, total revenues were $44.0 million, 25% lower
than total revenues in the second quarter of 1998. Natural gas revenues, 31%
lower than the year-earlier period, were impacted by both a 6% decrease in
average prices and a 27% decrease in production, primarily due to property
sales. The average natural gas sales price per thousand cubic feet ("Mcf") was
$2.11 in the second quarter of 1999, compared with $2.24 in the same period of
1998. Natural gas production for the second quarter of 1999 was 11 billion
cubic feet ("Bcf"), compared with 14 Bcf in the same period of 1998. Oil
revenues decreased 15% from the same period in 1998 due to a 26% decrease in
production, primarily due to property sales, offset by an increase in average
price to $14.91 from $13.05.
Costs and expenses for the second quarter of 1999 were $71.0 million, compared
with $61.0 million in 1998. Operating expenses (production and operating,
general and administrative and taxes other than income) were $18.5 million in
the current quarter, 16% lower than the same period of 1998, primarily as a
result of property sales and the favorable impact from cost reduction measures.
Exploration expenses for the second quarter of 1999 increased to $32.8 million,
compared to $13.9 million for the same period of 1998. The current quarter
includes $19.3 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 1999 was $17.8 million, $6.2 million
lower than the same period of 1998, primarily due to lower production volumes in
1999 resulting from the impact of dispositions of properties in 1998.
Total interest and other financing costs for the second quarter of 1999,
including interest income, minority interest and preferred stock
9
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dividends, were $5.9 million, a $1.5 million decrease from the same period of
1998. This decrease was primarily due to increased interest income on the
proceeds from the sale of the securities in January 1999, reduced debt and
redemption of the outstanding preferred securities of a subsidiary. This
decrease was partially offset by the dividends associated with preferred shares.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
For the six months ended June 30, 1999, total revenues were $83.5 million, 32%
lower than the year-earlier period. Natural gas revenues, 42% lower than the
first six months of 1998, were impacted by both a 14% decrease in average prices
and a 33% decrease in production, primarily due to property sales in 1998. The
average natural gas sales price per Mcf was $2.03 in the first six months of
1999, compared with $2.35 in the comparable period of 1998. Natural gas
production for 1999 was 22 Bcf, compared with 33 Bcf in 1998. Oil revenues
decreased 13%, primarily due to a $0.6 million hedging loss for the first six
months of 1999, compared to a $3.0 million hedging gain for the same period in
1998.
Costs and expenses were $122.5 million for the six months ended June 30, 1999,
compared with $134.7 million in the comparable period of 1998. Operating
expenses (production and operating, general and administrative and taxes other
than income) were $34.7 million in the first six months of 1999, 21% lower than
the comparable period of 1998, primarily as a result of property sales and the
favorable impact from cost reduction measures. Exploration expenses increased
to $45.5 million for the six months ended June 30, 1999, compared to $26.3
million for the comparable period in 1998. The current period includes $19.3
million of exploration expenses associated with the George prospect dry hole in
Mississippi Canyon Block 442. Depletion, depreciation and amortization during
the period was $38.3 million, $17.4 million lower than the comparable period of
1998, primarily due to lower production volumes in 1999 resulting from
disposition of properties and additional depreciation expense in 1998 associated
with the disposition of properties in East Texas.
Total interest and other financing costs for the six months ended June 30, 1999,
including interest income, minority interest and preferred stock dividends, were
$11.2 million, a $5.0 million decrease from the comparable period of 1998. This
decrease was primarily due to increased interest income on the proceeds from the
sale of the securities in January 1999, reduced debt and redemption of the
outstanding preferred securities of a subsidiary. This decrease was partially
offset by the dividends associated with preferred shares.
10
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EEX CORPORATION
SUMMARY OF SELECTED OPERATING DATA
FOR OIL & GAS PRODUCING ACTIVITIES
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales Volumes
Natural gas (Bcf).......................... 10.6 14.4 22.2 33.1
Oil and condensate (MMBbls) (a)............ 1.3 1.7 2.6 2.8
Total volumes (MMBoe) (b)................. 3.0 4.1 6.3 8.3
Average Sales Price (c)
Natural gas (per Mcf)...................... $ 2.11 $ 2.24 $ 2.03 $ 2.35
Oil and condensate (per Bbl) (a)........... 14.91 13.05 13.02 14.14
Total product revenue (per Boe) (b)....... 13.61 13.30 12.55 14.11
Average Cost and Expenses (per Boe) (b)
Production and operating (c)............... $ 3.37 $ 3.03 $ 3.09 $ 2.85
Exploration................................ 10.79 3.38 7.22 3.17
Depletion, depreciation and amortization... 5.86 5.83 6.08 6.72
General, administrative and other.......... 2.56 1.48 2.11 1.55
Taxes, other than income................... 0.16 0.85 0.31 0.89
</TABLE>
(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 six months ended June
30, 1999 were $26.9 million, compared to net cash flows used in operating
activities of $17.5 million in the same period of 1998. The increase in
operating cash flow was largely due to reduced working capital requirements in
1999.
Net cash flows used in investing activities during the six months ended June 30,
1999 were $52.9 million, compared with net cash flows provided by investing
activities of $148.9 million for the same period in 1998. In the first six
months of 1998, the Company realized $236.5 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
11
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issuance of Preferred Stock, asset sales, additional use of public and private
equity markets, and borrowings under credit facilities.
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 June 30, 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 June 30, 1999, debt, including both capital and operating leases as defined
in loan agreements, represented 40.5% of total capitalization, compared to 50.6%
at December 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 systems software. The Accounting and Human
Resources systems software were recently upgraded to versions certified by the
vendors to be Year 2000 compliant and testing in accordance with the plan is
underway.
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. Implementation of
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 second quarter, adequate responses had been received from 81%
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 are under development to
address the potential impact to the Company where risk has not been adequately
minimized. To date, EEX has spent approximately $1.1 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
12
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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, the Company believes that
implementation of its Year 2000 readiness program will reduce the potential for
material adverse consequences to occur.
RECENT EVENTS
Deepwater Gulf of Mexico -- Mississippi Canyon Block 442 (George, EEX 70%) The
George well reached a depth of 22,000 feet in July 1999, and encountered
hydrocarbons in non-commercial quantities. The well will be plugged and
abandoned. The total cost to EEX associated with this prospect is expected to
be approximately $26.9 million, $19.3 million of which has been included in the
results of operations in the current quarter. The remainder of the associated
cost will be recorded as incurred in the third quarter.
Deepwater Gulf of Mexico -- Garden Banks Block 388 (Cooper, EEX 60%) This field,
developed in the shallower depths of Pleistocene sands, began to produce oil and
gas in 1995 and has declined rapidly. In June 1999, the remaining producing
wells at Cooper were taken offline and plugging and abandonment is currently
underway. The Cooper Floating Production System will be relocated during the
third quarter to a shipyard for refurbishment.
Deepwater Gulf of Mexico -- Mississippi Canyon Block 620 (Mackerel, EEX 100%) In
early July, EEX took delivery of the Global Marine semi-submersible rig, Arctic
1, and began drilling on its Mackerel prospect. This well will test Pliocene
aged sands at a depth of approximately 15,000 feet.
13
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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.
14
<PAGE>
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. 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.
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 when necessary, 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.
15
<PAGE>
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.
16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the second quarter of 1999, EEX realized a net loss on hedging activities of
$1.3 million. The table below provides information about EEX's hedging
instruments for natural gas as of June 30, 1999. The Notional Amount is equal
to the net volumetric hedge position of EEX during the periods. The fair values
of the hedging instruments are based on the difference between the strike price
and the New York Mercantile Exchange future prices for the applicable trading
month of 1999 and 2000. EEX follows hedge accounting for these positions and
accordingly, the fair values presented below, which represent unrealized gains
(losses), have not been recognized in the financial statements.
<TABLE>
<CAPTION>
Notional Average Fair Value at
Amount Strike Price June 30, 1999
(BBtu)(1) ($ per MMBtu)(2) ($ in thousands)
------------ ---------------- ----------------
<S> <C> <C> <C>
Natural Gas:
July 1999 - September 1999..... 1,380 2.00 (503)
October 1999 - December 1999... 770 2.13 (274)
January 2000 - March 2000...... 455 2.47 (76)
April 2000 - June 2000......... 455 2.47 67
July 2000 - September 2000..... 460 2.47 73
October 2000 - December 2000... 460 2.47 (14)
----- ---- ----
Total....................... 3,980 (727)
===== ====
</TABLE>
During the second quarter, all subsequent period hedges on crude oil were
terminated resulting in a net loss of approximately $0.5 million which will be
recognized in income over the remaining period of the original hedge positions.
In July 1999, all hedges on natural gas, other than those related to the
contractual requirement described below, were terminated at no cost to EEX.
EEX has a contractual requirement to purchase gas for delivery to a co-
generation plant in East Texas. The below hedges were placed during the second
quarter of 1999 on those delivery volumes and are not included in the above
natural gas hedging table. The Notional Amount is equal to the net volumetric
position of EEX during the period. The fair values of the hedging instruments
are based on the difference between the strike price and the New York Mercantile
Exchange future prices for the applicable trading month of 1999 and 2000. EEX
follows hedge accounting for these positions and accordingly, the fair values
presented below, which represent unrealized gains (losses), have not been
recognized in the financial statements.
<TABLE>
<CAPTION>
Notional Average Fair Value at
Amount Strike Price June 30, 1999
(BBtu)(1) ($ per MMBtu)(2) ($ in thousands)
------------ ---------------- ----------------
<S> <C> <C> <C>
Natural Gas:
July 1999 - September 1999..... 1,380 1.98 529
October 1999 - December 1999... 1,380 2.19 522
January 2000 - March 2000...... 1,305 2.31 446
April 2000 - June 2000......... 1,365 2.14 252
July 2000 - September 2000..... 1,380 2.16 212
October 2000 - December 2000... 1,380 2.32 254
----- ---- -----
Total....................... 8,190 2,215
===== =====
</TABLE>
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.
17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on May 18, 1999, the shareholders (a)
elected two directors for terms expiring at the annual meeting in 2002; (b)
approved certain conversion rights contained in warrants issued by the Company;
(c) approved the Company's Amended and Restated 1998 Stock Incentive Plan; and
(d) ratified the appointment of Ernst & Young LLP as Independent Auditors for
fiscal year 1999. In addition to the two directors elected at the meeting, T. M
Hamilton, B. A. Bridgewater, Jr., M. P. Mallardi, and F. M. Lowther continue
their respective terms of office after the meeting. Below is the result of the
vote.
Election of Directors:
Withheld Abstentions and
Name For From Vote Broker Nonvotes
---- --- --------- ---------------
F. S. Addy 45,537,218 341,899 0
H. H. Newman 45,533,995 345,122 0
Approval of certain conversion rights contained in warrants previously
issued by the Company:
Abstentions and
For Against Broker Nonvotes
--- ------- ---------------
37,560,688 593,664 7,724,765
Approval of the Company's Amended and Restated 1998 Stock Incentive Plan:
Abstentions and
For Against Broker Nonvotes
--- ------- ---------------
29,540,633 8,631,246 7,644,238
Appointment of Ernst & Young LLP as Independent Auditors:
Abstentions and
For Against Broker Nonvotes
--- ------- ---------------
45,789,996 45,162 43,959
18
<PAGE>
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 April 13, 1999 and dated March 30, 1999.
(News release dated March 30, 1999: EEX suspends drilling on appraisal well
at Llano.)
19
<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: August 5, 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.
20
<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 STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 129,566
<SECURITIES> 0
<RECEIVABLES> 29,404
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 172,595
<PP&E> 1,137,337
<DEPRECIATION> (696,626)
<TOTAL-ASSETS> 643,547
<CURRENT-LIABILITIES> 49,491
<BONDS> 212,204
0
16
<COMMON> 425
<OTHER-SE> 336,517
<TOTAL-LIABILITY-AND-EQUITY> 643,547
<SALES> 0
<TOTAL-REVENUES> 83,538
<CGS> 0
<TOTAL-COSTS> 122,530
<OTHER-EXPENSES> (164)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,265
<INCOME-PRETAX> (44,361)
<INCOME-TAX> 1,220
<INCOME-CONTINUING> (51,403)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,403)
<EPS-BASIC> (1.22)
<EPS-DILUTED> (1.22)
</TABLE>
