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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X]Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (fee required) for the fiscal year ended December 31, 1999 or
[_]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required) for the transition period from
to
Commission file number 1-12905
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EEX CORPORATION
(Exact name of Registrant as specified in its charter)
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Texas 75-2421863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 CityWest Blvd. 77042
Suite 1400 (Zip Code)
Houston, Texas
(Address of principal executive
office)
(713) 243-3100
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock ($.01 Par Value) New York Stock Exchange
(Title of Each Class) (Name of Each Exchange on Which
Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the outstanding shares of Common Stock of the
Registrant, based upon the closing price of the shares on the New York Stock
Exchange on such date, held by nonaffiliates of the Registrant as of March 1,
2000: $99,970,174.
Shares of the Registrant's Common Stock outstanding as of March 1, 2000:
42,755,871 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) is
incorporated by reference to the Registrant's definitive proxy statement for
the 2000 annual meeting of shareholders.
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FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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Page
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PART I
ITEM 1. Business............................................................................... 3
General.............................................................................. 3
History.............................................................................. 3
Strategy............................................................................. 3
U.S. Exploration and Development--Offshore........................................... 4
U.S. Exploration and Development--Onshore............................................ 6
International Exploration and Development............................................ 6
Plant Operations Business............................................................ 6
Sales of Natural Gas and Crude Oil................................................... 7
Competition.......................................................................... 7
Government Regulation................................................................ 7
Employees............................................................................ 9
Offices.............................................................................. 9
Forward-Looking Statements--Uncertainties and Risks.................................. 10
ITEM 2. Properties............................................................................. 12
ITEM 3. Legal Proceedings...................................................................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 15
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 15
ITEM 6. Selected Financial and Operating Data.................................................. 16
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 18
Results of Operations................................................................ 18
Liquidity and Capital Resources...................................................... 20
Other Matters........................................................................ 22
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 24
ITEM 8. Financial Statements and Supplementary Data............................................ 27
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 56
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................................... 56
ITEM 11. Executive Compensation................................................................. 56
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......................... 56
ITEM 13. Certain Relationships and Related Transactions......................................... 56
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 56
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PART I
Item 1. Business
General
EEX Corporation ("EEX" or the "Company") and its predecessors have been
engaged in the exploration for and the development, production and sale of
natural gas and crude oil since 1918. Its activities are currently
concentrated in Texas, the Gulf of Mexico and Indonesia. EEX also provides
operation and maintenance services, under contract, to two cogeneration plants
("Plant Operations Business").
History
Until August 1997, the oil and gas exploration and production business of
EEX was conducted, historically, through subsidiary and affiliate entities of
ENSERCH Corporation ("ENSERCH"). From 1985 to 1994, the business was conducted
primarily through Enserch Exploration Partners, Ltd. ("EP"), a limited
partnership. At year-end 1994, EP and its affiliates were reorganized into a
Texas corporation, Enserch Exploration, Inc. ("Old EEI"), of which ENSERCH
owned approximately 99%. The publicly-owned interest in Old EEI increased to
approximately 17% in September 1995.
The current corporate entity that is EEX was organized in the State of Texas
in 1992 as a wholly-owned subsidiary of ENSERCH. It conducted the Plant
Operations Business of ENSERCH under the name of Lone Star Energy Plant
Operations, Inc. ("LSEPO").
In 1997, pursuant to a merger agreement between Texas Utilities Company and
ENSERCH, Old EEI was first merged into LSEPO, with LSEPO being the surviving
company ("Merger"). In the Merger, LSEPO changed its name to Enserch
Exploration, Inc. ("EEI"). ENSERCH then distributed its entire 83% ownership
interest in EEI pro rata to its shareholders in a tax-free distribution
("Distribution"). The Merger and the Distribution were each effective on
August 5, 1997. On December 19, 1997, EEI changed its name to EEX Corporation.
Strategy
The transition to independent status in 1997, coupled with the engagement of
a new senior management team, resulted in a significant restructuring of the
Company's assets, operations and strategy in 1997 and 1998. In 1999, the
Company acquired the domestic exploration and production operations of Tesoro
Petroleum Corporation. This acquisition supplements existing production,
lengthens average reserve life, provides reinvestment opportunities in faster
payback projects and results in a stronger foundation to pursue exploration
potential in the Deepwater Gulf of Mexico. The Company's strategy is intended
to provide reserve and production growth and improved investment and operating
efficiency. The major elements of this strategy are:
Explore EEX's Deepwater Gulf of Mexico Lease Portfolio--EEX separates its
Gulf of Mexico activities into two major areas: the Continental Shelf
("Shelf") for water depths up to 600 feet and the deepwater Gulf of Mexico
("Deepwater") for water depths typically in excess of 600 feet (a majority of
the Deepwater blocks held by EEX fall in water depths between 1,500 and 3,500
feet). Areas where water depths are in excess of 5,000 feet are often referred
to as "Ultra-deep." During early 1997, the EEX focus in the Deepwater Gulf of
Mexico shifted from the shallower Pleistocene play to the deeper Pliocene and
Miocene plays where significant reserve potential has been confirmed by
industry activity. Through application of geologic and geophysical models, the
Company believes that potential reserves under its current leasehold interests
may provide the basis for significant long-term production growth. To reduce
the financial risk associated with dry holes and to accelerate the drilling
program, a joint venture was formed with Enterprise Oil PLC ("Enterprise") in
1997. This joint venture provides that Enterprise will fund a portion of EEX's
share of exploratory well costs and certain appraisal and development costs in
return for one-half of EEX's working interest in 78 Deepwater leases. EEX
plans to pursue additional joint venture arrangements in the future to reduce
its financial risk and may acquire additional leases as part of its Deepwater
strategy. The Company has experienced significantly higher cost than planned
to drill exploration and appraisal wells and is focused on improving drilling
efficiency. To date, the Company has not demonstrated the economic viability
of its sole announced Deepwater discovery, Llano, nor does it have any proved
reserves associated with its Deepwater exploration program.
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Realize Value from the Cooper Floating Production System ("FPS") and
Pipelines--The Company owns a 60% interest in the FPS and two associated
pipelines and other supporting facilities ("Pipelines"). The FPS is a
combination Deepwater drilling rig and processing facility capable of
simultaneous drilling and production operations. The facility is capable of
processing approximately 40,000 barrels of oil and 100 million cubic feet of
gas daily for transport into a pipeline system. The Pipelines are each
approximately 53 miles long and have estimated daily throughput capacity of
100,000 barrels of oil and 200 million cubic feet of gas. A processing
facility located at the terminus of the pipelines in shallow water is also 60%
owned by EEX. These assets are not currently in service following the
abandonment of the Cooper field. The Pipelines are located approximately six
miles from the Llano discovery well and may have utility as support
infrastructure for anticipated development at Llano and the greater Llano
area. The Company is presently evaluating options to realize the value of the
FPS.
Explore Deep Potential in EEX's Gulf of Mexico Shelf Lease Portfolio--In
late 1998, the Company began geologic and geophysical studies to identify
reserve potential in formations deeper than that conventionally pursued in the
Gulf of Mexico Shelf ("Deep Shelf"). The Company believes it may be
economically more attractive to explore this potential than to continue an
exploitation program in and around existing mature fields. The Company has
substantially limited its investment in conventional Shelf exploration and
exploitation and intends to focus technical and financial resources on deeper
exploration potential. The Company is considering the sale of all or a portion
of its Shelf producing properties. The Company may change the composition and
size of its leasehold position in the Shelf through participation in lease
sales, asset trades or sales, acquisition of producing properties, and/or
permitting some leases to expire.
Grow the Onshore U.S. Business--During 1998, the Company sold substantially
all of its assets in East Texas, Oklahoma and North Texas. In addition, the
Company traded its West Texas assets and most of its producing properties in
Louisiana for Gulf of Mexico Shelf producing properties. The Company's
remaining onshore U.S. assets, located principally in Texas, are generally of
higher quality than the assets divested. During 1999, the Company concluded
that a combination of the remaining assets with those acquired from Tesoro
Petroleum Corporation would provide a more stable cash flow base and
reinvestment opportunities for near-term reserve and production growth. A
substantial portion of the projected year 2000 capital program has been
allocated for re-investment into these combined properties. The Company
intends to grow this onshore business through exploration, acquisition of
producing properties and/or investment in new leaseholds.
Realize Value from International Assets--The Company plans to continue
limited exploration and development activities in the Tuban Block in Indonesia
and is considering the sale of this asset to finance growth in its U.S.
operations. In addition, the Company plans to focus efforts on realizing value
from its other concessions in Indonesia and New Zealand in a manner that
limits near-term investment and that provides options to expand operations if
prospectivity and economic conditions warrant.
U.S. Exploration and Development--Offshore
Deepwater Gulf of Mexico Exploration--In 1997, the first exploratory well
(Llano, EEX 30% interest) drilled in the Deepwater program, at Garden Banks
Block 386, encountered hydrocarbon intervals between 23,000 and 25,000 feet.
During 1998, EEX deepened the Llano discovery well, drilled two exploration
wells in untested areas of the Deepwater and participated in a third
exploration well that tested a prospect in Ultra-deep waters. The Llano well
was deepened to 27,864 feet into Miocene age sands and encountered
hydrocarbons. Well logs indicated the presence of approximately 200 feet of
net pay. An initial exploration well in Green Canyon Block 341 (Sheba, EEX
36.25% interest) was drilled into the eastern edge of a large untested
structure. This well encountered sand development in the primary target, but
was not hydrocarbon bearing and, consequently, was not successful. The second
Deepwater exploratory well in 1998 was drilled at Mississippi Canyon Block 580
(Elvis, EEX 23% interest) and was unsuccessful due to the absence of
sufficient sand development. EEX participated in a third exploratory well
drilled by another operator (Gamera, EEX 12.5% interest) in a water depth in
excess of 7,700 feet on Atwater Valley Blocks 118/119. This well was also
unsuccessful. Also in 1998, EEX participated in an
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exploration well located on Viosca Knoll Block 737 (EEX 12.5% interest)
operated by another company to test a shallower Miocene-aged structure on the
Flex Trend in the Gulf of Mexico. The well encountered gas sands; however, the
reserve size was insufficient to justify commercial development. The well was
plugged and abandoned.
During 1999, EEX drilled an unsuccessful exploration well on its George
prospect in Mississippi Canyon Block 442 to a depth of 22,000 feet. The well
encountered hydrocarbons in non-commercial quantities and was plugged and
abandoned. Also, in September 1999 EEX temporarily suspended drilling
operations at its Mackerel prospect in Mississippi Canyon Block 620 at a depth
of 11,000 feet. In January 2000, the Company decided to abandon the Mackerel
well following the analysis of additional seismic and geological data, which
indicated that hydrocarbons encountered in the well were not commercial and
that deeper prospects could not be adequately tested from that location. These
two wells were drilled outside of the Enterprise joint venture agreement and
resulted in a net EEX 1999 charge against earnings of approximately $44
million.
EEX participated in the Minerals Management Service sponsored Outer
Continental Shelf lease sale number 172, adding 2 Deepwater blocks to the
leasehold inventory at a net cost of approximately $3 million. At year-end,
EEX held interests in 95 blocks in the Deepwater Gulf of Mexico, 61 of which
were operated by EEX.
At the end of 1999, EEX had two Deepwater rigs under contract. The Global
Marine semi-submersible rig, Arctic I, was delivered to EEX in July 1999, to
begin a three-year contract at an average rate of $130,000 per day. This rig
is currently drilling the second appraisal well for the Llano discovery (EEX
30% interest). The Company believes this rig will be used to drill, appraise
and develop its Deepwater program during the remaining contract period with
EEX bearing approximately 30% of the rig cost, and its joint venture partners
bearing the remainder. The Company has not, however, received approval from
partners to employ the Arctic I rig on any wells beyond the Llano appraisal
well that is currently drilling.
The second rig contract, for the R&B Falcon C. Kirk Rhein, Jr., had
approximately 260 drilling days remaining at a total cost of approximately
$90,000 per day ($45,000 net to EEX). In December 1999, EEX entered into an
agreement with the owners of this rig for early termination of the contract at
a net cost to EEX of $4 million, which was paid in January 2000.
Deepwater Gulf of Mexico Appraisal and Development--In the third quarter of
1998, drilling began on the first appraisal well in Garden Banks Block 386 to
follow-up on the Llano discovery. In early 1999, this well, Llano #2, was
drilled to a total measured depth in excess of 22,000 feet and confirmed the
presence of hydrocarbons in eastern flank sands correlative to the Llano #1
well. The well, originally planned to a depth of 25,000 feet, was suspended
before all target objectives could be tested due to increasing formation
pressure. In October 1999, EEX began drilling the second Llano appraisal well
(Llano #3) to test the north-western flank of the reservoir. The well is
currently drilling in a difficult geologic and mechanical environment and no
assurances can be given that the well will reach its target objective. During
1999, EEX continued feasibility studies to explore early production options
for the Llano field. The Llano working interest owners have not yet approved
any early production or development plans for the Llano field. EEX reported no
proved reserves at year-end 1999 attributable to the Llano discovery.
Deepwater Gulf of Mexico, Cooper Field--The Cooper Field (Garden Banks Block
388), developed in the shallower depths of Pleistocene sands, began to produce
oil and gas in 1995 and declined rapidly. In 1999, well abandonment operations
began and at year-end 1999, the FPS was undergoing major refurbishment at a
shipyard facility in Galveston, Texas. EEX is assessing alternative uses for
the FPS and the Pipelines previously serving the Cooper Field. EEX has entered
into preliminary discussions with a third party to purchase the FPS. The
Company is also studying the use of the Pipelines for possible production from
the discovery at Llano or other current and future discoveries in the Llano
area.
Gulf of Mexico Shelf (Including Texas State Waters)--EEX participated in
eight wells on the Shelf, four of which were successful, and none of which
were Deep Shelf wells.
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EEX abandonment activity in the Shelf is increasing as EEX limits
reinvestment into its Shelf properties except for investment associated with
deep exploration potential. Downward revision of reserve estimates for many of
its Shelf properties also has contributed to shorter field lives, in some
instances. Five platforms were de-commissioned in 1999: Vermilion 266,
Vermilion 359, Vermilion 37, East Cameron 234 and West Cameron 406. Cost
savings were realized as two platforms were sold and one was transferred to
South Timbalier 235 for re-deployment. Abandonment cost estimates were
reviewed for all well and platforms in which EEX participates. EEX exposure
for abandonment (net of salvage) was estimated to be $43 million at the end of
1999, an increase from the $25 million estimated at the end of 1998. Upward
revisions are primarily due to the re-estimate of exposure on non-operated
properties, platform and facilities' age and likelihood of salvage and sale.
The Company intends to fix a portion of its abandonment liability exposure
through the sale of mature properties.
U.S. Exploration and Development--Onshore
In December 1998, EEX agreed to exchange its operated oil and gas producing
properties in Louisiana plus cash compensation for interests in the East
Cameron Block 349/350 field. This exchange was completed on January 21, 1999.
During 1999, the focus of onshore activity was on the Vaquillas Ranch field
in South Texas. EEX acquired all of the outstanding interest at Vaquillas
Ranch in August and subsequently began an exploitation program. The initial
focus of this program was preparation of numerous wellbores for recompletion,
re-stimulation or sidetrack. By year-end, 12 wells had been successfully re-
entered and two additional re-entries were in progress.
In October 1999, EEX entered into an agreement to acquire Tesoro Petroleum
Corporation's domestic exploration and production operations in a stock
purchase transaction. The acquired properties, primarily natural gas fields in
South Texas and the Gulf Coast, are currently producing approximately 76 MMcfe
per day from proved reserves of 185 Bcfe as of December 31, 1999. EEX has
established an office in San Antonio, Texas, staffed largely by former Tesoro
employees. The acquisition supplemented EEX's existing Gulf Coast and South
Texas production, lengthened its average reserve life, and provided a better
balance between producing properties and exploration prospects. In addition to
the natural gas fields in South Texas and the Gulf Coast, certain gathering
and pipeline assets, primarily associated with the Bob West field in South
Texas, were also included in the transaction. In December 1999, EEX closed the
acquisition at a net cost of $215 million.
International Exploration and Development
Indonesia (Onshore Java) Tuban Block--EEX owns a 50% interest in the
production sharing contract relating to the Tuban block, which includes the
Mudi Field. During the fourth quarter of 1999, the operator of the Mudi Field
indicated that production from the field would be reduced from approximately
20,000 gross barrels per day, to approximately 10,000 gross barrels per day
(5,000 barrels per day EEX net), due to increased water production. The
operator has developed a plan to increase water handling and drill additional
production wells to restore production. That plan has not yet received full
approval by EEX or Pertamina, the Indonesian state oil company.
Indonesia (Offshore Sumatra) Asahan Block--In 1997, EEX acquired a 60%
interest in 4,200 square kilometers in the Asahan block. During 1998, seismic
data over the block was acquired and processed. During 1999, EEX obtained a
partner to contribute all or a portion of the cost for an exploratory well to
earn an interest in the block. In the event a well is not drilled, EEX has
negotiated a performance guarantee that will require the farmee to pay EEX
compensation equal to the costs previously incurred in the block.
Plant Operations Business
EEX Power Systems Company ("EEXPS"), a division of EEX, provides operation
and maintenance services under contract to two cogeneration plants: (i)
"Encogen One," a 255 MW cogeneration facility located
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in Sweetwater, Texas and (ii) "Encogen Northwest," a 160 MW cogeneration
facility located in Bellingham, Washington. EEXPS operates and maintains the
facilities under terms of operation and maintenance agreements that provide
EEXPS periodic fees and reimbursement of certain costs. Until November 1998,
EEXPS also operated a third cogeneration facility in Buffalo, New York.
However, as a result of the termination of the facility's power purchase
agreement, the owners exercised buy-out provisions and terminated the
operation and maintenance agreement.
Sales of Natural Gas and Crude Oil
EEX sells its natural gas under both long- and short-term contracts. EEX
markets most of its gas through third-party marketing organizations. EEX sells
its crude oil under contracts that are for periods of one year or less. Prices
generally are based upon field posted prices plus negotiated bonuses. EEX
makes no sales of natural gas and/or crude oil to any customer where the loss
of such customer would have a material adverse effect on EEX.
Sales data are set forth under "Selected Operating Data" included as part of
Item 6.
EEX utilizes financial instruments to reduce exposure of its oil and gas
production to price volatility. See Item 7A, "Quantitative and Qualitative
Disclosures about Market Risk," Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Oil and Gas Marketing," and
Note 15 to Consolidated Financial Statements in Item 8 for additional
information on hedging activities.
Competition
All phases of the oil and gas industry are highly competitive. EEX competes
in the acquisition of properties, the search for and development of reserves,
the production and sale of oil and gas and the securing of the labor,
equipment, and capital required to conduct operations. EEX's competitors
include major oil and gas companies, as well as numerous other independent oil
and gas concerns and individual producers and operators. Many of these
competitors have financial and other resources that are substantially greater
than those available to EEX. Oil and gas producers also compete with other
industries that supply energy and fuel.
The Company believes that it has a significant inventory of exploratory
prospects, relative to its size; however, EEX will require capital investments
greater than EEX's current resources to explore, appraise and develop these
prospects. The Company's success in discovering reserves will depend on its
ability to identify and exploit suitable prospects in today's competitive
market and on its ability to find appropriate partners to reduce the financial
risk of exploration and development.
Government Regulation
The oil and gas industry is extensively regulated by federal, state and
local authorities and by governmental agencies of foreign countries.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion. Numerous departments and agencies, federal, state and
foreign, have issued rules and regulations binding on the oil and gas industry
and its individual members, some of which carry substantial penalties for the
failure to comply. Because these laws and regulations are frequently amended,
reinterpreted or expanded, EEX is unable to predict the future cost or impact
of complying with such laws and regulations.
Regulation of Onshore Operations--The production of oil and gas by EEX in
Texas is regulated by The Texas Railroad Commission, and in Louisiana, by The
Louisiana Department of Natural Resources. Similar types of regulations are in
effect in Indonesia and other foreign countries. Such regulations include
requiring permits for the drilling of wells, maintaining bonding requirements
in order to drill or operate wells, and regulating the location of wells, the
method of drilling and casing wells, the surface use and restoration of
properties upon which wells are drilling and the plugging and abandonment of
wells. EEX's operations are also subject to various conservation laws and
regulations. These include the regulation of the size of drilling and spacing
units or
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proration units and the density of wells which may be drilled and unitization
or pooling of oil and gas properties. In addition, conservation laws establish
maximum rates of production requirements regarding the ratability of
production.
Regulation of Offshore Operations--Lessees must obtain the approval of the
Minerals Management Service ("MMS"), a federal agency, and various other
federal and state agencies for exploration, development and production plans
prior to the commencement of offshore operations. Similarly, the MMS has
promulgated regulations governing the plugging and abandoning of wells located
offshore and the removal of all production facilities. The MMS also issues
rules on calculation of royalty payments and valuation of production for
royalty purposes. Under certain circumstances, including, but not limited to,
conditions deemed to be a threat or harm to the environment, the MMS may also
require any EEX operation on federal leases to be suspended or terminated in
the affected area.
Environmental Matters--EEX's U.S. oil and gas operations are subject to
extensive federal, state and local laws and regulations dealing with
environmental protection, including, but not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), also known
as "Superfund," and similar state statutes. Failure to comply with these laws
and regulations may result in the assessment of administrative, civil, or
criminal penalties.
With respect to offshore leases in U.S. waters, EEX's operations are subject
to interruption or termination by governmental authorities on account of
environmental contamination and other considerations. The Outer Continental
Shelf Lands Act ("OCSLA") provides the federal government with broad
discretion in regulating the release or continued use of offshore resources
for oil and gas production. If the government were to exercise its authority
under OCSLA to restrict the availability of offshore oil and gas leases (for
example, due to a serious incident of pollution), such an action could have a
material adverse effect on EEX's operations.
The Oil Pollution Act of 1990 ("OPA") and regulations thereunder impose a
variety of regulations on "responsible parties" (which includes owners and
operators of onshore facilities, pipelines, and vessels, or lessees or
permittees of areas where offshore facilities are located) related to the
prevention of oil spills and liability for damages resulting from such spills
in the United States waters. The OPA assigns liability to each responsible
party for oil removal and cleanup costs, and a variety of public and private
damages including natural resource damages. In addition, OPA imposes ongoing
requirements on responsible parties, including preparation of spill response
plans and proof of financial responsibility to cover at least some costs in a
potential spill. EEX maintains insurance against costs of cleanup operations,
but is not fully insured against all such risks. The Coastal Zone Management
Act authorizes state implementation and development of programs containing
management measures for the control of nonpoint source pollution to restore
and protect coastal waters.
EEX's U.S. onshore operations are subject to numerous laws and regulations
controlling the discharge of materials into the environment or otherwise
relating to the protection of the environment. These laws and regulations,
among other things, may impose absolute liability on the lessee under a lease
for the cost of clean-up of pollution resulting from a lessee's operations,
subject the lessee to liability for pollution damages, require suspension or
cessation of operations in affected areas and impose restrictions on the
injection of liquids into subsurface aquifers that may contaminate
groundwater. Persons who are or were responsible for releases of hazardous
substances under CERCLA may be subject to joint and several liability for the
remediation and clean-up costs and for damages to natural resources.
The operations of EEX are also subject to the Clean Water Act and the Clean
Air Act, as amended, and comparable state statutes. EEX may be required to
incur certain capital expenditures over the next five to ten years for
pollution control equipment. The Company's operations may generate or
transport both hazardous and nonhazardous solid wastes that are subject to the
requirements of the Resource Conservation and Recovery Act ("RCRA") and
comparable state laws and regulations. In addition, EEX currently owns or
leases, and has in the past owned or leased, properties that have been used
for oil and gas operations for many years. Although EEX has utilized operating
and disposal practices that were standard in the industry at the time,
hydrocarbons or other
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wastes may have been disposed of or released on or under the properties owned
or leased by EEX or on or under other locations where such wastes have been
taken for disposal. Many of these properties have been operated by third
parties whose operations were not under EEX's control. These properties and
the wastes disposed thereon may be subject to CERCLA, RCRA, and analogous
state laws, and EEX could be required to remove or remediate previously
disposed wastes or property contamination or perform remedial plugging
operations to prevent future contamination.
EEX's foreign operations are potentially subject to similar governmental
controls and restrictions relating to the environment. Requirements of these
foreign governmental bodies may include, among other things, controls over the
discharge of materials in the environment, standards for removal and cleanup
of spills, and restrictions on the handling and disposal of waste materials.
Regulation of Natural Gas Marketing and Transportation--Although maximum
selling prices of natural gas were formerly regulated, the Natural Gas
Wellhead Decontrol Act of 1989 ("Decontrol Act") terminated wellhead price
controls on all domestic natural gas on January 1, 1993, and amended the
Natural Gas Policy Act of 1978 to remove completely by January 1, 1993 price
and nonprice controls for all "first sales" of natural gas, which includes all
sales by EEX of its own production. Consequently, sales of EEX's natural gas
currently may be made at market prices, subject to applicable contract
provisions. The jurisdiction of the Federal Energy Regulatory Commission
("FERC") over natural gas transportation was unaffected by the Decontrol Act.
The FERC regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of natural gas produced by EEX, as well
as the revenues received by EEX for sales of such natural gas. Since the
latter part of 1985, the FERC has endeavored to make interstate natural gas
transportation more accessible to gas buyers and sellers on an open and
nondiscriminatory basis. The FERC's efforts have significantly altered the
marketing and pricing of natural gas, most notably from Order Nos. 636, 636-A,
636-B, 636-C and 637.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. EEX cannot predict when or if any such
proposals might become effective, or their effect, if any, on EEX's
operations. The natural gas industry historically has been very heavily
regulated; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future. State regulation of gathering facilities generally includes
various transportation, safety, environmental, nondiscriminatory purchase and
transport requirements, but does not currently entail rate regulation. Growing
competitive pressures in marketing natural gas may cause states to regulate
gathering facilities more stringently in the future.
In the aggregate, compliance with federal and state rules and regulations is
not expected to have a material adverse effect on EEX's operations.
Employees
At January 1, 2000, EEX had 204 full-time employees, 162 of which were
involved principally with oil and gas operations. The remaining employees were
involved with Plant Operations Business.
Offices
The principal offices of EEX are located at 2500 CityWest Blvd., Suite 1400,
Houston, Texas 77042, and its telephone number is (713) 243-3100. An onshore
office is located at 1020 N.E. Loop 410, Suite 700, San Antonio, Texas 78209,
and its telephone number is (210) 829-3500. Plant operation offices are
maintained in Sweetwater, Texas and Bellingham, Washington.
9
<PAGE>
Forward-Looking Statements--Uncertainties and Risks
Certain statements in this report, including statements of EEX's and
management's expectations, intentions, plans and beliefs, are "forward-looking
statements," within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, and are subject to certain events, risks and
uncertainties that may be outside EEX's control. These forward-looking
statements include statements of management's plans and objectives for EEX's
future operations and statements of future economic performance; information
regarding drilling schedules, expected or planned production, future
production levels of international and domestic fields, EEX's capital budget
and future capital requirements, EEX's meeting its future capital needs, the
level of future expenditures for environmental costs and the outcome of
regulatory and litigation matters; and the assumptions underlying such
forward-looking statements. Actual results and developments could differ
materially from those expressed in or implied by such statements due to a
number of factors, including, without limitation, those described in the
context of such forward-looking statements and the risk factors set forth
below and described from time to time in EEX's other documents and reports
filed with the Securities and Exchange Commission.
Exploration Risk--Exploration for oil and gas in the Deepwater Gulf of
Mexico and unexplored frontier areas has inherent and historically high risk.
EEX is focusing on exploration opportunities in offshore and international
areas that will increase associated exploration risk. Future reserve increases
and production will be dependent on EEX's success in these exploration efforts
and no assurances can be given of such success. Exploration may involve
unprofitable efforts, not only with respect to dry wells, but also with
respect to wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs.
Operational Risks and Hazards--EEX's operations are subject to the risks and
uncertainties associated with finding, acquiring and developing oil and gas
properties, and producing, transporting and selling oil and gas. Operations
may be materially curtailed, delayed or canceled as a result of numerous
factors, such as accidents, weather conditions, compliance with governmental
requirements and shortages or delays in the delivery of equipment. Operating
hazards such as fires, explosions, blow-outs, equipment failures, abnormally
pressured formations and environmental accidents may have a material adverse
effect on EEX's operations or financial condition. EEX's ability to sell its
oil and gas production is dependent on the availability and capacity of
gathering systems, pipelines and other forms of transportation.
Offshore Risks--EEX's Gulf of Mexico oil and gas reserves and exploration
prospects include properties located in water depths of 20 to greater than
7,000 feet where operations are by their nature more difficult than drilling
operations conducted on land in established producing areas. Deepwater
drilling and operations require the application of more advanced technologies
that involve a higher risk of mechanical failure and can result in
significantly higher drilling and operating costs which, in turn, can require
greater capital investment than anticipated and materially change the expected
future value of offshore development projects. The size of oil and gas
reserves determined through exploration and confirmation drilling operations
must ultimately be significant enough to justify the additional capital
required to construct and install production and transportation systems and
drill development wells. Development of any discoveries made pursuant to EEX's
Deepwater exploration program may not return any profit to the Company and
could result in an economic loss. Furthermore, offshore operations require a
significant amount of time between the discovery and the time the gas or oil
is actually marketed, increasing the market risk involved with such
operations.
Capital Funding and Liquidity--EEX's access to public or private equity or
debt markets may be limited by general conditions in or volatility of the
markets, general conditions affecting the oil and gas industry, or by EEX's
financial condition. No assurances can be given that the Company will be able
to secure funds in these markets when necessary, or that such funds will be
obtained on terms favorable to the Company. If the Company is unable to secure
funds when required for its activities, its liquidity and ability to make
capital investments may become impaired. See the additional discussion in Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
10
<PAGE>
FPS and Pipeline Marketing Risk--The FPS and Pipelines have a carrying value
of $144 million net to EEX at December 31, 1999 and currently do not generate
any cash returns to the Company. The FPS is a unique asset. A successful
marketing program for this asset will require finding a prospective purchaser
with the need for such a facility, successfully negotiating a transaction and
obtaining agreement from EEX's partner in the facility. The utility of the
Pipelines depend primarily on the future reserve potential of the Llano area
or other discoveries not yet made which would require use of these Pipelines.
Until such reserves are proved or other discoveries are made, the risk to a
prospective pipeline purchaser will likely be reflected in its assessment of
value. While management believes that it can realize the value of the FPS and
Pipelines, there can be no assurance that it can do so in the near term or on
favorable financial terms.
Volatility of Oil and Gas Markets--EEX's operations are highly dependent
upon the prices of, and demand for, oil and gas. These prices have been, and
are likely to continue to be, volatile. Prices are subject to fluctuations in
response to a variety of factors that are beyond the control of EEX, such as
worldwide economic and political conditions as they affect actions of OPEC and
Middle East and other producing countries, and the price and availability of
alternative fuels. EEX's hedging activities with respect to some of its
projected oil and gas production, which are designed to protect against price
declines, may prevent EEX from realizing the benefits of price increases above
the levels of the hedges.
Estimating Reserves and Future Net Cash Flows--Uncertainties are inherent in
estimating quantities and values of reserves and in projecting rates of
production, net revenues and the timing of development expenditures. Reserve
data represent estimates only of the recovery of hydrocarbons from underground
accumulations and are often different from the quantities ultimately
recovered. Downward adjustment in reserve estimates could adversely affect
EEX. Also, any substantial decline in projected net revenues resulting from
production of reserves could have a material adverse effect on the Company's
financial position and results of operations.
Government Regulation--EEX's business is subject to certain federal, state
and local laws and regulations relating to the drilling for and the production
of oil and gas, as well as environmental and safety matters. See "Business--
Government Regulation," above. Enforcement of or changes to these regulations
could have a material impact on the Company's operations, financial condition
and results of operations.
International Operations--EEX's interests in properties in countries outside
the United States are subject to the various risks inherent in foreign
operations. These risks may include, among other things, property and
equipment as a result of expropriation, nationalization, war, insurrection and
other political risks, risks of increases in taxes and governmental royalties,
renegotiations of contracts with governmental entities, changes in laws and
policies governing operations of foreign-based companies and other
uncertainties arising out of foreign government sovereignty over the Company's
international operations. The Company's international operations may also be
adversely affected by laws and policies of the United States affecting foreign
trade, taxation and investment. In addition, in the event of a dispute arising
from foreign operations, the Company may be subject to the exclusive
jurisdiction of foreign courts or may not be successful in subjecting foreign
persons to the jurisdiction of the courts of the United States.
11
<PAGE>
Item 2. Properties
In 1999, EEX's operations were located in three regions: (i) the Gulf of
Mexico--Deepwater, (ii) Onshore and Gulf of Mexico Shelf and (iii)
International, primarily Indonesia. The following table sets forth estimated
net proved reserves of EEX by region, as audited by Netherland, Sewell &
Associates, Inc., at December 31, 1999:
<TABLE>
<CAPTION>
Proved Reserves at
December 31, 1999
--------------------------------
Natural Oil and Gas
Gas Liquids Total
(MMcf)(1) (MBbls)(2) (MMcfe)(3)
--------- ----------- ----------
<S> <C> <C> <C>
Gulf of Mexico--Deepwater................... -- -- --
Onshore and Gulf of Mexico Shelf............ 362,813 5,702 397,025
------- ------ -------
Total Domestic............................ 362,813 5,702 397,025
International............................... -- 11,840 71,038
------- ------ -------
Total..................................... 362,813 17,542 468,063
======= ====== =======
Minority Interest(4)........................ 86,319 1,043 92,574
======= ====== =======
</TABLE>
- --------
(1) Million cubic feet.
(2) Thousand barrels.
(3) Million cubic feet of gas equivalent with one barrel of liquid converted
to six Mcf of gas.
(4) Included in Onshore and Gulf of Mexico Shelf above. See Note 13 to
Consolidated Financial Statements in Item 8 for additional information on
Minority Interest.
See Note 23 to Consolidated Financial Statements in Item 8 for additional
information on oil and gas reserves.
During 1999, EEX filed Form EIA-23 with the Department of Energy reflecting
reserve estimates for the year 1998. Such reserve estimates were not
materially different from the 1998 reserve estimates reported in Note 23 to
Consolidated Financial Statements in Item 8.
Developed and undeveloped lease acreage as of December 31, 1999 is set forth
below:
<TABLE>
<CAPTION>
Developed Acres Undeveloped Acres
--------------- -------------------
Gross Net(1) Gross Net(1)
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Gulf of Mexico--Deepwater............... 42,625 18,720 494,324 179,468
Onshore and Gulf of Mexico Shelf........ 375,613 116,656 703,005 302,784
------- ------- --------- ---------
Total Domestic........................ 418,238 135,376 1,197,329 482,252
International........................... 5,000 5,000 3,576,056 2,426,924
------- ------- --------- ---------
Total................................. 423,238 140,376 4,773,385 2,909,176
======= ======= ========= =========
Minority Interest(2).................... 26,872 13,016 142,093 76,642
======= ======= ========= =========
</TABLE>
- --------
(1) Represents the proportionate interest of EEX in the gross acres under
lease.
(2) Included in Onshore and Gulf of Mexico Shelf above. See Note 13 to
Consolidated Financial Statements in Item 8 for additional information on
Minority Interest.
EEX purchased approximately 17,100 net acres in 4 offshore blocks (2
Deepwater and 2 Shelf) at Federal OCS Lease Sale 172 held March 14, 1999.
Additionally, EEX acquired 25,592 net acres in 1999 through a like-kind
exchange transaction completed in the first quarter. The total number of
blocks in which EEX had an interest at year-end was 286, with an average
working interest of 38%. EEX operates 123 of these blocks.
12
<PAGE>
During 1999, EEX cancelled or allowed to expire 57 Gulf of Mexico blocks and
sold its interest in another 8 blocks that had already been condemned through
either geological or geophysical findings or by drilling.
EEX plans further drilling on undeveloped acreage, but at this time cannot
specify the extent of the drilling or predict how successful it will be in
establishing commercial reserves sufficient to justify retention of the
acreage. The primary terms during which the undeveloped acreage can be
retained by the payment of delay rentals without the establishment of oil and
gas reserves expire as follows:
<TABLE>
<CAPTION>
Undeveloped Acres Expiring
---------------------------------------------------
Gulf of
Mexico-- Onshore and
Deepwater GOM Shelf International
--------------- --------------- -------------------
Gross Net Gross Net Gross Net
------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
2000.................... 69,120 25,344 249,337 104,332 1,037,568 155,635
2001.................... 64,077 20,072 162,126 58,831 2,182,222 2,182,222
2002 and later.......... 361,127 134,052 291,542 139,621 356,266 89,067
------- ------- ------- ------- --------- ---------
Total................. 494,324 179,468 703,005 302,784 3,576,056 2,426,924
======= ======= ======= ======= ========= =========
</TABLE>
The Company may allow drilling rights with regard to a portion of the
undeveloped acreage to expire before the expiration of primary terms specified
in this schedule by non-payment of delay rentals.
Drilling activity during the three years ended December 31 is set forth
below:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
Gross Net Gross Net Gross Net
----- --- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells:
Productive................................. 2.0 1.5 5.0 2.3 32 11.3
Dry........................................ 7.0 3.6 9.0 3.4 19 8.7
--- --- ---- ---- --- ----
Total.................................... 9.0 5.1 14.0 5.7 51 20.0
=== === ==== ==== === ====
Development Wells:
Productive................................. 2.0 0.8 35.0 17.1 75 33.2
Dry........................................ -- -- 3.0 1.2 9 3.8
--- --- ---- ---- --- ----
Total.................................... 2.0 0.8 38.0 18.3 84 37.0
=== === ==== ==== === ====
</TABLE>
Productive wells are either producing wells or wells capable of commercial
production, although currently shut-in. The term "gross" refers to the wells
in which a working interest is owned, and the term "net" refers to gross wells
multiplied by the percentage of EEX's working interest owned therein.
At December 31, 1999, EEX was participating in 10 wells (5.1 net) which were
either being drilled or in some stage of completion.
The number of wells drilled is not a significant measure or indicator of the
relative success or value of a drilling program because the significance of
the reserves and economic potential may vary widely for each project. It is
also important to recognize that reported completions may not necessarily
correspond to capital expenditures, since Securities and Exchange Commission
guidelines do not allow a well to be reported as completed until it is ready
for production. In the case of offshore wells, this may be several years
following initial drilling because of the timing of construction of platforms,
pipelines and other necessary facilities.
13
<PAGE>
The Company owned interest in productive gas and oil wells at December 31,
1999 as follows:
<TABLE>
<CAPTION>
Gas Oil
----------- ----------
Gross Net Gross Net
----- ----- ----- ----
<S> <C> <C> <C> <C>
Gulf of Mexico--Deepwater............................. -- -- -- --
Onshore and Gulf of Mexico Shelf...................... 644.0 311.5 121.0 50.2
----- ----- ----- ----
Total Domestic...................................... 644.0 311.5 121.0 50.2
International......................................... -- -- 13.0 6.5
----- ----- ----- ----
Total............................................... 644.0 311.5 134.0 56.7
===== ===== ===== ====
</TABLE>
The Company has ownership in wells with dual completions in single boreholes
at December 31, 1999 as follows:
<TABLE>
<CAPTION>
Gas Oil
---------- ---------
Gross Net Gross Net
----- ---- ----- ---
<S> <C> <C> <C> <C>
Gulf of Mexico--Deepwater............................... -- -- -- --
Onshore and Gulf of Mexico Shelf........................ 72.0 42.4 3.0 2.0
---- ---- --- ---
Total Domestic........................................ 72.0 42.4 3.0 2.0
International........................................... -- -- -- --
---- ---- --- ---
Total................................................. 72.0 42.4 3.0 2.0
==== ==== === ===
</TABLE>
Additional information relating to the oil and gas activities of EEX is set
forth in Note 23 to Consolidated Financial Statements in Item 8 and in
"Selected Financial and Operating Data" in Item 6.
EEX leases approximately 78,000 square feet of office space for its office
in Houston, Texas, expiring in September 2002. EEX subleases approximately
19,000 square feet of office space for its office in San Antonio, Texas,
expiring in December 2002.
Item 3. Legal Proceedings
EEX is involved in a number of legal and administrative proceedings incident
to the ordinary course of its business. In the opinion of management, based on
the advice of counsel and current assessment, any liability to EEX relative to
these ordinary course proceedings will not have a material adverse effect on
EEX's operations or financial condition.
In addition, EEX is a defendant in Gracy Fund L.P. v. EEX Corporation, et
al., ("Gracy Fund"), a class action in Federal District Court for the Northern
District of Texas. Gracy Fund is a consolidated case combining two actions
filed against EEX in August 1998. In January 1999, plaintiffs in Gracy Fund
filed an amended class action complaint against EEX, several of its current
and/or former officers and directors and another company, ENSERCH Corporation
(the "Consolidated Complaint"). The Consolidated Complaint alleges violations
of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and violations
of Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934
against various defendants. The Consolidated Complaint also alleges Section
10(b), 15 and 20(a) claims on behalf of a class of plaintiffs who acquired
EEX's stock pursuant to an October 1996 Registration Statement and
Proxy/Prospectus ("EEX Subclass").
Plaintiffs allege that during the class period, defendants made materially
false and misleading statements, and failed to disclose material facts,
regarding the value and volume of EEX's proved reserves from its East Texas
operations. According to plaintiffs, these purported misrepresentations
artificially inflated the price of EEX's common stock throughout the class
period, induced the EEX Subclass to approve the merger that spun EEX off from
ENSERCH Corporation and induced the EEX Subclass to acquire stock pursuant to
the Registration Statement and Proxy/Prospectus issued regarding this merger.
14
<PAGE>
The Company is vigorously contesting this action and filed a motion to
dismiss the Consolidated Complaint on March 8, 1999. The motion has been fully
briefed and under submission to the court since June 23, 1999. All discovery
is stayed pending the determination of the motion to dismiss. Since it has not
yet been determined whether, or to what extent, the plaintiffs have pled a
viable complaint, the Company cannot predict the outcome of this matter at
this time.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded principally on the New York Stock
Exchange under the ticker symbol "EEX." The following table shows the high and
low sales prices per share of the common stock as reported in the New York
Stock Exchange--Composite Transactions report for the periods shown.
<TABLE>
<CAPTION>
1999 1998
------------- --------------
High Low High Low
---- --- ---- ----
<S> <C> <C> <C> <C>
First Quarter.......................... $7 11/16 $4 5/8 $30 3/8 $22 11/16
Second Quarter......................... 7 11/16 4 7/8 31 7/8 24 9/16
Third Quarter.......................... 7 1/8 2 15/16 28 11/16 11 5/8
Fourth Quarter......................... 4 1/16 2 1/2 15 5 1/16
</TABLE>
At March 1, 2000, EEX had 42,755,871 outstanding shares of common stock held
by 11,584 shareholders of record.
There were no dividends declared on the Company's common stock in 1999 or
1998. The declaration of future dividends will be dependent upon business
conditions, earnings, cash requirements and other relevant factors as
determined by the Company's Board of Directors. Under the terms of the
Company's Series B 8% Cumulative Perpetual Preferred Stock (the "Series B
Preferred Stock"), the Company may not declare or pay any dividend or make any
other distribution on its common stock, unless all dividends due upon the
Series B Preferred Stock have been paid or provided for.
15
<PAGE>
Item 6. Selected Financial and Operating Data
EEX CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of or for the Year Ended December 31
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- --------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues.............. $177,374 $219,052 $ 314,213 $ 338,146 $ 237,358
======== ======== ========= ========== ==========
Net (Loss) Applicable
to Common
Shareholders......... $(99,914) $(40,926) $(216,103) $ (36,801) $ (42,585)
======== ======== ========= ========== ==========
Basic and Diluted Net
(Loss) per Share(a).. $ (2.37) $ (0.97) $ (5.12) $ (0.87) $ (1.14)
======== ======== ========= ========== ==========
BALANCE SHEET DATA
Total Assets.......... $780,784 $565,070 $ 807,789 $1,195,454 $1,180,238
======== ======== ========= ========== ==========
CAPITAL STRUCTURE
Short-term
borrowings........... $ -- $ -- $ 5,000 $ -- $ --
Capital lease
obligations.......... 222,444 233,318 241,735 244,985 98,043
Long-term debt........ -- -- 25,000 115,000 160,000
Gas sales obligation.. 105,000 -- -- -- --
Company-obligated
mandatorily
redeemable preferred
securities of
subsidiary........... -- -- -- 150,000 150,000
Minority interest in
preferred stock of
subsidiary........... -- -- 100,000 -- --
Minority interest
third party.......... 3,050 -- -- -- --
Shareholders' equity.. 294,863 234,300 274,663 490,406 525,992
-------- -------- --------- ---------- ----------
Total............... $625,357 $467,618 $ 646,398 $1,000,391 $ 934,035
======== ======== ========= ========== ==========
</TABLE>
- --------
(a) The per share amounts for periods prior to 1998 have been restated to
reflect the reduction in weighted average shares outstanding due to the
one-for-three reverse stock split effective on December 8, 1998.
16
<PAGE>
EEX CORPORATION
SELECTED OPERATING DATA
<TABLE>
<CAPTION>
As of or for the Year Ended December
31
--------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Sales volume
Natural gas (Bcf)(a)................. 41.0 57.9 84.5 100.5 90.2
Oil, condensate and natural gas
liquids (MMBbls)(e)................. 4.6 5.8 5.4 5.7 3.9
Total volumes (Bcfe)(a)............ 68.5 92.7 116.9 135.0 113.4
Average sales price(b)
Natural gas (per Mcf)(c)............. $ 2.28 $ 2.21 $ 2.36 $ 2.17 $ 1.74
Oil, condensate and natural gas
liquids (per Bbl)................... 16.45 13.15 18.53 18.65 15.86
Total (per Mcfe)(c)................ 2.46 2.20 2.57 2.40 1.93
Average costs and expenses (per
Mcfe)(c)
Production and operating(b).......... $ 0.57 $ 0.51 $ 0.42 $ 0.52 $ 0.44
Exploration(d)....................... 0.62 0.49 0.60 0.69 0.68
Depreciation and amortization........ 1.01 1.09 1.24 1.26 0.99
General, administrative and other.... 0.41 0.26 0.24 0.26 0.26
Taxes, other than income............. 0.07 0.12 0.15 0.16 0.17
Net Wells Drilled
Total................................ 6 24 57 109 81
Productive........................... 2 19 44 84 51
Proved Reserve Data (at year end)
Natural Gas (Bcf)(a)................. 362.8 203.6 460.2 1,216.2 1,362.8
Oil, condensate and natural gas
liquids (MMBbls)(e)................. 17.5 26.2 23.8 59.2 71.5
Total (Bcfe)(a).................... 468.1 360.6 603.2 1,571.5 1,791.8
Standardized Measure of Discounted
Future Net Cash Flows (in millions)... $436.3 $275.9 $619.1 $1,715.1 $1,227.4
</TABLE>
- --------
(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) Excludes unusual and non-recurring expenses.
(e) One million barrels of crude oil or other liquid hydrocarbons.
17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with EEX's
Consolidated Financial Statements and notes thereto included under Item 8.
In 1997, EEX became a separate company, wholly independent of its former
majority owner, ENSERCH Corporation, a public utility. This transition to
independent status, coupled with the engagement of a new management team,
resulted in a restructuring of the Company's assets, operations and strategy.
Refer to Item 1 for a discussion of the development of EEX's business and
strategy.
Certain statements in this report, including statements of EEX Corporation's
("EEX" or the "Company") 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" in Item 1.
Results of Operations
On December 8, 1998, the shareholders approved a one-for-three reverse split
of EEX common stock. All references to the number of common shares and per
share amounts for prior period financial statements have been restated to
reflect this event. See "Capital Structure" below.
EEX reported a 1999 net loss of $100 million ($2.37 per share), versus a net
loss of $41 million ($0.97 per share) in 1998 and a net loss of $216 million
($5.12 per share) in 1997.
In 1999, results of operations were impacted by three major items. The first
item was a $26 million pre-tax charge for impairment of producing oil and gas
properties required by Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The second major item was a gain on sales of property,
plant and equipment of $15 million pre-tax. The third major item was the write
off of deepwater dry hole costs of $44 million associated with the George and
Mackerel prospects.
In the following comparisons of results of operations, 1999 results have
been adjusted to exclude the items described above. Results for 1998 were
adjusted to exclude gains on sale of assets of $9 million pre-tax and FAS 121
impairment of $10 million pre-tax. Results for 1997 were adjusted to exclude
gains on sales of assets of $53 million pre-tax, FAS 121 impairment of $260
million pre-tax and reorganization expense of $27 million pre-tax.
The reorganization expense in 1997 was classified as general, administrative
and other expense in the Consolidated Statement of Operations. Cash
requirements for these charges totaled $14 million in 1997, $11 million in
1998 and the remainder in 1999.
1999 Results of Operations Compared With 1998
Revenues for 1999 were $177 million, $42 million (19%) lower than 1998.
Natural gas revenues, 27% lower than 1998, were impacted by a 29% decrease in
production primarily due to production decline on properties located in the
Shelf, offset by a slight increase in the average price of 3%. The average
natural gas sales price per thousand cubic feet (Mcf) was $2.28 in 1999,
compared with $2.21 in 1998. Natural gas production for 1999 was 41 billion
cubic feet (Bcf), compared with 58 Bcf in 1998. Oil revenues remained constant
with 1998. A 35% increase in unhedged average oil prices was offset by a $1.3
million oil hedging loss for the year 1999, compared to a $4.3 million oil
hedging gain for the year 1998. Crude oil production decreased 19% to 4,528
thousand barrels (MBbls) in 1999 from 5,612 MBbls in 1998.
Costs and expenses, excluding the unusual items described above, were $192
million in 1999, compared to $239 million in 1998, a 20% decrease. Operating
expenses (production and operating, general and administrative
18
<PAGE>
and taxes other than income) were $72 million in 1999, 12% lower than 1998,
resulting from property sales and the favorable impact from restructuring
measures implemented over the last year. Exploration expenses for 1999 include
$51 million for dry hole costs compared to $18 million in 1998. Depreciation
and amortization was $69 million in 1999, $32 million lower than 1998 due to
lower production volumes resulting from asset sales and production decline
primarily on properties located in the Gulf of Mexico Shelf. In July 1999,
depreciation of approximately $0.9 million per quarter was suspended on the
Pipelines following abandonment of the Cooper Field pending future utilization
in the Llano area.
Total interest and other financing costs, including interest income,
preferred stock dividends, minority interest and other income, were $24
million, a $1 million reduction from 1998, resulting from an increase in
interest income, offset by preferred stock dividends in 1999 due to the
issuance of 1.5 million shares of cumulative perpetual preferred stock on
January 8, 1999.
1998 Results of Operations Compared With 1997
Revenues for 1998 were $219 million, $95 million (30%) lower than 1997.
Natural gas revenues, 36% lower than 1997, were impacted by a 6% decrease in
average prices, and a 31% decrease in production, primarily due to property
sales. The average natural gas sales price per thousand cubic feet (Mcf) was
$2.21 in 1998, compared with $2.36 in 1997. Natural gas production for 1998
was 58 billion cubic feet (Bcf), compared with 84 Bcf in 1997. Oil revenues
decreased $17 million (18%), reflecting a 31% decrease in the average sales
price per barrel to $13.24, which was partially offset by an 18% increase in
production primarily attributable to start up of the Mudi Field in Indonesia.
Crude oil production was 5,612 thousand barrels (MBbls), compared with 4,743
MBbls in 1997. Production from the Mudi Field was 2,364 MBbls.
Costs and expenses, excluding the unusual items described above, were $239
million in 1998, compared to $320 million in 1997, a 25% decrease. Operating
expenses (production and operating, general and administrative and taxes other
than income) were $82 million in 1998, 14% lower than 1997, resulting from
property sales and the favorable impact from restructuring measures
implemented over the last year. Production and operating costs for 1998
includes $11 million for oil production from the Mudi Field. Exploration
expenses for 1998 decreased 36% from 1997 due to curtailment of the onshore
exploration program and the impact of the offshore exploration joint ventures
with Enterprise and others. Exploration expense for 1998 includes $18 million
for dry holes in both domestic and international drilling activities.
Depreciation and amortization was $101 million in 1998, $43 million lower than
1997 due to lower production volumes resulting from asset sales and the
impairment to producing oil and gas properties recognized in 1997, which was
partially offset by amortization recorded from oil production from the Mudi
Field. Taxes, other than income, decreased 37% from 1997, primarily due to
property sales and lower commodity prices.
Total interest and other financing costs, including minority interest, were
$26 million, a $10 million reduction from 1997, resulting from a lower overall
debt level in 1998 and redemption of the minority interest in the second
quarter of 1998.
Oil and Gas Marketing
Results of operations are largely dependent upon the difference between the
prices received for oil and gas produced and the costs of finding and
producing such resources. On an energy-equivalent basis, gas reserves at
January 1, 2000 constituted approximately 78% of total reserves, and gas
production accounted for approximately 60% of total production for 1999.
Accordingly, variations in gas prices have a more significant impact on
operations than variations in oil prices.
A portion of the risk associated with fluctuations in the price of oil and
natural gas is managed through the use of hedging techniques such as oil and
gas swaps and collars. EEX fixed the price on 1999 production volumes of
approximately 21 Bcf of natural gas (50% of production) at an average price of
$2.22 per Mcf, excluding Encogen hedges, and 660 MBbls of oil (15% of
production) at an average price of $14.23 per Bbl. In total, oil and gas price
hedging activities decreased 1999 revenues by $1.9 million and 1997 revenues
by $11 million, and increased 1998 revenues by $7.5 million.
19
<PAGE>
Impairment of Assets
EEX accounts for oil and gas properties using the successful efforts method
which requires EEX to comply with the requirements of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," ("SFAS 121"). See Note 7
to Consolidated Financial Statements in Item 8. In the fourth quarter of 1999,
the Company's independent petroleum consultant completed its annual review and
audit of the Company's proved oil and gas reserves and their commercial
feasibility. EEX recorded a $26 million pre-tax charge for impairment in 1999.
This impairment was primarily associated with the Company's Gulf of Mexico
Shelf properties and generally results from downward revisions to proved
reserves and an increase in the estimated abandonment cost for these assets.
The Company reviewed the estimated value of the production payment due EEX
as a result of the sale of its East Texas properties together with the
estimated future gas delivery obligation to Encogen One Partners, Ltd.
("Encogen") and determined that a provision for possible future losses was not
appropriate. The production payment is recorded as oil and gas properties, net
of a provision for future gas deliveries arising from past gas "overtakes."
This review included estimates of the cost of EEX's future gas delivery
obligations to Encogen and estimated receipts from the production payment on
an undiscounted cash flow basis. The analysis also included assumptions about
future gas delivery schedules, gas prices and the likelihood that the obligor
will exercise annual options to repurchase portions of the production payment.
The obligor did not exercise its option in 1998 or 1999. As of December 31,
1999, the Company had a future volumetric delivery obligation of approximately
16 Bcf of natural gas to Encogen; the total production payment due EEX is
approximately 30 Bcf net of royalty.
The Company again reviewed the estimated future value of the Cooper Floating
Production System, Pipelines and other related facilities. In 1997, the
Company impaired the assets by approximately $83 million. The Company
determined that, if placed in service as an early production and pipeline
system for future oil and gas developments in the Llano area, the estimated
future cash flows from the assets would exceed the carrying value of
approximately $144 million. Further, the Company continues to evaluate other
potential uses for these facilities. Based on these analyses and an indication
of market value, no additional impairment was considered appropriate in 1999.
As of December 31, 1999, the Company had a deferred tax asset of
approximately $126 million. A valuation allowance of $102 million has been
applied to result in a net realizable value of $24 million. The plan to
realize the value of the net deferred tax asset is based on expected future
earnings and tax planning strategies that include, primarily, planned sales of
assets with fair market values in excess of book basis. The Company does not
expect to tax-effect any future operating losses until the value of the net
deferred tax asset has been realized.
Although management believes that the estimates and assumptions underlying
the analyses described above are appropriate, no assurances can be given that
events in the future will be consistent with those estimates and assumptions.
Liquidity and Capital Resources
Cash Flows
During 1999, EEX generated sufficient cash flows from operations, property
sales and financing activities to fund its capital requirements, including the
purchase of certain oil and gas properties and pipeline assets of Tesoro
Petroleum Corporation. Despite a reduction in revenues of $42 million, net
cash flows provided by operating activities were $95 million, an increase of
$71 million over 1998, largely due to changes in current operating assets and
liabilities. Net cash flows used in investing activities in 1999 were $342
million, a $469 million decrease from cash flows of $127 million provided by
investing activities in 1998. The reduction in investing activities is
primarily due to the purchase of the Tesoro oil and gas properties and
pipeline assets in 1999 of $212 million and proceeds from asset sales in 1998
of $298 million.
20
<PAGE>
Capital Budget
Planned 2000 capital expenditures are approximately $140 million, compared
with actual expenditures of $388 million in 1999 (including $215 million for
the acquisition of Tesoro oil and gas properties and pipelines) and $166
million in 1998. Planned 2000 capital expenditures exclude approximately $14
million of carried working interest expenses resulting from joint venture
arrangements and any significant costs which may be incurred for the
acquisition of producing properties. The Company expects to fund these capital
expenditures by operating cash flows, proceeds from property sales, investment
costs carried under joint venture arrangements and increased borrowings under
the revolving credit agreement. In addition, the Company may seek additional
funds from public and private equity and debt markets.
Liquidity
EEX has a $350 million revolving credit line with a group of banks that
matures on June 27, 2002, of which none was outstanding at December 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. As of December
31, 1999, the debt to capital ratio under the revolving credit agreement was
44%. 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. As of March 1, 2000, the
Company had $75 million outstanding under the revolving credit agreement. See
Note 10 to the Consolidated Financial Statements in Item 8.
In December 1999, EEX E&P L.P., a limited partnership indirectly half-owned
by EEX ("E&P L.P."), entered into a $105 million prepaid forward sale
agreement, the gas sales obligation, for approximately 50 billion cubic feet
equivalent of production from E&P L.P. to be delivered from January 2000
through December 2004. In the event production is not delivered, the
obligation will be settled with a cash payment. The proceeds of the gas sales
obligation were used to fund a portion of the purchase price of the Tesoro oil
and gas properties and pipelines. See Notes 6 and 11 to the Consolidated
Financial Statements in Item 8. Because of the structure of the transaction,
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.
The Company's ability to fund its capital budget and its liquidity can be
affected by any of the following:
. The value of EEX's investment in the Llano area, the Pipelines and a
portion of its plan to realize the value of its deferred tax asset is
dependent upon successful appraisal and development of its Llano
discovery or other exploration success on its Llano area leases. A
reduction in value of these assets due to adverse drilling results,
limited development plans, or an adverse economic assessment would
decrease the amount of funds available to the Company to borrow under its
revolving credit agreement through a reduction in the capitalization used
in computing the debt to capital ratio.
. Sale of the FPS and/or Pipeline assets would result in a significant
change in EEX's debt structure due to the termination of the capital
lease obligation associated with those assets. The Company would also
incur substantial early termination costs. A disposition of the capital
lease would reduce the debt used in computing the debt to capital ratio
and increase the amount of funds available to the Company to borrow under
its revolving credit agreement. There can be no assurance that such debt
structure changes can be accomplished on favorable terms.
. The majority of the commitment associated with the Arctic I rig (See Note
19 to the Consolidated Financial Statements in Item 8) has been assumed,
for budget purposes, to be funded by EEX's joint venture partners in its
Deepwater Exploration program. If the joint venture partners elect not to
participate in these projects, and EEX cannot find other participants to
share the costs of drilling, EEX would incur expenditures greater than
forecast which could result in increased exploration expense.
. Any decreases in capitalization through losses incurred from dry hole
expense or other reasons, or increases in debt as defined in the
revolving credit agreement will increase the debt to capital ratio and
further limit available borrowings.
21
<PAGE>
Capital Structure
In January 1999, EEX recorded $150 million of equity from the issuance of
1.5 million of shares of Series B 8% Cumulative Perpetual Preferred Stock
("Preferred Stock") and Warrants to acquire 21 million shares of common stock
to Warburg Pincus Equity Partners, L.P. and its affiliates. 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 agreements.
Prior to any adjustment of the dividend rate, the Company 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. Prior to any adjustment in the dividend rate, holders of the
Preferred Stock will be entitled to cast an aggregate of eight million votes
on matters voted on by the holders of common stock and to a separate class
vote on certain matters affecting the Preferred Stock. The purchasers 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, prohibit the purchasers from proposing business
combinations involving the Company or soliciting proxies, and limit 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. In the event of a change of control
occurring prior to the sixth anniversary of the closing of issuance of the
Preferred Stock, the purchasers of the Preferred Stock will have the right to
exchange all or part of their Preferred Stock and Warrants proportionately for
shares of common stock at the rate of 18.6047 shares of common stock for each
share of Preferred Stock (and proportionate number of Warrants), subject to
adjustment under certain circumstances and to the Company's right under
certain circumstances to pay a portion of the exchange in cash. For additional
information, see Note 5 to Consolidated Financial Statements in Item 8.
In the second quarter of 1998, EEX redeemed, at par value, all the
outstanding preferred securities of a subsidiary. The dividend rate on these
preferred securities was based on LIBOR plus a spread of 4% for the quarter
ended March 31, 1998, 5% for the quarter ended June 30, 1998 and was to
increase by 1% quarterly through December 31, 1998.
At a special meeting held on December 8, 1998, the Company's shareholders
approved a one-for-three reverse split of the Company's issued and outstanding
common stock and a reduction of the Company's authorized common stock from 400
million shares to 150 million shares.
EEX does not anticipate paying cash dividends on its common stock in the
foreseeable future.
Other Matters
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.
Year 2000 Issue
The Year 2000 Readiness Program (the "Readiness Program") initiated by EEX
in 1998 was completed during the fourth quarter of 1999 at a cost of
approximately $1.3 million. The Readiness Program evaluated
22
<PAGE>
potential impacts of the Year 2000 issue on Company Information Technology
("IT") systems, non-IT systems, and on third parties with whom the Company has
a significant business relationship. As a result of the Readiness Program,
certain mission critical systems were upgraded or replaced to prevent or
minimize the potential for failures.
EEX suffered no malfunctions or disruptions at the century rollover and the
Company believes that the risk of significant adverse affects resulting from
the rollover to future Year 2000 related dates is minimal.
23
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Hedging activity in 1999 resulted in a gain of $1.1 million for natural gas
and a loss of $1.3 million for crude oil that totals to a combined loss of
$0.2 million. The total net hedging gain for natural gas includes a gain of
$1.7 million related to hedging activities associated with the contractual
requirement to purchase gas for delivery to a co-generation plant in Texas.
This gain is recorded as oil and gas properties. The tables below provide
information about EEX's hedging instruments as of December 31, 1999. Since
essentially all of the hedging done by EEX utilized either "swap" or "collar"
instruments, the tables have been separated to show the volumes hedged
utilizing each instrument. The Notional Amount is equal to the net volumetric
hedge position of EEX during the periods. The fair values of the hedging
instruments are based on the difference between the applicable strike price
and the New York Mercantile Exchange future prices for the applicable trading
months. EEX follows hedge accounting for these positions and accordingly, the
fair values presented below, which represent unrealized gains (losses), have
not been recognized in the financial statements.
<TABLE>
<CAPTION>
Fair Value at
Notional Average Strike December 31,
Amount Price 1999
(BBtu)(1) (Per MMBtu)(2) (In thousands)
--------- -------------- --------------
<S> <C> <C> <C>
Natural Gas Swaps:
January 2000-March 2000............... 1,128 $2.85 $ 586
April 2000-June 2000.................. 1,040 2.53 190
July 2000-September 2000.............. 1,041 2.55 157
October 2000-December 2000............ 994 2.70 115
January 2001-March 2001............... 383 2.75 52
April 2001-June 2001.................. 398 2.48 38
July 2001-September 2001.............. 414 2.49 35
October 2001-December 2001............ 391 2.69 43
January 2002-March 2002............... 439 2.74 47
April 2002-June 2002.................. 445 2.51 42
July 2002-September 2002.............. 455 2.51 38
October 2002-December 2002............ 426 2.69 40
January 2003-March 2003............... 290 2.76 28
April 2003-June 2003.................. 315 2.54 26
July 2003-September 2003.............. 311 2.54 22
October 2003-December 2003............ 303 2.72 24
January 2004-March 2004............... 315 2.80 27
April 2004-June 2004.................. 310 2.58 22
July 2004-September 2004.............. 335 2.57 20
October 2004-December 2004............ 319 2.76 22
------ ------
Total............................... 10,052 $1,574
====== ======
</TABLE>
- --------
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.
24
<PAGE>
<TABLE>
<CAPTION>
Average Strike
Price Fair Value at
Notional (Per MMBtu)(2) December 31,
Amount -------------- 1999
(BBtu)(1) Floor Ceiling (In thousands)
--------- ------ ------- --------------
<S> <C> <C> <C> <C>
Natural Gas Collars:
January 2000-March 2000............... 3,640 $2.781 $3.137 $1,634
April 2000-June 2000.................. 4,550 2.364 2.682 109
July 2000-September 2000.............. 3,680 2.318 2.648 --
October 2000-December 2000............ 3,680 2.506 2.835 --
January 2001-March 2001............... 900 2.584 2.889 --
April 2001-June 2001.................. 910 2.320 2.625 --
July 2001-September 2001.............. 920 2.315 2.620 --
October 2001-December 2001............ 920 2.495 2.800 --
------ ------
Total............................... 19,200 $1,743
====== ======
</TABLE>
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.
In connection with the Tesoro acquisition, EEX assigned approximately 50 Bcf
of gas hedge positions outstanding at the end of the third quarter of 1999 to
the purchaser of the gas sales obligation. See Note 6 to the Consolidated
Financial Statements in Item 8.
EEX has a contractual requirement to purchase gas for delivery to a co-
generation plant in Texas. These volumes are not included in the above natural
gas hedging table. The Notional Amount is equal to the net volumetric position
of EEX during the period. The fair values of the hedging instruments are based
on the difference between the strike price and the New York Mercantile
Exchange future prices for the applicable trading month. EEX follows hedge
accounting for these positions and accordingly, the fair values presented
below, which represent unrealized gains (losses), have not been recognized in
the financial statements. When recognized, the gains (losses) are recorded as
oil and gas properties.
<TABLE>
<CAPTION>
Fair Value at
Notional Average Strike December 31,
Amount Price 1999
(BBtu)(1) (Per MMBtu)(2) (In thousands)
--------- -------------- --------------
<S> <C> <C> <C>
Natural Gas:
January 2000-March 2000............... 1,365 $2.31 $ 27
April 2000-June 2000.................. 1,365 2.14 278
July 2000-September 2000.............. 1,380 2.16 331
October 2000-December 2000............ 1,380 2.32 336
----- ----
Total............................... 5,490 $972
===== ====
</TABLE>
- --------
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.
25
<PAGE>
Interest Rate Risk--The Company has no open interest rate swap or interest
rate lock agreements. At December 31, 1999, the Company's only outstanding
debt consisted of capital leases with fixed interest rates. The following
table presents principal amounts and related average interest rates by year of
maturity for the Company's capital leases at December 31, 1999:
<TABLE>
<CAPTION>
Average
Principal Interest Rate
-------------- -------------
(In thousands)
<S> <C> <C>
2000......................................... $ 16,810 6.46%
2001......................................... 13,351 6.46%
2002......................................... 15,419 6.46%
2003......................................... 15,573 6.46%
2004......................................... 16,601 6.46%
Thereafter................................... 144,690 6.46%
--------
Total........................................ $222,444
========
Fair Value................................... $222,444
========
</TABLE>
The Company's exposure to interest rate risk is primarily related to future
use of its revolving credit facility and to market conditions, as they may
exist, should new financings be undertaken. These exposures will be managed
through the use of swap or other derivatives as appropriate.
26
<PAGE>
Item. 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
EEX Corporation
We have audited the accompanying consolidated balance sheet of EEX
Corporation and subsidiaries (the "Company"), as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EEX
Corporation and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Houston, Texas
February 11, 2000
27
<PAGE>
EEX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1999 1998 1997
------------- ------------- --------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Natural gas.................... $ 93,512 $ 128,061 $ 199,754
Oil, condensate and natural gas
liquids....................... 75,189 76,328 100,190
Cogeneration operations........ 8,878 13,794 13,297
Other.......................... (205) 869 972
------------- ------------- --------------
Total........................ 177,374 219,052 314,213
------------- ------------- --------------
Costs and Expenses:
Production and operating....... 39,338 46,861 48,960
Exploration.................... 86,369 45,144 70,599
Depletion, depreciation and
amortization.................. 68,978 101,051 144,485
Impairment of producing oil and
gas properties................ 26,424 10,439 260,112
(Gain) on sales of property,
plant and equipment........... (15,483) (9,085) (52,917)
Cogeneration operations........ 8,043 10,564 10,381
General, administrative and
other......................... 28,355 24,058 55,590
Taxes, other than income....... 4,744 11,017 17,356
------------- ------------- --------------
Total........................ 246,768 240,049 554,566
------------- ------------- --------------
Operating (Loss)................. (69,394) (20,997) (240,353)
Other Income--Net................ 95 81 301
Interest Income.................. 6,129 512 574
Interest and Other Financing
Costs........................... (17,686) (18,987) (30,645)
------------- ------------- --------------
(Loss) Before Income Taxes....... (80,856) (39,391) (270,123)
Income Taxes (Benefit)........... 6,891 (4,997) (58,945)
Minority Interest Third Party.... 50 6,532 4,925
------------- ------------- --------------
Net (Loss)....................... (87,797) (40,926) (216,103)
Preferred Stock Dividends........ 12,117 -- --
------------- ------------- --------------
Net (Loss) Applicable to Common
Shareholders.................... $ (99,914) $ (40,926) $ (216,103)
============= ============= ==============
Basic and Diluted Net (Loss) Per
Share........................... $ (2.37) $ (0.97) $ (5.12)
============= ============= ==============
Weighted Average Shares
Outstanding..................... 42,200 42,208 42,214
============= ============= ==============
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
EEX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (Loss)................................... $ (87,797) $ (40,926) $(216,103)
Impairment of producing oil and gas
properties.................................. 26,424 10,439 260,112
Impairment of undeveloped leasehold.......... 2,907 1,936 40,866
Dry hole cost................................ 50,770 18,326 8,224
Depletion, depreciation and amortization..... 68,978 101,051 144,485
Deferred income taxes (benefit).............. 6,988 (9,397) (55,461)
(Gain) on sales of property, plant and
equipment................................... (15,483) (9,085) (52,917)
Other........................................ 16,513 547 10,332
Changes in current operating assets and
liabilities:
Accounts receivable........................ 21,031 15,395 24,550
Other current assets....................... 785 (2,695) 6,721
Restricted cash............................ (5,000) -- --
Accounts payable........................... 11,235 (57,187) 18,392
Other current liabilities.................. (2,610) (4,841) (1,812)
--------- --------- ---------
Net cash flows provided by operating
activities.............................. 94,741 23,563 187,389
--------- --------- ---------
INVESTING ACTIVITIES
Additions of property, plant and equipment... (169,061) (165,820) (180,147)
Tesoro acquisition, net...................... (212,086) -- --
Proceeds from dispositions of property, plant
and equipment............................... 19,081 298,373 133,426
Other (changes in accruals).................. 19,614 (5,901) (7,859)
--------- --------- ---------
Net cash flows provided by (used in)
investing activities.................... (342,452) 126,652 (54,580)
--------- --------- ---------
FINANCING ACTIVITIES
Issuance of preferred stock and common stock
warrants.................................... 150,000 -- --
Borrowings under bank revolving credit
agreement................................... 235,000 175,000 170,000
Repayment of borrowings under bank revolving
credit agreement............................ (235,000) (200,000) (260,000)
Borrowings under short-term financing
agreement................................... 2,000 171,264 172,900
Repayment of borrowings under short-term
financing agreement......................... (2,000) (176,264) (167,900)
Gas sales obligation......................... 105,000 -- --
Minority interest third party................ 3,050 -- --
Redemption of company-obligated mandatorily
redeemable preferred securities of
subsidiary.................................. -- -- (150,000)
Issuance of minority interests in preferred
securities of subsidiary.................... -- -- 150,000
Redemption of minority interests in preferred
securities of subsidiary.................... -- (100,000) (50,000)
Changes in temporary advances with affiliated
companies................................... -- -- 13,328
Payments of capital lease obligations........ (10,874) (8,417) (3,250)
Change in advances under leasing
arrangements--net........................... -- -- (5,457)
Issuance of common stock..................... -- -- 2
--------- --------- ---------
Net cash flows provided by (used in)
financing activities.................... 247,176 (138,417) (130,377)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents................................... (535) 11,798 2,432
Cash and Cash Equivalents at Beginning of
Year.......................................... 15,588 3,790 1,358
--------- --------- ---------
Cash and Cash Equivalents at End of Year....... $ 15,053 $ 15,588 $ 3,790
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
EEX CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31
---------------------
1999 1998
---------- ----------
(In thousands)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................. $ 15,053 $ 15,588
Restricted cash....................................... 5,000 --
Accounts receivable--trade (net of allowance of $1,791
and $2,504).......................................... 28,248 42,530
Other................................................. 12,737 14,240
---------- ----------
Total current assets................................ 61,038 72,358
---------- ----------
Property, Plant and Equipment (at cost):
Oil and gas properties (successful efforts method).... 1,259,364 1,106,274
Other................................................. 8,047 19,998
---------- ----------
Total............................................... 1,267,411 1,126,272
---------- ----------
Less accumulated depletion, depreciation and
amortization......................................... 576,914 674,887
---------- ----------
Net property, plant and equipment................... 690,497 451,385
---------- ----------
Deferred Income Tax Assets.............................. 22,809 28,826
Other Assets............................................ 6,440 12,501
---------- ----------
Total............................................... $ 780,784 $ 565,070
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable--trade............................... $ 72,518 $ 45,528
Short-term borrowings................................. -- --
Current portion of capital lease obligations.......... 16,810 10,874
Other................................................. 2,580 5,190
---------- ----------
Total current liabilities........................... 91,908 61,592
---------- ----------
Bank Revolving Credit Agreement......................... -- --
---------- ----------
Capital Lease Obligations............................... 205,634 222,444
---------- ----------
Gas Sales Obligation.................................... 105,000 --
---------- ----------
Other Liabilities....................................... 80,329 46,734
---------- ----------
Minority Interest Third Party........................... 3,050 --
---------- ----------
Shareholders' Equity (Consolidated Statement of
Shareholders' Equity).................................. 294,863 234,300
---------- ----------
Total............................................... $ 780,784 $ 565,070
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
EEX CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Common Stock, authorized 150 million shares:
Balance at beginning of year................ $ 424 $ 1,271 $ 126,736
Issued for stock plans (103 and 323
shares).................................... -- 1 185
Change in par value to $0.01 from $1.00..... -- -- (125,650)
One-for-three reverse split at par value
(84,775 share reduction)................... -- (848) --
--------- --------- ---------
Balance at end of year (Outstanding shares:
42,483, 42,387, and 127,059)............... 424 424 1,271
--------- --------- ---------
Preferred Stock, authorized 10 million shares:
Balance at beginning of year................ -- -- --
Issued 1.5 million shares, $0.01 par value.. 15 -- --
Dividend payment............................ 1 -- --
--------- --------- ---------
Balance at end of year (1.6 million
shares).................................... 16 -- --
--------- --------- ---------
Paid in Capital:
Balance at beginning of year................ 569,268 570,493 442,246
Excess of proceeds over par value of common
stock issued for stock plans............... -- 871 3,075
Market valuation adjustments of restricted
stock...................................... 302 (2,944) (478)
Change in par value of common stock......... -- -- 125,650
One-for-three reverse common stock split.... -- 848 --
Issuance of preferred stock................. 149,985 -- --
Dividends on preferred stock................ 12,117 -- --
Stock issue costs........................... (1,747) -- --
--------- --------- ---------
Balance at end of year...................... 729,925 569,268 570,493
--------- --------- ---------
Retained Earnings (Deficit):
Balance at beginning of year................ (334,698) (293,772) (77,669)
Termination of phantom stock plan........... (129) -- --
Issue common stock from treasury stock...... (7) -- --
Net (Loss) applicable to common
shareholders............................... (99,914) (40,926) (216,103)
--------- --------- ---------
Balance at end of year...................... (434,748) (334,698) (293,772)
--------- --------- ---------
Unamortized Restricted Stock Compensation:
Balance at beginning of year................ (206) (2,877) (677)
Grants (98, 50, and 387 shares)............. (597) (1,195) (3,874)
Cancellations (18, 10, and 90 shares)....... 21 4 715
Amortization................................ 143 1,032 515
Market value adjustments.................... 196 2,830 444
--------- --------- ---------
Balance at end of year...................... (443) (206) (2,877)
--------- --------- ---------
Treasury Stock:
Balance at beginning of year................ (488) (452) (230)
Issuance of shares for restricted stock
awards (47 and 67 shares).................. -- 452 625
Cancellations of restricted stock grants (10
and 90 shares)............................. -- (90) (847)
Termination of phantom stock plan; issued
common stock
(8 shares)................................. 170 -- --
Issue common stock from treasury stock...... 7 -- --
Repurchase of outstanding shares (55
shares).................................... -- (398) --
--------- --------- ---------
Balance at end of year (14, 22, and 47
shares).................................... (311) (488) (452)
--------- --------- ---------
Shareholders' Equity.......................... $ 294,863 $ 234,300 $ 274,663
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
EEX Corporation ("EEX" or the "Company") is an energy exploration company
involved in both domestic and international (primarily Indonesia) oil and gas
exploration and production. EEX also provides operation and maintenance
services, under contract, to two cogeneration plants. Prior to August 5, 1997,
Enserch Exploration, Inc. ("Old EEI"), EEX's predecessor, was approximately
83% owned by ENSERCH Corporation ("ENSERCH").
On August 5, 1997, the merger of ENSERCH Corporation ("ENSERCH") and Texas
Utilities Company and the related merger of Old EEI and Lone Star Energy Plant
Operations, Inc. ("LSEPO") were completed. Under the terms of the Old
EEI/LSEPO merger, LSEPO changed its name to "Enserch Exploration, Inc."
("EEI"), shares of Old EEI were automatically converted into shares of EEI on
a one-for-one basis in a tax-free transaction, EEI issued 691,631 shares of
common stock to ENSERCH in exchange for outstanding LSEPO common stock and
ENSERCH distributed to its shareholders, on a pro rata basis, all of the
shares of EEI common stock it owned.
On December 19, 1997, a special meeting of shareholders was held at which
time the name of the Company was changed to EEX Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of EEX and its
subsidiaries. All intercompany accounts and transactions have been eliminated
in consolidation. The preparation of financial statements requires the use of
estimates and assumptions by management, many of which may significantly
affect financial results. Future outcomes could differ from those estimates
and assumptions and materially affect reported financial results. Certain
items in prior periods have been reclassified to be consistent with the
current presentation.
Net Income (Loss) Applicable to Common Shareholders Per Share--Basic net
income (loss) per share is based on the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per common
share is based on the weighted average number of common shares and all
dilutive potential common shares outstanding during the period.
Oil and Gas Properties--The successful efforts method of accounting is used
for oil and gas operations. Under the successful efforts method of accounting,
lease acquisition costs are capitalized when incurred. Significant unproved
properties are reviewed periodically on a property-by-property basis to
determine if there has been an impairment in value, with such impairment
charged to expense. All other unproved properties are aggregated and a portion
of the costs estimated to be non-productive, based on historical experience,
is amortized over the average life of the leases. Geological and geophysical
costs and the costs of carrying and retaining undeveloped properties are
expensed as incurred. Exploratory drilling costs are initially capitalized
when incurred, but charged to expense if the well is deemed commercially
unsuccessful.
Leasehold costs of producing properties are depleted using the unit of
production method based on estimated proved oil and gas reserves quantified on
the basis of their equivalent energy content. Amortization of drilling and
equipment costs is based on the unit of production method using estimated
proved developed oil and gas reserves quantified on the basis of their
equivalent energy content. Depreciation of other property, plant and equipment
is provided principally by the straight line method over the estimated service
lives of the related assets. The current undiscounted cost of estimated future
site restoration, dismantlement and abandonment, net of salvage, is included
in the cost of productive oil and gas properties and a corresponding liability
recorded. The recorded cost is amortized on the unit of production method.
Actual costs incurred for these activities are charged to the recorded
liability.
32
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Derivative Instruments--The Company enters into swaps, options, collars and
other derivative contracts to hedge the price risks associated with a portion
of anticipated future oil and gas production. Realized gains and losses on
settled derivative contracts are deferred and recognized as adjustments to oil
and gas revenues in the applicable period(s) hedged. In applying hedge
accounting, the Company periodically monitors the correlation of changes in
the value of its derivative contracts with that of the prices the Company
realizes for its production. In the event of a lack of significant
correlation, as might occur in the event of a major market disturbance,
certain of the Company's derivative contracts no longer may qualify for hedge
accounting, and would be marked to market accordingly. If the instruments are
terminated prior to maturity, resulting gains and losses continue to be
deferred until the hedged item is recognized in revenue. The Company may also
enter into interest rate swaps to manage risk associated with interest rates
and reduce the Company's exposure to interest rate fluctuations. Interest rate
swaps are valued on a periodic basis, with resulting differences recognized as
an adjustment to interest and other financing costs over the term of the
agreement. The Company does not enter into derivative contracts for trading
purposes.
Stock Based Employee Compensation--Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation," (SFAS 123)
encourages, but does not require companies to record compensation cost for
stock based employee compensation plans at fair value. In accordance with the
SFAS 123, EEX has elected to continue to account for stock based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of EEX's stock at the date
of the grant over the amount an employee must pay to acquire the stock.
Compensation cost for restricted stock awards is based on the quoted market
price of EEX's stock on the date the award becomes vested (See Note 14).
Cash and Cash Equivalents--Cash and cash equivalents include highly liquid
investments with maturities of three months or less when purchased. In
addition, EEX classified as restricted cash, the collateral deposit required
by contractual commitment under a forward purchase facility (See Note 4).
Revenue Recognition and Gas Imbalances--The Company follows the sales method
of accounting for revenue recognition and gas imbalances, which recognizes
over and under lifts of gas when sold, to the extent sufficient gas reserves
or balancing agreements are in place. Gas sales volumes are not significantly
different from the Company's share of production.
3. MAJOR CUSTOMERS
The Company sold oil and gas production representing more than 10% of its
oil and gas revenues for the year ended December 31, 1999, to Shell Oil
Company (30%); for the year ended December 31, 1998, to Shell Oil Company
(13%); and for the year ended December 31, 1997, to Enserch Energy Services,
Inc. (12%). Because alternative purchasers of oil and gas are readily
available, the Company believes that the loss of any of its purchasers would
not have a material adverse effect on the financial results of the Company.
4. COMMON STOCK TRANSACTIONS
At a special meeting held on December 8, 1998, the Company's shareholders
approved a one-for-three reverse split of the issued and outstanding common
stock and a decrease in the number of authorized shares of common stock from
400,000,000 shares to 150,000,000 shares. In the Consolidated Statement of
Shareholders' Equity, all activity prior to 1998 has not been restated. All
references to the number of common shares and per share amounts elsewhere in
the consolidated financial statements and related footnotes have been restated
as appropriate to reflect the effect of the split for all periods presented.
Early in 1998, EEX entered into two forward purchase facilities to
repurchase shares of its common stock. EEX initiated several transactions
under these facilities, which allow for settlement, at EEX's option, by
physical
33
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 December 31, 1999, transactions under these
facilities covered approximately $9.0 million or 796,533 shares of EEX's
common stock, with an average forward purchase price of $11.25 per share. If
the agreements were settled on a net basis on the December 31, 1999 market
price of EEX's common stock ($2.9375 per share), EEX would be obligated to pay
approximately $6.6 million in cash, or deliver approximately 2,254,974 shares.
Under the terms of one of the facilities, EEX deposited in a cash collateral
account the amount of $5 million as of December 31, 1999, and may be required
to settle the transactions under one of the above-described options prior to
the expiration dates of August and September 2000.
5. PREFERRED STOCK TRANSACTION
On December 22, 1998, EEX entered into a Purchase Agreement ("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. 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 earlier
occurrence of certain events including a change of control (as defined). 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 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 membership 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 proportionally for 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 in 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 for $12 per share
of Common Stock: (a) Series A Warrants to acquire 10.5 million shares,
exercisable for 10 years; (b) Series B Warrants to acquire 2.5 million shares,
exercisable for 7 years, and (c) Series C Warrants to acquire 8 million
shares, exercisable for 7 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 are 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
34
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 agreed to standstill provisions for 10 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.
EEX paid in-kind dividends during 1999 on the Preferred Stock as follows:
<TABLE>
<CAPTION>
Amount of Number of
Dividends Preferred
(In Shares
Date millions) Issued
---- --------- ---------
<S> <C> <C>
December 31, 1999........................................ $3.2 31,788
September 30, 1999....................................... $3.1 31,164
June 30, 1999............................................ $3.0 30,554
March 31, 1999........................................... $2.8 27,667
</TABLE>
6. TESORO ACQUISITION
On December 17, 1999, the Company closed a stock purchase of certain oil and
gas properties and pipeline assets of Tesoro. A Stock Purchase Agreement dated
as of October 8, 1999, between EEX Operating LLC ("EEX Operating") and Tesoro
and Tesoro Gas Resources Company, Inc. was amended on December 16, 1999, and
three corollary purchase agreements were entered into on December 17, 1999.
Collectively, the purchase agreements provided for the purchase of (i) all of
the member interests in four limited liability companies which, together, own
all of the partnership interests of Tesoro E&P Company, L.P. (whose name was
changed after closing to EEX E&P Company, L.P., "E&P L.P."), owner of the oil
and gas assets ("Oil and Gas Interests"), and (ii) all of the issued and
outstanding stock of Tesoro Natural Gas Company (whose name was changed after
closing to EEX Natural Gas Company) and Tesoro Gathering Company (whose name
was changed after closing to EEX Gathering Company), which, together, own all
of the partnership interests in Tesoro Pipeline Company, L.P. (whose name was
changed after closing to EEX Pipeline Company, L.P.), which owns partnership
interests in pipeline and gathering systems ("Pipeline Interests"). The
adjusted purchase price for the Oil and Gas Interests was $209.1 million and
for the Pipeline Interests, $5.7 million.
EEX Operating acquired the Pipeline Interests. The Oil and Gas Interests
were acquired by EEX Reserves Funding LLC ("ERF"), a limited liability company
half-owned by subsidiaries of the Company, EEX Operating (49%) and EEX
Capital, Inc. (1%), and half-owned by a third party. The Company has fully
consolidated ERF, the limited liability companies owning E&P L.P. partnership
interests, E&P L.P., EEX Natural Gas Company, EEX Gathering Company and EEX
Pipeline Company, L.P. The third party's 50% equity interest in ERF is
reflected in the balance sheet as Minority Interest.
E&P L.P. owns U.S. domestic properties located principally in South Texas
and the Gulf Coast. The properties are primarily natural gas fields that
currently produce approximately 76 million cubic feet of gas equivalent per
day with an estimated net total proved reserves of 185 billion cubic feet
equivalent.
The Company has also entered into a call option to purchase the third
party's equity interest in ERF for the lessor of $5 million or the fair market
value of the third party's interest, provided that the fair market value shall
35
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
not exceed the equity percentage represented by the third party's interest in
the oil and gas reserves of E&P L.P. This call option is payable in either
cash or common stock of EEX Corporation, or a combination of cash and EEX
Corporation common stock, at the Company's option. This call option is at any
time after the termination of the forward sale between the third party and E&P
L.P., but terminates five years after the date after the termination of the
forward sale contract.
E&P L.P. entered into a $105 million forward sale agreement with a third
party for approximately 50 billion cubic feet equivalent of production from
E&P L.P. through December 2004 that was prepaid upon the close of the purchase
transaction (See Note 11).
The Company also loaned $101 million to ERF. The loan is in the form of a
subordinated convertible note that at the Company's option is convertible into
ERF units. The convertible note will accrete in value at a rate of 11.5 % per
annum, compounded quarterly, commencing on March 31, 2000. Beginning January
1, 2005, interest will accrue at a rate of 14.5% per annum and will be payable
in cash quarterly commencing on March 1, 2005 until the principal amount is
paid or made available for payment.
The transaction described above has been accounted for using the purchase
method of accounting and has been included in the EEX Consolidated Financial
Statements for the period December 17, 1999 through December 31, 1999.
The following table sets forth certain financial information for the
Company, on an unaudited pro forma basis, assuming the acquisition occurred
January 1, 1999 and January 1, 1998. The pro forma data is based on numerous
assumptions and is not necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
(Unaudited)
Pro Forma For
the Year Ended
-------------------------
December 31, December 31,
1999 1998
------------ ------------
(In millions,
except per share data)
<S> <C> <C>
Revenues.............................................. $ 237 $ 291
Operating Income (Loss)............................... (62) 1
Net (Loss) Applicable to Common Shareholders.......... (102) (39)
Basic and Diluted Net (Loss) per Share................ $(2.42) $(0.92)
</TABLE>
7. IMPAIRMENT OF PRODUCING OIL AND GAS PROPERTIES
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
(SFAS 121) provides for the recognition of losses when events or changes in
circumstances indicate that the carrying value of Long-Lived Assets may not be
realized. When there is evidence that the cost of such assets may not be
realized based upon such events, changed circumstances or periodic evaluation,
SFAS 121 requires the carrying value of the subject Long-Lived Asset to be
reduced to its fair value.
The process by which the Company assesses its assets under SFAS 121 starts
with a comparison of the carrying value of an asset to its estimated future
undiscounted net cash flow ("Future Value"). These net cash flows are prepared
by the Company or its independent petroleum consultant, Netherland, Sewell &
Associates, Inc. This analysis uses a multi-year market based commodity price
forecast in effect at year-end 1999. The base prices used in this analysis for
2000 annual cash flows were $22.75 per barrel of oil and $2.17 per million
British Thermal Units of gas. This analysis is generally prepared at a field
level or field-group level. The fields or groups reflect the lowest level for
which cash flows are reasonably and separately identifiable and for which the
assets possess common operational infrastructure and geographic proximity.
36
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Where insufficient Future Value is projected to recover the carrying value
of an asset, a determination of fair value is made. Fair value is estimated by
discounting the annual net cash flows at a rate of 10% per annum. The carrying
value of the asset is reduced to its estimated fair value.
Assets held for sale are carried at the lower of cost or estimated net
realizable value.
Based upon the resulting fair values at December 31, 1999, the carrying
value of Long-Lived Assets was reduced and a pre-tax charge of $26 million for
impairment was recorded for oil and gas properties located in the
Onshore/Shelf business segment, primarily due to downward reserve revisions
and higher abandonment cost estimates.
8. UNUSUAL CHARGES
In December 1999, EEX entered into an agreement for early termination of the
R&B Falcon C. Kirk Rhein, Jr. rig at a net cost to EEX of $4 million. This is
reflected in the Consolidated Statement of Operations as exploration expense
as of December 31, 1999.
In early 1997, EEX management initiated a plan to sell or trade non-core
assets, reduce operating costs and focus exploration activities in the
offshore U.S. Gulf of Mexico and International areas. Unusual charges include
costs incurred in connection with restructuring operations, relocating the
Corporate headquarters and severance. In the third quarter of 1997, as an
integral part of this restructuring plan, EEX relocated its Corporate
headquarters to Houston, Texas, committed to the severance of approximately
375 Dallas-based employees and authorized the closure of its Dallas, Texas
administrative office.
The Company incurred approximately $27 million of restructure costs in 1997,
which are classified as general, administrative and other expense in the
Consolidated Statement of Operations. Cash requirements for these charges
totaled $14 million in 1997, $11 million in 1998 and the remainder in 1999.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized, was $12 million in 1999,
$19 million in 1998 and $25 million in 1997. Net cash income taxes were $2.4
million in 1998 and refunds of $0.1 million in 1999 and $5.6 million in 1997.
On December 17, 1999, EEX closed the Tesoro acquisition at a net cost of
$215 million. The purchase price was adjusted for estimated working capital
changes between the effective date and the closing date. The timing of these
working capital balances resulted in an adjusted cash purchase price of $212
million as of December 31, 1999. This amount is reflected in the Consolidated
Statement of Cash Flows as the Tesoro acquisition, net.
In October 1998, EEX exchanged substantially all of its properties located
in West Texas for properties in the Gulf of Mexico Shelf plus $9 million in
cash consideration. The effective date for this exchange was January 1, 1998.
The Company accounted for the exchange of interests as a nonmonetary
transaction whereby the basis in the exchanged properties became the new basis
in the properties received as reduced by the cash consideration. No gain or
loss was recognized as a result of the exchange of interests in accordance
with Statement of Financial Accounting Standards No. 19, "Financial Accounting
and Reporting by Oil and Gas Producing Companies."
In December 1998, EEX agreed to exchange its operated oil and gas producing
properties in Louisiana plus compensation of approximately $7 million for
interests in the East Cameron Block 349/350 field. This exchange was completed
on January 21, 1999. No gain or loss was recognized as a result of the
exchange of interests in accordance with Statement of Financial Accounting
Standards No. 19, "Financial Accounting and Reporting by Oil and Gas Producing
Companies."
37
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. BORROWINGS AND CREDIT AGREEMENTS
EEX has a $350 million revolving credit line with a group of banks that
matures on June 27, 2002, of which none was outstanding at December 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. 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 capitalization ratio. A portion of the funds available under the
revolving credit line may be borrowed on a short-term basis at current money
market rates.
The following is a calculation of the debt to capital ratio as defined in
the revolving credit agreement (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31
------------------
1999 1998
-------- --------
<S> <C> <C>
Bank revolving credit agreement.......................... $ -- $ --
Short-term borrowings ................................... -- --
Capital lease obligations................................ 222,444 233,318
Operating lease obligations.............................. 5,388 6,857
-------- --------
Total Consolidated Debt................................ $227,832 $240,175
Consolidated Net Worth................................... 294,863 234,300
-------- --------
Total Consolidated Debt and Net Worth.................. $522,695 $474,475
======== ========
Maximum permitted Debt to Capital Ratio................ 60% 60%
Debt to Capital Ratio.................................. 44% 51%
</TABLE>
The following is a summary of interest and other financing costs (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest costs incurred............................. $17,686 $18,987 $30,645
Interest capitalized................................ -- -- --
------- ------- -------
Interest charged to expense......................... $17,686 $18,987 $30,645
======= ======= =======
</TABLE>
11. GAS SALES OBLIGATION
E&P L.P. entered into a $105 million forward sale agreement with a third
party for approximately 50 billion cubic feet equivalent of production from
E&P L.P. through December 2004 that was prepaid upon the close of the purchase
transaction. The third party receives an adjusted index price monthly for the
committed volume. In the event production is not delivered, the obligation
will be settled with a cash payment from E&P L.P. The third party also has a
lien on the E&P L.P. oil and gas properties as security in the event the
committed volumes are not delivered or cash payment is not made. The forward
sale agreement also enables E&P L.P. to act as the third party's marketing
agent to market the committed production. E&P L.P., at its discretion, may
terminate the prepayment obligation by paying the third party a predetermined
amount. The prepayment has been recorded as a gas sales obligation in the
Consolidated Balance Sheet. Payments under this obligation will be amortized
on the interest method through final pay out. This obligation is not debt for
purposes of determining the debt to capital ratio under the bank revolving
credit agreement described in Note 10 above.
12. LEASE COMMITMENTS
In December 1996, the Cooper Project equipment and facilities were
refinanced through certain financial institutions. EEX simultaneously entered
into two leases of the facilities extending through December 30, 2010, with
the option to renew the leases, with the consent of the lessors, for up to
five years. For accounting purposes, these leases are classified as capital
leases. The Company has the option to purchase the facilities for fair market
38
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
value on any renewal date, or for fixed amounts or fair market value at the
end of the initial lease term. The leases also contain two early buy-out
options in January 2003 and 2006, on which the Company may purchase the
facilities for $185 million and $133 million, respectively, and other fixed
purchase options. The first purchase option occurs July 2001, at the greater
of $205 million or fair market value. A termination of the lease at times
other than those fixed for early buy-out or purchase options requires the
payment of a termination payment computed under the lease, including potential
make-whole penalties. Interest on the leases was fixed at
6.43%. The equipment and facilities may not be removed from U.S. waters under
the lease provisions. At December 31, 1999, EEX was required to maintain a $65
million four-year letter of credit in support of the equity owners of the
leased facilities. The commitment fee incurred associated with the letter of
credit totaled $0.8 million, $0.2 million and $0.5 million in 1999, 1998 and
1997, respectively. As of January 31, 2000, the letter of credit increased to
$70 million.
The equipment and facilities used in developing and producing reserves in
the Mississippi Canyon Block 441 are leased through certain financial
institutions for a term extending through October 2001. For accounting
purposes, this lease is classified as a capital lease. EEX has an option to
purchase the facilities for a fixed amount at the early buy-out date of July
22, 2000, or for fair market value at the end of the lease term. There are no
renewal options. Interest on the lease was fixed at 7.06%.
Amortization of assets recorded under capital leases is included in
depreciation, depletion and amortization expense.
EEX also leases buildings and office space under noncancellable operating
leases that expire at various dates through 2002.
Estimated future minimum payments under noncancellable operating and capital
leases with initial or remaining terms of one year or more at December 31,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- --------
<S> <C> <C>
2000........................................................ $2,075 $ 30,948
2001........................................................ 2,204 25,998
2002........................................................ 2,004 26,000
2003........................................................ 255 25,999
Thereafter.................................................. -- 184,706
------ --------
Total..................................................... $6,538 293,651
======
Less interest factor...................................... 71,207
--------
Capital lease obligations................................. $222,444
========
</TABLE>
Assets recorded under capital leases, excluding any investment since lease
inception, are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Property and equipment..................................... $249,699 $249,699
Accumulated depreciation................................... (112,802) (106,399)
-------- --------
Total.................................................... $136,897 $143,300
======== ========
</TABLE>
Rental expenses incurred under all operating leases totaled $1.8 million,
$2.4 million, and $3.6 million in 1999, 1998 and 1997, respectively.
39
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. MINORITY INTERESTS
As described in Note 6, the third party's 50% equity interest in ERF is
reflected in the Consolidated Balance Sheet as Minority Interest.
In late 1997, EEX concluded several transactions which resulted in
redemption of all of the outstanding mandatorily redeemable preferred
securities of a subsidiary at the stated value of $150 million, funded by
private sales of new issues of preferred stock by EEX Capital, Inc. ("EEXC"),
wholly-owned by EEX. EEXC has no operations independent of EEX. The dividend
rate for EEXC's new securities was based on LIBOR (reset quarterly) plus a
spread beginning at 3.0% for the period ending December 31, 1997, and
increasing by 1.0% quarterly. The new securities were redeemable, in whole or
in part, at the option of EEXC on the quarterly dividend payment dates and $50
million was redeemed in the fourth quarter of 1997 and the remaining $100
million in the second quarter of 1998.
14. STOCK PLANS
The Company's Revised and Amended 1996 Stock Incentive Plan (the "1996
SIP"), provides for awards to officers, directors and key employees of
restricted stock, stock options to purchase shares of common stock of EEX, or
a combination of both. EEX has reserved a total of 1.3 million shares of its
common stock for issuance under the 1996 SIP. Options granted under the 1996
SIP have an exercise price of not less than the fair market value of the
common stock on the grant date. Options granted under the 1996 SIP become
exercisable over three to seven years and expire after ten years. The terms
for the release of restrictions on awards of restricted stock may be
performance based, time based, or a combination of both, and each award may
have different restrictions and conditions.
The following is a summary of stock option activity under the 1996 SIP:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Fair
Shares Price Value
--------- -------- --------
<S> <C> <C> <C>
Options outstanding
December 31, 1996................................ 320,500 $28.68
Granted.......................................... 942,750 $31.71 $12.84
Exercised........................................ -- --
Canceled......................................... (312,917) $28.68
--------- ------
Options outstanding
December 31, 1997................................ 950,333 $31.59
Granted.......................................... 130,000 $25.14 $10.02
Exercised........................................ -- --
Canceled......................................... (59,667) $28.50
--------- ------
Options outstanding
December 31, 1998................................ 1,020,666 $31.02
Granted.......................................... 85,910 $ 6.56 $ 4.51
Canceled......................................... (374,914) $30.20
--------- ------
Options outstanding
December 31, 1999................................ 731,662 $28.58
========= ======
</TABLE>
40
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of 1996 SIP stock options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Range of Exercise Prices
----------------------------
$6.56 $23.16-$43.50 Total
------ ------------- -------
<S> <C> <C> <C>
Options outstanding........................... 85,910 645,752 731,662
Weighted average remaining contractual life,
in years..................................... 9 7 8
Weighted average exercise price............... $ 6.56 $ 31.50 $ 28.58
Number exercisable............................ 85,910 49,084 134,994
Weighted average exercise price............... $ 6.56 $ 32.65 $ 16.05
</TABLE>
A summary of restricted stock award activity follows:
<TABLE>
<CAPTION>
Number of Shares
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Outstanding--Beginning of year.................... 168,667 123,477 23,333
Awarded......................................... 399,343 53,000 130,144
Restrictions lifted............................. (5,022) (4,477) --
Canceled........................................ (11,569) (3,333) (30,000)
------- ------- -------
Outstanding--End of year.......................... 551,419 168,667 123,477
======= ======= =======
</TABLE>
The weighted average grant date fair value per share of restricted stock
awarded during 1999, 1998 and 1997 was $3.60, $23.76 and $30.06, respectively.
Fair value is equal to the common stock fair market value on the grant date.
In 1998, the Company adopted the 1998 Stock Incentive Plan ("1998 SIP") for
directors, officers and eligible full-time employees. The 1998 SIP provides
for awards of restricted stock, stock options and stock appreciation rights,
and 2.5 million shares of common stock are reserved for issuance. Option terms
and restrictions on restricted stock may be set by the Compensation Committee
of the Board of Directors (the "Committee"), but the exercise price may be no
less than the fair market value on the date of the grant. In September and
October 1998, the Committee made grants of options totaling 519,775 shares
under the "Performance Option Program." Performance grants will become
exercisable, in part or whole, only if EEX stock achieves designated
performance goals over a three-year period ending 2001, and have not been
included in the table below. Options granted under the 1998 SIP become
exercisable over three years and expire after ten years.
The following is a summary of basic stock option activity under the 1998
SIP:
<TABLE>
<CAPTION>
Weighted Weighted
Number of Average Average
Shares Exercise Price Fair Value
--------- -------------- ----------
<S> <C> <C> <C>
Options outstanding
December 31, 1997..................... -- --
Granted............................... 329,850 $12.24 $4.83
Canceled.............................. (4,117) $11.16
--------- ------
Options outstanding
December 31, 1998..................... 325,733 $12.27
Granted............................... 1,376,867 $ 5.97 $4.11
Canceled.............................. (205,823) $ 7.37
--------- ------
Options outstanding
December 31, 1999..................... 1,496,777 $ 7.15
========= ======
</TABLE>
41
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of 1998 SIP stock options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Range of Exercise Prices
---------------------------------
$4.00-
$6.00 $11.16-$15.47 Total
--------- ------------- ---------
<S> <C> <C> <C>
Options outstanding...................... 1,225,704 271,073 1,496,777
Weighted average remaining contractual
life, in years.......................... 9 9 9
Weighted average exercise price.......... $ 5.97 $ 12.48 $ 7.15
Number exercisable....................... 1,433 91,630 93,063
Weighted average exercise price.......... $ 6.00 $ 12.46 $ 12.36
</TABLE>
A summary of restricted stock award activity follows:
<TABLE>
<CAPTION>
Number of Shares
----------------
1999 1998 1997
------ ---- ----
<S> <C> <C> <C>
Outstanding--Beginning of year.............................. -- -- --
Awarded................................................... 68,400 -- --
Restrictions lifted....................................... -- -- --
Canceled.................................................. -- -- --
------ --- ---
Outstanding--End of year.................................... 68,400 -- --
====== === ===
</TABLE>
The weighted average grant date fair value per share of restricted stock
awarded during 1999 was $2.81. Fair value is equal to the common stock fair
market value on the grant date.
In 1997, the Company adopted the 1997 Non-Officer Stock Option Plan ("1997
SOP") for eligible employees and non-employees. Stock options granted to
purchase shares of EEX common stock have an exercise price of not less than
the fair market value of the common stock on the grant date. EEX has reserved
a total of 0.5 million shares for issuance under the 1997 SOP. Options become
exercisable over three years and expire after ten years.
A summary of stock option activity under the 1997 SOP follows:
<TABLE>
<CAPTION>
Number Weighted Weighted
of Average Average
Shares Exercise Price Fair Value
-------- -------------- ----------
<S> <C> <C> <C>
Options outstanding
December 31, 1996...................... -- --
Granted................................ 126,667 $30.51 $11.61
Exercised.............................. -- --
Canceled............................... (5,000) $32.25
-------- ------
Options outstanding
December 31, 1997...................... 121,667 $30.48
Granted................................ 25,333 $11.37 $ 4.44
Canceled............................... (1,667) $32.25
-------- ------
Options outstanding
December 31, 1998...................... 145,333 $27.15
Granted................................ 248,200 $ 2.86 $ 1.96
Canceled............................... (129,199) $26.99
-------- ------
Options outstanding
December 31, 1999...................... 264,334 $ 4.39
======== ======
</TABLE>
42
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of 1997 SOP stock options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Range of Exercise Prices
--------------------------
$2.72-$7.97 $32.25 Total
----------- ------ -------
<S> <C> <C> <C>
Options outstanding............................. 251,000 13,334 264,334
Weighted average remaining contractual life, in
years.......................................... 10 7 10
Weighted average exercise price................. $ 2.91 $32.25 $ 4.39
Number exercisable.............................. 2,800 12,778 15,578
Weighted average exercise price................. $ 7.97 $32.25 $ 27.89
</TABLE>
In 1996, the Company adopted the 1996 Employee Stock Option Plan ("1996
SOP"). Stock options granted to purchase shares of EEX common stock have an
exercise price of not less than the fair market value of the common stock on
the grant date. EEX reserved a total of 0.5 million shares for issuance under
this plan. Options become exercisable over three to seven years and expire
after ten years. The ability to grant new options under the 1996 SOP expired
December 31, 1998.
A summary of stock option activity under the 1996 SOP follows:
<TABLE>
<CAPTION>
Number Weighted Weighted
of Average Average
Shares Exercise Price Fair Value
-------- -------------- ----------
<S> <C> <C> <C>
Options outstanding
December 31, 1996...................... 363,317 $33.00
Granted................................ 137,733 $26.91 $12.84
Canceled............................... (176,457) $32.88
-------- ------
Options outstanding
December 31, 1997...................... 324,593 $30.48
Granted................................ 207,033 $25.62 $10.20
Canceled............................... (110,650) $32.19
-------- ------
Options outstanding
December 31, 1998...................... 420,976 $27.63
Granted................................ -- -- --
Canceled............................... (368,938) $27.42
-------- ------
Options outstanding
December 31, 1999...................... 52,038 $28.37
======== ======
</TABLE>
The following is a summary of stock options outstanding under the 1996 SOP
at December 31, 1999:
<TABLE>
<CAPTION>
Range of Exercise Prices
---------------------------------
$9.19-$19.41 $23.53-$33.00 Total
------------ ------------- ------
<S> <C> <C> <C>
Options outstanding...................... 2,816 49,222 52,038
Weighted average remaining contractual
life, in years.......................... 9 7 8
Weighted average exercise price.......... $13.63 $29.22 $28.37
Number exercisable....................... -- 26,308 26,308
Weighted average exercise price.......... $ -- $32.46 $32.46
</TABLE>
43
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On December 7, 1999, the Committee initiated an offer to certain holders of
stock options with exercise prices greater than $20.00 under the 1996 SIP, the
1996 SOP and the 1997 SOP. If accepted by the holder, the offer provided that,
effective December 7, 1999, the designated options would be exchanged for
restricted stock granted under the 1996 SIP and the 1998 SIP. The amount of
the restricted stock was computed using the Black Scholes options pricing
model. The forfeiture restrictions on the restricted stock lapse as to one-
third of the grant annually beginning December 7, 2000. The effect of this
exchange is shown in the tables above. The restricted stock under the exchange
was not issued at December 31, 1999.
Total compensation cost recognized in income for 1999, 1998 and 1997 for
stock based employee compensation awards was immaterial. Had compensation cost
for the Company's plans been determined based on the fair value at the grant
dates consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Net (Loss) Applicable to Common
Shareholders
As reported............................. $ (99,914) $(40,926) $(216,103)
Pro forma............................... $(104,555) $(44,252) $(218,663)
Basic and Diluted Net (Loss) Per Share
As reported............................. $ (2.37) $ (0.97) $ (5.12)
Pro forma............................... $ (2.48) $ (1.05) $ (5.18)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts as additional awards in future years are
anticipated.
Fair value of options was calculated by using the Black Scholes options
pricing model using the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate.................................... 6.10% 5.36% 6.26%
Expected volatility........................................ 49% 42% 37%
Expected dividend yield.................................... None None None
</TABLE>
15. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company's operations involve managing market risks related to changes in
interest rates and commodity prices. Derivative financial instruments,
specifically swaps, futures, options and other contracts, are used to reduce
and manage those risks.
Commodity Hedging Activities--The Company addresses market risk by selecting
instruments whose value fluctuations correlate strongly with the underlying
commodity being hedged. The Company enters into swaps, options, collars and
other derivative contracts to hedge the price risks associated with a portion
of anticipated future oil and gas production. While the use of hedging
arrangements limits the downside risk of adverse price movements, it may also
limit future gains from favorable movements. Under these agreements, payments
are received or made based on the differential between a fixed and a variable
product price. These agreements are settled in cash at or prior to expiration
or exchanged for physical delivery contracts. The Company does not obtain
collateral to support the agreements but monitors the financial viability of
counter-parties and believes its credit risk is minimal on these transactions.
In the event of nonperformance, the Company would be exposed to price risk.
The Company has some risk of accounting loss since the price received for the
product at the actual physical delivery point may differ from the prevailing
price at the delivery point required for settlement of the hedging
transaction.
44
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Oil and gas hedging activities decreased 1999 revenues by $1.9 million and
1997 revenues by $11.0 million and increased 1998 revenues by $7.5 million.
At December 31, 1999, EEX had outstanding natural gas swaps that were
entered into as hedges extending through December 31, 2004 to exchange
payments on 10 Bcf of natural gas. At December 31, 1999, the weighted average
strike price and market price per Mcf of natural gas was $2.71 and $2.58,
respectively. At December 31, 1999 there were $1.6 million of net unrealized
and unrecognized hedging gains based on the difference between the average
strike price and the New York Mercantile Exchange futures price for the
applicable trading month.
At December 31, 1999, EEX had outstanding natural gas collars that were
entered into as hedges extending through December 31, 2001 to exchange
payments on 19 Bcf of natural gas. At December 31, 1999, the weighted average
floor and ceiling strike price and market price per Mcf of natural gas was
$2.54, $2.87 and $2.51, respectively. At December 31, 1999, there were $1.7
million of net unrealized and unrecognized hedging gains based on the
difference between the strike price and the New York Mercantile Exchange
futures price for the applicable trading month.
At December 31, 1999, EEX had outstanding hedging transactions extending
through December 31, 2000 to exchange payments on 6 Bcf of natural gas with an
average strike price of $2.23. At December 31, 1999, there were $1 million of
net unrealized and unrecognized hedging gains based on the difference between
the strike price and the New York Mercantile Exchange futures price for the
applicable trading month.
Fair Value of Financial Instruments--At December 31, 1999, the estimated
proceeds the Company would have received to terminate or otherwise settle all
open gas hedging activities was $4.3 million, which represented their
estimated fair value.
16. INCOME TAXES
Prior to August 5, 1997, EEX's operations were included in ENSERCH's
consolidated federal income tax return. Pursuant to a tax sharing agreement,
EEX and ENSERCH made or received payments determined as though EEX and its
subsidiaries filed a separate consolidated federal income tax return. On
August 5, 1997, EEX became a separate taxable entity (See Note 1).
Provision (Benefit) for Income Taxes (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $ -- $ 741 $ (3,945)
Foreign........................................ (317) 2,432 --
State.......................................... 220 1,227 461
------ ------- --------
Total........................................ (97) 4,400 (3,484)
Deferred--Federal................................ 6,988 (9,397) (55,461)
------ ------- --------
Total provision (benefit)...................... $6,891 $(4,997) $(58,945)
====== ======= ========
</TABLE>
45
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliation of Income Taxes (Benefit) computed at the Federal Statutory
Rate to Provision for Income Taxes (Benefit):
<TABLE>
<S> <C> <C> <C>
(Loss) before income taxes:
Domestic.................................. $(100,998) $(35,135) $(269,081)
Foreign................................... 20,092 (4,256) (1,042)
--------- -------- ---------
Total................................... $ (80,906) $(39,391) $(270,123)
========= ======== =========
Income taxes (benefit) computed at the
federal statutory rate
of 35%..................................... $ (28,317) $(13,787) $ (94,543)
Percentage depletion...................... -- -- (193)
Foreign taxes............................. (317) 2,432 --
State taxes............................... 220 1,227 --
Valuation allowance on deferred tax
asset.................................... 35,294 5,410 35,254
Other--net................................ 11 (279) 537
--------- -------- ---------
Provision for income taxes (benefit).... $ 6,891 $ (4,997) $ (58,945)
========= ======== =========
</TABLE>
The deferred tax effect of the difference in financial accounting basis and
income tax basis of EEX's assets and liabilities at December 31, 1999 and 1998
was as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------- ----------------------------
Total Current Noncurrent Total Current Noncurrent
--------- ------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Deferred Tax Assets
(Liabilities):
Property, plant and
equipment............ $ 61,306 $ -- $ 61,306 $ 64,498 $ -- $ 64,498
Employee benefit
obligations.......... 1,388 -- 1,388 2,824 -- 2,824
Accruals and
allowances........... 2,276 829 1,447 3,246 1,800 1,446
Foreign corporations.. (1,005) -- (1,005) 9,230 -- 9,230
Net operating loss.... 61,847 -- 61,847 17,708 -- 17,708
Valuation allowance... (102,174) -- (102,174) (66,880) -- (66,880)
--------- ---- --------- -------- ------ --------
Net deferred tax
asset.............. $ 23,638 $829 $ 22,809 $ 30,626 $1,800 $ 28,826
========= ==== ========= ======== ====== ========
</TABLE>
Note: The current portion is included in other current assets in the
consolidated balance sheets.
The Company maintains a valuation allowance to reduce the calculated
deferred tax asset to net realizable value in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109). In 1999, EEX decreased the
deferred tax asset by $7 million due to the utilization of past foreign net
operating losses to shelter the current year foreign earnings of $20 million.
The realization of the remaining deferred tax asset is based on expected
future earnings and tax planning strategies which include potential sales of
assets with fair market values in excess of book and tax cost bases, including
the Llano prospect, utilization of excess capacity or sale of the Cooper
floating production facility and pipeline, and acceleration of income from the
favorable impact from restructuring measures over the last two years. Although
the Company has incurred net taxable losses for book purposes in recent years,
management believes it is more likely than not that the Company will generate
taxable income sufficient to realize a portion of the tax benefits associated
with assets which have a tax basis in excess of net cost recorded under the
successful efforts method of accounting used for financial reporting purposes.
Such assets are primarily represented by seismic costs capitalized for tax
purposes but expensed under successful efforts accounting and assets impaired
under the provisions of SFAS 121 for which no tax deduction is immediately
available. Due to the uncertainty of future income estimates, the additional
anticipated earnings
46
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
benefit from further realization of the additional tax basis has not been
fully recognized at this time and is included in the valuation allowance of
$102 million at December 31, 1999 for the Company's deferred tax asset.
As of December 31, 1999, the Company had approximately $177 million of U.S.
net operating loss carryforwards ("NOLs"). The NOLs have expiration dates
ranging from 2003 through 2019. Due to the uncertainty of the realization of
this tax carryforward, EEX has included in its valuation allowance the full
carryforward benefit of $62 million.
17. EMPLOYEE BENEFIT PLANS
Most of the Company's employees participate in a noncontributory defined
benefit pension plan. Accrued retirement costs are funded based upon
applicable requirements of federal law and deductibility for federal income
tax purposes. Employees hired prior to July 1, 1989 are eligible for medical
benefits when they retire. Medical benefits are not prefunded.
In 1998, the Company recognized a curtailment gain of approximately $2.5
million in connection with the termination of a significant number of
employees announced in 1997 pursuant to the provisions of Statement of
Financial Accounting Standards No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits" (SFAS 88).
Prior to ENSERCH's August 5, 1997 distribution of EEI stock to ENSERCH
shareholders (see Note 1), EEX's cost for pension and retiree medical benefits
was based on allocations from ENSERCH plans. From August 5, 1997 through
December 31, 1999, EEX's costs for these benefits were based on EEX's
allocated pension plan assets, employees and retirees based upon information
provided by ENSERCH. EEX's share of the ENSERCH pension plan assets and
liabilities for accrued benefits have been estimated by EEX based upon
information supplied by ENSERCH. After resolving a dispute over the definition
of those employees and retirees who are included in the EEX plan, it is
expected that these assets will be transferred to EEX's plan providing
substantially the same benefits as provided by the ENSERCH plan. The assets
are held in a trust account with investments consisting primarily of domestic
equities and fixed income funds. For pension benefits, the "benefit
obligation" is the projected benefit obligation. For post-retirement benefits,
the "benefit obligation" is the accumulated post-retirement benefit
obligation.
47
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee Benefit Plan Disclosures (in thousands):
<TABLE>
<CAPTION>
Post-Retirement
Pension Benefits Benefits
------------------ ----------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Assumptions as of December 31:
Discount rate used in determining
benefit obligation.................... 7.75% 7.00% 7.75% 7.00%
Expected return on Plan assets......... 9.00% 9.00%
Rate of compensation increases......... 4.00% 4.00%
Changes in Benefit Obligation:
Benefit obligation as of beginning of
period................................ $(19,173) $(23,396) $(8,949) $(8,366)
Service cost........................... (634) (720) (7) (22)
Interest cost.......................... (1,426) (1,411) (496) (584)
Actuarial liability gain (loss)........ 832 3,179 2,220 (117)
Effect of curtailment.................. -- 2,378 -- 98
Participants contribution.............. -- -- (165) (151)
Benefits paid.......................... 914 797 394 193
-------- -------- ------- -------
Benefit obligation as of December
31.................................. $(19,487) $(19,173) $(7,003) $(8,949)
======== ======== ======= =======
Change in Plan Assets:
Fair value of Plan assets as of
beginning of period................... $ 11,820 $ 11,420
Actual return on assets................ 894 1,065
Employer contributions................. 5,770 --
Benefits paid.......................... (786) (665)
-------- --------
Fair value of Plan assets as of December
31...................................... $ 17,698 $ 11,820
======== ========
Reconciliation of Funded Status:
Funded status.......................... $ (1,788) $ (7,353) $(7,003) $(8,949)
Unrecognized net obligation (asset).... -- -- 3,482 3,755
Unrecognized actuarial (gain) loss..... (2,071) (1,516) (102) 2,117
-------- -------- ------- -------
Accrued benefit cost as of December
31.................................. $ (3,859) $ (8,869) $(3,623) $(3,077)
======== ======== ======= =======
Components of Net Periodic Benefit Cost:
Allocations from ENSERCH............... $ -- $ -- $ -- $ --
Service cost--benefits earned during
the period............................ 634 720 7 22
Interest cost on projected benefit
obligation............................ 1,426 1,411 496 584
Expected return on assets.............. (1,181) (993) -- --
Effect of curtailment.................. -- (2,378) -- (98)
Amortization--net obligation........... -- -- 273 273
Amortization--unrecognized (gain)
loss.................................. 11 (1) -- 80
-------- -------- ------- -------
Net periodic benefit cost............ $ 890 $ (1,241) $ 776 $ 861
======== ======== ======= =======
</TABLE>
For measurement purposes, a 5.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999 and remains at that
level thereafter.
48
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the following effects (in
thousands):
<TABLE>
<CAPTION>
1-Percentage 1-Percentage
Point Point
Increase Decrease
------------ ------------
<S> <C> <C>
Effect on total of service and interest cost for
1999............................................ $ 41 $ (36)
Effect on year-end 1999 post-retirement benefit
obligation...................................... $543 $(475)
</TABLE>
Investment Plan--At December 31, 1999, EEX provided a defined contribution
pension plan which permits pre-tax employee contributions and was available to
substantially all employees of the Company. The Company's share of costs under
the plan was $0.2 million, $0.3 million, and $0.3 million in 1999, 1998, and
1997, respectively. The Company matches up to 60% of the first 6% of employee
contributions.
18. RELATED PARTY TRANSACTIONS
As described in Note 1, on August 5, 1997, ENSERCH distributed to its
shareholders all the shares of EEI common stock it owned and EEI ceased being
a subsidiary of ENSERCH. In preparation for this distribution, on January 1,
1997, responsibility for all management and administrative functions for oil
and gas activities previously performed by ENSERCH, along with selected
ENSERCH employees, were transferred to Old EEI and cost allocations from
ENSERCH for these functions were discontinued.
The Company had sales to certain ENSERCH companies (Enserch Energy Services,
Inc., Lone Star Gas Company and Enserch Processing Company) that totaled $26
million in 1997.
19. COMMITMENTS AND CONTINGENCIES
EEX is involved in a number of legal and administrative proceedings incident
to the ordinary course of its business. In the opinion of management, based on
the advice of counsel and current assessment, any liability to EEX relative to
these ordinary course proceedings will not have a material adverse effect on
EEX's operations or financial condition.
In addition, EEX is a defendant in Gracy Fund L.P. v. EEX Corporation, et
al., ("Gracy Fund"), a class action in Federal District Court for the Northern
District of Texas. Gracy Fund is a consolidated case combining two actions
filed against EEX in August 1998. In January 1999, plaintiffs in Gracy Fund
filed an amended class action complaint against EEX, several of its current
and/or former officers and directors and another company, ENSERCH Corporation
(the "Consolidated Complaint"). The Consolidated Complaint alleges violations
of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and violations
of Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934
against various defendants. The Consolidated Complaint also alleges Section
10(b), 15 and 20(a) claims on behalf of a class of plaintiffs who acquired
EEX's stock pursuant to an October 1996 Registration Statement and
Proxy/Prospectus ("EEX Subclass").
Plaintiffs allege that during the class period, defendants made materially
false and misleading statements, and failed to disclose material facts,
regarding the value and volume of EEX's proved reserves from its East Texas
operations. According to plaintiffs, these purported misrepresentations
artificially inflated the price of EEX's common stock throughout the class
period, induced the EEX Subclass to approve the merger that spun EEX off from
ENSERCH Corporation and induced the EEX Subclass to acquire stock pursuant to
the Registration Statement and Proxy/Prospectus issued regarding this merger.
49
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company intends to contest this action vigorously and filed motion to
dismiss the Consolidated Complaint on March 8, 1999. The motion has been fully
briefed and under submission to the court since June 23, 1999. All discovery
is stayed pending the determination of the motion to dismiss. Since it has not
yet been determined whether, or to what extent, the plaintiffs have pled a
viable complaint, the Company cannot predict the outcome of this matter at
this time.
The operations and financial position of EEX continues 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.
In the fourth quarter of 1998, EEX signed a contract with a major drilling
company to provide and operate an offshore drilling rig for use in Deepwater
drilling activities. The contract covers a basic period of three years at an
approximate average day rate of $130,000 commencing in July 1999. As of
January 1, 2000, approximately 913 days remained under the contract at a cost
of $122 million.
As of December 31, 1999, the Company has a future volumetric delivery
obligation of approximately 16 billion cubic feet of natural gas to Encogen
One Partners, Ltd.
20. OTHER INFORMATION
Major accounts in certain line items of the Consolidated Balance Sheets are
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Other current assets prepaid costs related to Mudi Field... $ 5,941 $ 5,784
======= =======
Other non-current liabilities
Accrued liabilities for restoration, dismantlement and
abandonment costs....................................... $42,756 $25,157
======= =======
Advances from partners................................... $20,604 $ 7,046
======= =======
</TABLE>
21. 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.
50
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
22. SEGMENT INFORMATION
Segment information has been prepared in accordance with Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information. EEX has determined that its reportable
segments are those that are based on the Company's method of internal
reporting. EEX has four reportable segments, which are primarily in the
business of natural gas and crude oil exploration and production: Deepwater
Operations, Deepwater FPS/Pipelines, Onshore/Shelf and International. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. EEX's reportable segments are
consistent with the Company's business strategy. Financial information by
operating segment is presented below (in thousands):
<TABLE>
<CAPTION>
Deepwater
------------------------------
Operations(a) FPS/Pipelines(b) Onshore/Shelf International Other(c) Total
------------- ---------------- ------------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1999:
Total Revenues........ $ -- $ -- $ 116,118 $54,601 $ 6,655 $ 177,374
Production and
operating costs...... -- -- 23,241 16,097 -- 39,338
Exploration costs..... 70,386 -- 12,034 3,949 -- 86,369
Depletion,
depreciation and
amortization......... -- 5,400 78,531 10,148 1,323 95,402
Other costs........... -- -- 5,366 (d) -- 20,293 25,659
-------- -------- --------- ------- -------- ---------
Operating Income
(Loss)............... (70,386) (5,400) (3,054) 24,407 (14,961) (69,394)
Interest Income....... -- -- -- -- 6,224 6,224
Interest and other
financing costs...... -- (14,361) (765) -- (2,560) (17,686)
-------- -------- --------- ------- -------- ---------
Income (Loss) before
income taxes......... $(70,386) $(19,761) $ (3,819) $24,407 $(11,297) $ (80,856)
======== ======== ========= ======= ======== =========
Long-Lived Assets..... $ 47,782 $144,150 $ 432,015 $60,638 $ 5,912 $ 690,497
======== ======== ========= ======= ======== =========
Additions to Long-
Lived Assets......... $ 52,595 $ 15,533 $ 304,018 $14,797 $ 1,331 $ 388,274
======== ======== ========= ======= ======== =========
1998:
Total Revenues........ $ -- $ -- $ 167,668 $29,270 $ 22,114 $ 219,052
Production and
operating costs...... -- -- 36,002 10,859 -- 46,861
Exploration costs..... 19,581 -- 13,542 12,021 -- 45,144
Depletion,
depreciation and
amortization......... -- -- 101,925 8,421 1,144 111,490
Other costs........... -- -- 10,121 (d) -- 26,433 36,554
-------- -------- --------- ------- -------- ---------
Operating Income
(Loss)............... (19,581) -- 6,078 (2,031) (5,463) (20,997)
Interest Income....... -- -- -- -- 593 593
Interest and other
financing costs...... -- -- (15,222) -- (3,765) (18,987)
-------- -------- --------- ------- -------- ---------
(Loss) before income
taxes................ $(19,581) $ -- $ (9,144) $(2,031) $ (8,635) $ (39,391)
======== ======== ========= ======= ======== =========
Long-Lived Assets..... $ 42,236 $ -- $ 346,975 $55,800 $ 6,374 $ 451,385
======== ======== ========= ======= ======== =========
Additions to Long-
Lived Assets......... $ 20,552 $ -- $ 88,940 $54,000 $ 2,328 $ 165,820
======== ======== ========= ======= ======== =========
1997:
Total Revenues........ $ -- $ -- $ 310,643 $ -- $ 3,570 $ 314,213
Production and
operating costs...... -- -- 48,960 -- -- 48,960
Exploration costs..... -- -- 69,717 882 -- 70,599
Depletion,
depreciation and
amortization......... -- -- 401,538 -- 3,059 404,597
Other costs........... -- -- 16,421 (d) -- 13,989 30,410
-------- -------- --------- ------- -------- ---------
Operating (Loss)...... -- -- (225,993) (882) (13,478) (240,353)
Interest Income....... -- -- -- -- 875 875
Interest and other
financing costs...... -- -- (16,141) -- (14,504) (30,645)
-------- -------- --------- ------- -------- ---------
(Loss) before income
taxes................ $ -- $ -- $(242,134) $ (882) $(27,107) $(270,123)
======== ======== ========= ======= ======== =========
Long-Lived Assets..... $ -- $ -- $ 684,739 $18,419 $ 5,829 $ 708,987
======== ======== ========= ======= ======== =========
Additions to Long-
Lived Assets......... $ -- $ -- $ 161,499 $13,140 $ 5,508 $ 180,147
======== ======== ========= ======= ======== =========
</TABLE>
- -------
(a) In connection with the transition to independent status in 1997, the
Company began managing its Gulf of Mexico activities in two major areas:
Deepwater and Onshore/Shelf. The Company did not track this activity
separately until 1998 when operations in this segment became significant.
Prior to 1998, Deepwater activities were included in the Onshore/Shelf
segment.
(b) In connection with the abandonment of the Cooper Field in 1999, the
Company began managing the FPS/Pipelines separately. Prior to 1999, the
operations of the FPS/Pipelines were considered assets committed to the
Cooper Field and were included in the Onshore/Shelf segment.
(c) Includes primarily Cogeneration Plant Operations, General and
Administrative and gains/loss on hedging and sale of assets.
(d) Includes taxes other than income.
51
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
23. SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
Oil and Gas Producing Activities--The following tables (in thousands) set
forth information relating to oil and gas producing activities of EEX. Reserve
data for natural gas liquids attributable to leasehold interests owned by the
Company are included in oil and condensate.
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Capitalized Costs:
Proved oil and gas properties...................... $ 935,360 $ 799,948
Floating Production System and Pipelines........... 232,908 228,844
Unproved oil and gas properties.................... 91,097 77,482
Accumulated depletion, depreciation and
amortization...................................... (574,778) (668,512)
--------- ---------
Total net capitalized cost....................... $ 684,587 $ 437,762
========= =========
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
Non- Non- Non-
U.S. U.S. U.S. U.S. U.S. U.S.
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Costs Incurred:
Property acquisition
costs:
Proved................. $238,749 $ 4,523 $ 7,990 $35,555 $ -- $ --
Unproved............... 4,767 -- 14,168 473 24,970 200
Exploration costs........ 79,618 4,143 59,729 6,501 50,220 1,428
Development costs........ 79,091 10,069 44,845 8,142 112,457 12,396
-------- ------- -------- ------- -------- -------
Total................ $402,225 $18,735 $126,732 $50,671 $187,647 $14,024
======== ======= ======== ======= ======== =======
</TABLE>
The following information is required and defined by the Financial
Accounting Standards Board. The disclosure does not represent the results of
operations based on historical financial statements. The disclosure excludes
interest expense, corporate overhead and gains and losses from hedging (in
thousands).
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ----------------
Non- Non- Non-
U.S. U.S. U.S. U.S. U.S. U.S.
-------- ------- -------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Results of Operations:
Revenues................ $116,118 $54,601 $167,668 $29,270 $ 310,643 $ --
Less:
Production costs(a)... 28,607 16,097 46,117 10,859 65,366 --
Exploration costs..... 82,420 3,949 33,129 12,021 69,732 882
Depletion,
depreciation and
amortization(b)...... 83,931 10,148 101,925 8,421 401,538 --
Income tax
effects(c)........... -- 1,807 477 -- (44,037) (309)
-------- ------- -------- ------- --------- -----
Net producing
activities......... $(78,840) $22,600 $(13,980) $(2,031) $(181,956) $(573)
======== ======= ======== ======= ========= =====
</TABLE>
- --------
(a) Includes severance, ad valorem and production taxes.
(b) Includes pre-tax property impairment of $26 million, $10 million and $260
million in 1999, 1998 and 1997, respectively.
(c) Amount includes $35.3 million, $5.4 million and $61.5 million for
valuation allowance on deferred tax asset for 1999, 1998 and 1997,
respectively.
Oil and Gas Reserves--The following table of estimated proved and proved
developed reserves of oil and gas has been prepared utilizing estimates of
year end reserve quantities provided and audited by Netherland, Sewell &
Associates, Inc., independent petroleum consultants, for December 31, 1999,
1998 and 1997 reserves.
52
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reserve estimates are inherently imprecise and estimates of new discoveries
are more imprecise than those of producing oil and gas properties.
Accordingly, the reserve estimates are expected to change as additional
performance data becomes available.
<TABLE>
<CAPTION>
Gas (MMcf) Oil (MBbls)(a)
---------------------------- ------------------------
1999 1998 1997 1999 1998 1997
------- -------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Reserves:
At January 1.......... 203,551 460,158 1,215,624 6,431 18,100 53,209
Revisions of previous
estimates............ (10,658) (13,129) (622,640) (1,116) 847 (15,710)
Extensions,
discoveries and
additions............ 11,804 38,458 40,254 40 1,145 3,062
Purchases of minerals
in place(b).......... 206,002 33,143 -- 2,305 1,118 --
Sales of minerals in
place(c)............. (6,883) (257,169) (88,611) (619) (11,340) (17,054)
Production............ (41,003) (57,910) (84,469) (1,339) (3,439) (5,407)
------- -------- --------- ------ ------- -------
At December 31.......... 362,813 203,551 460,158 5,702 6,431 18,100
======= ======== ========= ====== ======= =======
Proved Developed
Reserves:
At January 1.......... 191,985 425,773 859,094 6,299 16,882 27,938
At December 31........ 309,424 191,985 425,773 4,592 6,299 16,882
Minority interest at
12/31 total proved(d).. 86,319 -- -- 1,043 -- --
Minority interest at
12/31 proved
developed(d)........... 65,073 -- -- 584 -- --
</TABLE>
- --------
(a) Includes condensate and natural gas liquids of 427 MBbls for 1999, 561
MBbls for 1998 and 825 MBbls for 1997.
(b) Includes reserves acquired through property exchanges of 1,118 MBbls and
33,143 MMcf for 1998.
(c) Includes reserves disposed of through property exchanges of 6,497 MBbls
and 24,102 MMcf for 1998.
(d) Minority Interest amounts are included in the table above.
<TABLE>
<CAPTION>
Gas
(MMcf) Oil (MBbls)
------ ----------------------
1997 1999 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Non-U.S. Reserves:
At January 1................................... 618 19,728 5,741 6,008
Revisions of previous estimates................ -- (4,657) 5,877 778
Extensions, discoveries and additions.......... -- -- 4,733 --
Purchases of minerals in place................. -- -- 5,741 --
Sales of minerals in place..................... (618) -- -- (1,045)
Production..................................... -- (3,231) (2,364) --
---- ------ ------ ------
At December 31................................... -- 11,840 19,728 5,741
==== ====== ====== ======
Proved Developed Reserves:
At January 1................................... -- 15,831 4,767 --
At December 31................................. -- 9,896 15,831 4,767
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserve Quantities--The following table has been prepared using
estimated future production rates and associated production and development
costs. Continuation of economic conditions existing at the balance sheet date
was assumed. Accordingly, estimated future net cash flows were computed by
applying prices and contracts in effect in December to estimated future
production of proved oil and gas reserves, estimating future expenditures to
develop proved reserves and estimating costs to produce the proved reserves
based on average costs for the year. Prices used in the computations were: Gas
(per Mcf) $2.08 in 1999, $2.19 in 1998 and $2.51 in 1997; Oil (per barrel)
$23.41 in 1999, $9.50 in 1998 and $15.71 in 1997.
53
<PAGE>
EEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Because reserve estimates are imprecise and changes in the other variables
are unpredictable, the standardized measure should be interpreted as
indicative of the order of magnitude only and not as precise amounts.
<TABLE>
<CAPTION>
United
Total States International
-------- -------- -------------
<S> <C> <C> <C>
Standardized Measure (in millions):
1999
Future cash inflows...................... $1,166.5 $ 886.2 $ 280.3
Future production and development costs.. (524.7) (314.8) (209.9)
Future income tax expense................ -- -- --
-------- -------- -------
Future net cash flows.................... 641.8 571.4 70.4
10% annual discount...................... (205.5) (197.9) (7.6)
-------- -------- -------
Standardized measure of discounted future
net cash flows.......................... $ 436.3 $ 373.5 $ 62.8
======== ======== =======
Minority interest (a).................... $ 79.0 $ 79.0 $ --
======== ======== =======
1998
Future cash inflows...................... $ 706.1 $ 498.0 $ 208.1
Future production and development costs.. (325.1) (191.3) (133.8)
Future income tax expense................ -- -- --
-------- -------- -------
Future net cash flows.................... 381.0 306.7 74.3
10% annual discount...................... (105.1) (88.4) (16.7)
-------- -------- -------
Standardized measure of discounted future
net cash flows.......................... $ 275.9 $ 218.3 $ 57.6
======== ======== =======
1997
Future cash inflows...................... $1,529.0 $1,440.3 $ 88.7
Future production and development costs.. (540.1) (509.7) (30.4)
Future income tax expense................ (26.8) (18.5) (8.3)
-------- -------- -------
Future net cash flows.................... 962.1 912.1 50.0
10% annual discount...................... (343.0) (334.7) (8.3)
-------- -------- -------
Standardized measure of discounted future
net cash flows.......................... $ 619.1 $ 577.4 $ 41.7
======== ======== =======
</TABLE>
- --------
(a) Minority Interest amounts are included in the table above.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ---------
<S> <C> <C> <C>
Changes in Standardized Measure (in millions):
Sales and transfers of oil and gas produced, net
of production costs............................ $(126.0) $(139.9) $ (245.6)
Changes in prices, net of production and future
development costs.............................. 68.0 (149.3) (761.8)
Extensions, discoveries and improved recovery,
less related costs............................. 16.4 58.3 92.5
Purchases of minerals in place.................. 181.6 70.2 --
Revisions of previous quantity estimates........ (1.0) (4.9) (806.8)
Sales of minerals in place...................... (6.9) (258.7) (231.6)
Accretion of discount........................... 27.6 61.9 234.3
Net change in income taxes...................... -- 26.9 622.3
Other........................................... 0.7 (7.7) 0.7
------- ------- ---------
Total......................................... $ 160.4 $(343.2) $(1,096.0)
======= ======= =========
</TABLE>
54
<PAGE>
QUARTERLY RESULTS (UNAUDITED)
The results of operations of the Company by quarters are summarized below
(in thousands, except per share data). In the opinion of the Company's
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation have been made. The first three quarters of
1998 per share amounts have been restated to reflect the reduction in weighted
average shares outstanding due to the one-for-three reverse stock split
approved by shareholders on December 8, 1998.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1999:
Revenues........................ $ 39,555 $ 43,983 $50,087 $ 43,749
Gain on Property Sales.......... 4 507 747 14,225
Impairment of Assets............ -- -- -- (26,424)
Operating Income (Loss)(a)...... (12,007) (26,985) 5,423 (35,825)
Net (Loss) Applicable to Common
Shareholders................... (18,280) (33,123) (1,657) (46,854)
Basic and Diluted Net (Loss) Per
Share.......................... $ (0.43) $ (0.79) $ (0.04) $ (1.11)
1998:
Revenues........................ $ 64,513 $ 58,561 $46,323 $ 49,655
Gains (Losses) on Property
Sales.......................... (6,027) 1,761 3,000 10,351
Impairment of Assets............ -- -- -- (10,439)
Operating (Loss)(a)............. (9,169) (2,484) (7,098) (2,246)
Net (Loss) Applicable to Common
Shareholders................... (19,027) (10,406) (5,452) (6,041)
Basic and Diluted Net (Loss) Per
Share.......................... $ (0.45) $ (0.25) $ (0.13) $ (0.14)
</TABLE>
- --------
(a) Net Income excluding interest and taxes.
55
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required in this Item is incorporated by reference from
EEX's definitive proxy statement to be filed pursuant to Regulation 14A within
120 days after year-end.
Item 11. Executive Compensation
The information required in this Item is incorporated by reference from
EEX's definitive proxy statement to be filed pursuant to Regulation 14A within
120 days after year-end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required in this Item is incorporated by reference from
EEX's definitive proxy statement to be filed pursuant to Regulation 14A within
120 days after year-end.
Item 13. Certain Relationships and Related Transactions
The information required in this Item is incorporated by reference from
EEX's definitive proxy statement to be filed pursuant to Regulation 14A within
120 days after year-end.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)-1 Financial Statements
The information required hereunder is set forth under "Report of Independent
Auditors," "Consolidated Statement of Operations," "Consolidated Statement of
Cash Flows," "Consolidated Balance Sheet," "Consolidated Statement of
Shareholders' Equity," "Notes to Consolidated Financial Statements" and
"Quarterly Results" included in Item 8.
(a)-2 Financial Statement Schedules
The consolidated financial statement schedules are omitted because of the
absence of the conditions under which they are required or because the
required information is included in the consolidated financial statements or
notes thereto.
(a)-3 Exhibits
<TABLE>
<C> <S>
3.1 Restated Articles of Incorporation of the Registrant, as amended.(1)
3.2 Bylaws of the Registrant, as amended.(1)
4.1 Form of Common Stock Certificate, incorporated by reference to Exhibit 4.1
to Registrant's Form 10-K for the year ended December 31, 1998.(2)
4.2 Form of Preferred Stock Certificate, incorporated by reference to Exhibit
4.2 to Registrant's Form 10-K for the year ended December 31, 1998.(2)
4.3 Rights Agreement dated as of September 10, 1996, between the Registrant
and Harris Trust Company of New York as Rights Agent, incorporated by
reference to Exhibit 10.21 to the Registrant's Registration Statement on
Form S-4 (No. 333-13241).(2)
</TABLE>
56
<PAGE>
<TABLE>
<C> <S>
4.4 First Amendment to Rights Agreement dated December 21, 1998, between the
Registrant and Harris Trust Company of New York, as Rights Agent,
incorporated by reference to Exhibit 4.4 to Registrant's Form 10-K for
the year ended December 31, 1998.(2)
4.5 Statement of Resolution of Series B 8% Cumulative Perpetual Preferred
Stock of the Registrant filed with the Secretary of State of Texas on
January 7, 1999, incorporated by reference to Exhibit 4.5 to Registrant's
Form 10-K for the year ended December 31, 1998.(2)
4.6 Form of Series A Warrant issued to Warburg, Pincus Equity Partners, L.P.,
and affiliates on January 7, 1999, incorporated by reference to Exhibit
4.6 to Registrant's Form 10-K for the year ended December 31, 1998.(2)
4.7 Form of Series B Warrant issued to Warburg, Pincus Equity Partners, L.P.,
and affiliates on January 7,1999, incorporated by reference to Exhibit
4.7 to Registrant's Form 10-K for the year ended December 31, 1998.(2)
4.8 Form of Series C Warrant issued to Warburg, Pincus Equity Partners, L.P.,
and affiliates on January 7, 1999, incorporated by reference to Exhibit
4.7 to Registrant's Form 10-K for the year ended December 31, 1998.(2)
10.1 PRODUCTION SYSTEM LEASE AGREEMENT (1996-A) dated as of November 15, 1996
among WILMINGTON TRUST COMPANY, not in its individual capacity but solely
as Corporate Grantor Trustee under the Trust Agreement, and THOMAS P.
LASKARIS, not in his individual capacity but solely as Individual Grantor
Trustee under the Trust Agreement, Lessor and ENSERCH EXPLORATION, INC.,
Lessee, incorporated by reference to Exhibit 10.1 to Registrant's Form
10-K for the year ended December 31, 1997.(2)
10.2 PRODUCTION SYSTEM LEASE AGREEMENT (1996-B) dated as of November 15, 1996
among WILMINGTON TRUST COMPANY, not in its individual capacity but solely
as Corporate Grantor Trustee under the Trust Agreement, and THOMAS P.
LASKARIS, not in his individual capacity but solely as Individual Grantor
Trustee under the Trust Agreement, Lessor and ENSERCH EXPLORATION, INC.,
Lessee, incorporated by reference to Exhibit 10.2 to Registrant's Form
10-K for the year ended December 31, 1997.(2)
10.3 Participation Agreement between EP Operating Limited Partnership and
Mobil Producing Texas and New Mexico Inc., incorporated by reference to
Exhibit 10.6 to the Registration Statement of Enserch Exploration, Inc.
on Form S-4 (No. 33-56791).(2)
10.4 Credit Agreement, dated as of May 1, 1995, among Registrant as Borrower,
Texas Commerce Bank National Association, as Administrative Agent, The
Chase Manhattan Bank, N.A., as Syndication Agent, Chemical Bank, as
Auction Agent, and the Lenders now or hereafter Parties hereto, amended
by First Amendment dated September 16, 1996, Second Amendment dated June
27, 1997, Third Amendment, dated September 25, 1997, and Fourth Amendment
dated December 15, 1997. Incorporated by reference to Exhibit 10.5 to
Registrant's Form 10-K for the year ended December 31, 1997.(2)
10.5 Fifth Amendment dated March 31, 1999 to Credit Agreement, dated as of May
1, 1995, among Registrant as Borrower, Texas Commerce Bank National
Association, as Administrative Agent, The Chase Manhattan Bank, N.A., as
Syndication Agent, and Book Runner and the Lenders now or hereafter
Parties hereto.(1)
10.6 Tax Sharing Agreement, dated as of January 1, 1995, between ENSERCH and
Enserch Exploration, Inc., incorporated by reference to Exhibit 10.21 to
the Registration Statement of Enserch Exploration, Inc. on Form S-2 (No.
33-60461).(2)
10.7 Tax Allocation Agreement among ENSERCH, the Registrant and Texas
Utilities Company, incorporated by reference to Annex A-3 to the
Agreement and Plan of Merger filed as Exhibit 2 to the Registrant's
Registration Statement on Form S-4 (No. 333-13241).(2)
10.8 Tax Assurance Agreement between ENSERCH and the Registrant incorporated
by reference to Annex A-4 to the Agreement and Plan of Merger filed as
Exhibit 2 to the Registrant's Registration Statement on Form S-4 (No.
333-13241).(2)
</TABLE>
57
<PAGE>
<TABLE>
<C> <S>
10.9 Exploration and Participation Agreement, dated June 20, 1997, by and
between Enserch Exploration, Inc. and Enterprise Oil Gulf of Mexico,
Inc., incorporated by reference to Exhibit 10.10 to Registrant's Form
10-K for the year ended December 31, 1997.(2)
10.10 Enserch Exploration, Inc. Revised and Amended 1996 Stock Incentive Plan
incorporated by reference to Annex A-2 to the Agreement and Plan of
Merger filed as Exhibit 2 to the Company's Registration Statement on
Form S-4 (No. 333-13241). (2)
10.11 Registrant's Deferred Compensation Plan effective as of July 1, 1997,
incorporated by reference to Exhibit 10.12 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.(2)
10.12 First Amendment to Registrant's Deferred Compensation Plan dated as of
November 1, 1998, incorporated by reference to Exhibit 10.11 to
Registrant's Form 10-K for the year ended December 31, 1998.(2)
10.13 Second Amendment to Registrant's Deferred Compensation Plan dated
December 8, 1998, incorporated by reference to Exhibit 10.12 to
Registrant's Form 10-K for the year ended December 31, 1998.(2)
10.14 Deferred Compensation Plan for Directors, effective January 1, 1996, as
amended February 11, 1997, incorporated by reference to Exhibit 10.14 to
Registrant's Form 10-K for the year ended December 31, 1998.(2)
10.15 Form of Change of Control Agreement executed by certain executive
officers of the Registrant, filed as Exhibit 10.20 to the Annual Report
on Form 10-K for the year ended December 31, 1996 of Enserch
Exploration, Inc.(2)
10.16 Form of Amendment to Change of Control Agreement executed by certain
executive officers of the Company, incorporated by reference to Exhibit
10.16 to Registrant's Form 10-K for the year ended December 31, 1998.(2)
10.17 Form of Employment Agreement executed by certain executive officers of
the Registrant, incorporated by reference to Exhibit 10.20 to the Annual
Report on Form 10-K for the year ended December 31, 1996 of Enserch
Exploration, Inc.(2)
10.18 Form of Amendment to Employment Agreement effective July 27, 1998
between Registrant and certain executive officers, incorporated by
reference to Exhibit 10.18 to Registrant's Form 10-K for the year ended
December 31, 1998.(2)
10.19 Second Amendment to Employment Agreement effective July 27, 1998,
between Registrant and Thomas M Hamilton, incorporated by reference to
Exhibit 10.19 to Registrant's Form 10-K for the year ended December 31,
1998.(2)
10.20 Form of Amendment to Restricted Stock Agreement effective July 27, 1998,
between Registrant and certain executive officers, incorporated by
reference to Exhibit 10.20 to Registrant's Form 10-K for the year ended
December 31, 1998.(2)
10.21 Floating Drilling Rig Requirement Offshore Drilling Contract dated
October 15, 1998, between the Registrant and Global Marine Drilling
Company for the "Glomar Arctic I" floating drilling unit, without
appendices, incorporated by reference to Exhibit 10.21 to Registrant's
Form 10-K for the year ended December 31, 1998.(2)
10.22 Purchase Agreement, dated as of December 22, 1998, by and among
Registrant and Warburg, Pincus Equity Partners, L.P., a Delaware limited
partnership, Warburg, Pincus Netherlands Equity Partners I, C.V., a
Dutch limited partnership, Warburg, Pincus Netherlands Equity Partners
II, C.V. a Dutch limited partnership and Warburg, Pincus Netherlands
Equity Partners III, C.V., a Dutch limited partnership, incorporated by
reference to Exhibit 99.1 to Registrant's Form 8-K dated December 22,
1998.(2)
10.23 Registration Rights Agreement dated January 8, 1999, by and among
Registrant and Warburg, Pincus Equity Partners, L.P., and affiliates,
incorporated by reference to Exhibit 10.23 to Registrant's Form 10-K for
the year ended December 31, 1998.(2)
10.24 Stock Purchase Agreement dated as of October 8, 1999 by and between
Tesoro Petroleum Corporation and Tesoro Gas Resources Company, Inc., as
Seller, and EEX Operating LLC, as Buyer, incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.(2)
</TABLE>
58
<PAGE>
<TABLE>
<C> <S>
10.25 First Amendment to Stock Purchase Agreement dated December 16, 1999,
effective October 8, 1999, among Tesoro Petroleum Corporation, Tesoro
Gas Resources Company, Inc., EEX Operating LLC and EEX Corporation,
incorporated by reference to Exhibit 99.1 to Registrant's Form 8-K dated
December 17, 1999.(2)
10.27 Purchase Agreement dated December 17, 1999 between Tesoro Petroleum
Corporation and Tesoro Gas Resources Company, Inc. and EEX Operating LLC
(sale of membership interests in Tesoro Reserves, LLC), incorporated by
reference to Exhibit 99.3 to Registrant's Form 8-K dated December 17,
1999.(2)
10.28 Purchase Agreement dated December 17, 1999 between Tesoro Petroleum
Corporation and Tesoro Gas Resources Company, Inc. and EEX Operating LLC
(sale of membership interests in Tesoro Southeast LLC), incorporated by
reference to Exhibit 99.4 to Registrant's Form 8-K dated December 17,
1999.(2)
10.29 Natural Gas Prepaid Forward Sale Contract dated December 17, 1999
between EEX E&P Company, L.P. and Bob West Treasure L.L.C., incorporated
by reference to Exhibit 99.5 to Registrant's Form 8-K dated December 17,
1999.(2)
10.30 Call Agreement dated December 17, 1999, between EEX Capital, Inc. and
Bob West Treasure L.L.C., incorporated by reference to Exhibit 99.6 to
Registrant's Form 8-K dated December 17, 1999.(2)
10.31 Subordinated Convertible Note dated December 17, 1999, from EEX Reserves
Funding LLC to EEX Corporation, incorporated by reference to Exhibit
99.7 to Registrant's Form 8-K dated December 17, 1999.(2)
10.32 EEX Corporation Undertaking dated December 17, 1999, incorporated by
reference to Exhibit 99.8 to Registrant's Form 8-K dated December 17,
1999.(2)
21 Subsidiaries of the Registrant.(1)
23.1 Consent of Ernst & Young LLP.(1)
23.2 Consent of Netherland, Sewell & Associates, Inc.(1)
27 Financial Data Schedule--December 31, 1999.(1)
</TABLE>
- --------
(1) Filed herewith.
(2) Incorporated by reference.
(b) Reports on Form 8-K
Current Report on Form 8-K dated December 17, 1999. (Acquisition of
properties from Tesoro.)
59
<PAGE>
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
/s/ T. M Hamilton
By: _________________________________
T. M Hamilton
Chairman and President,
Chief Executive Officer
March 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ T. M Hamilton Chairman and President, March 14, 2000
______________________________________ Chief Executive Officer
T. M Hamilton
/s/ R. S. Langdon Executive Vice President, March 14, 2000
______________________________________ Finance and
R. S. Langdon Administration, Chief
Financial Officer
/s/ J. T. Leary Vice President, Finance March 14, 2000
______________________________________ and Treasurer
J. T. Leary
/s/ T. E. Coats Vice President, Planning March 14, 2000
______________________________________ and Controller (Principal
T. E. Coats Accounting Officer)
/s/ F. S. Addy Director March 14, 2000
______________________________________
F. S. Addy
/s/ B. A. Bridgewater, Jr. Director March 14, 2000
______________________________________
B. A. Bridgewater, Jr.
/s/ F. M. Lowther Director March 14, 2000
______________________________________
F. M. Lowther
/s/ M. P. Mallardi Director March 14, 2000
______________________________________
M. P. Mallardi
/s/ H. H. Newman Director March 14, 2000
______________________________________
Howard H. Newman
</TABLE>
60
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
3.1 Restated Articles of Incorporation of the Registrant, as
amended. (1)
3.2 Bylaws of the Registrant, as amended. (1)
4.1 Form of Common Stock Certificate, incorporated by reference
to Exhibit 4.1 to Registrant's Form 10-K for the year ended
December 31, 1998. (2)
4.2 Form of Preferred Stock Certificate, incorporated by
reference to Exhibit 4.2 to Registrant's Form 10-K for the
year ended December 31, 1998. (2)
4.3 Rights Agreement dated as of September 10, 1996, between the
Registrant and Harris Trust Company of New York as Rights
Agent, incorporated by reference to Exhibit 10.21 to the
Registrant's Registration Statement on Form S-4
(No. 333-13241). (2)
4.4 First Amendment to Rights Agreement dated December 21, 1998,
between the Registrant and Harris Trust Company of New York,
as Rights Agent, incorporated by reference to Exhibit 4.4 to
Registrant's Form 10-K for the year ended December 31, 1998.
(2)
4.5 Statement of Resolution of Series B 8% Cumulative Perpetual
Preferred Stock of the Registrant filed with the Secretary of
State of Texas on January 7, 1999, incorporated by reference
to Exhibit 4.5 to Registrant's Form 10-K for the year ended
December 31, 1998. (2)
4.6 Form of Series A Warrant issued to Warburg, Pincus Equity
Partners, L.P., and affiliates on January 7, 1999,
incorporated by reference to Exhibit 4.6 to Registrant's Form
10-K for the year ended December 31, 1998. (2)
4.7 Form of Series B Warrant issued to Warburg, Pincus Equity
Partners, L.P., and affiliates on January 7,1999,
incorporated by reference to Exhibit 4.7 to Registrant's Form
10-K for the year ended December 31, 1998. (2)
4.8 Form of Series C Warrant issued to Warburg, Pincus Equity
Partners, L.P., and affiliates on January 7, 1999,
incorporated by reference to Exhibit 4.7 to Registrant's Form
10-K for the year ended December 31, 1998. (2)
10.1 PRODUCTION SYSTEM LEASE AGREEMENT (1996-A) dated as of
November 15, 1996 among WILMINGTON TRUST COMPANY, not in its
individual capacity but solely as Corporate Grantor Trustee
under the Trust Agreement, and THOMAS P. LASKARIS, not in his
individual capacity but solely as Individual Grantor Trustee
under the Trust Agreement, Lessor and ENSERCH EXPLORATION,
INC., Lessee, incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-K for the year ended December 31, 1997.
(2)
10.2 PRODUCTION SYSTEM LEASE AGREEMENT (1996-B) dated as of
November 15, 1996 among WILMINGTON TRUST COMPANY, not in its
individual capacity but solely as Corporate Grantor Trustee
under the Trust Agreement, and THOMAS P. LASKARIS, not in his
individual capacity but solely as Individual Grantor Trustee
under the Trust Agreement, Lessor and ENSERCH EXPLORATION,
INC., Lessee, incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-K for the year ended December 31, 1997.
(2)
<PAGE>
10.3 Participation Agreement between EP Operating Limited
Partnership and Mobil Producing Texas and New Mexico Inc.,
incorporated by reference to Exhibit 10.6 to the Registration
Statement of Enserch Exploration, Inc. on Form S-4
(No. 33-56792). (2)
10.4 Credit Agreement, dated as of May 1, 1995, among Registrant
as Borrower, Texas Commerce Bank National Association, as
Administrative Agent, The Chase Manhattan Bank, N.A., as
Syndication Agent, Chemical Bank, as Auction Agent, and the
Lenders now or hereafter Parties hereto, amended by First
Amendment dated September 16, 1996, Second Amendment dated
June 27, 1997, Third Amendment, dated September 25, 1997, and
Fourth Amendment dated December 15, 1997. Incorporated by
reference to Exhibit 10.5 to Registrant's Form 10-K for the
year ended December 31, 1997. (2)
10.5 Fifth Amendment dated March 31, 1999 to Credit Agreement,
dated as of May 1, 1995, among Registrant as Borrower, Texas
Commerce Bank National Association, as Administrative Agent,
The Chase Manhattan Bank, N.A., as Syndication Agent, and
Book Runner and the Lenders now or hereafter Parties hereto.
(1)
10.6 Tax Sharing Agreement, dated as of January 1, 1995, between
ENSERCH and Enserch Exploration, Inc., incorporated by
reference to Exhibit 10.21 to the Registration Statement of
Enserch Exploration, Inc. on Form S-2 (No. 33-60461). (2)
10.7 Tax Allocation Agreement among ENSERCH, the Registrant and
Texas Utilities Company, incorporated by reference to Annex
A-3 to the Agreement and Plan of Merger filed as Exhibit 2 to
the Registrant's Registration Statement on Form S-4
(No. 333-13241). (2)
10.8 Tax Assurance Agreement between ENSERCH and the Registrant
incorporated by reference to Annex A-4 to the Agreement and
Plan of Merger filed as Exhibit 2 to the Registrant's
Registration Statement on Form S-4 (No. 333-13241). (2)
10.9 Exploration and Participation Agreement, dated June 20, 1997,
by and between Enserch Exploration, Inc. and Enterprise Oil
Gulf of Mexico, Inc., incorporated by reference to Exhibit
10.10 to Registrant's Form 10-K for the year ended
December 31, 1997. (2)
10.10 Enserch Exploration, Inc. Revised and Amended 1996 Stock
Incentive Plan incorporated by reference to Annex A-2 to the
Agreement and Plan of Merger filed as Exhibit 2 to the
Company's Registration Statement on Form S-4 (No. 333-13241).
(2)
10.11 Registrant's Deferred Compensation Plan effective as of
July 1, 1997, incorporated by reference to Exhibit 10.12 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997. (2)
10.12 First Amendment to Registrant's Deferred Compensation Plan
dated as of November 1, 1998, incorporated by reference to
Exhibit 10.11 to Registrant's Form 10-K for the year ended
December 31, 1998. (2)
10.13 Second Amendment to Registrant's Deferred Compensation Plan
dated December 8, 1998, incorporated by reference to Exhibit
10.12 to Registrant's Form 10-K for the year ended
December 31, 1998. (2)
10.14 Deferred Compensation Plan for Directors, effective
January 1, 1996, as amended February 11, 1997, incorporated
by reference to Exhibit 10.14 to Registrant's Form 10-K for
the year ended December 31, 1998. (2)
10.15 Form of Change of Control Agreement executed by certain
executive officers of the Registrant, filed as Exhibit 10.20
to the Annual Report on Form 10-K for the year ended
December 31, 1996 of Enserch Exploration, Inc. (2)
<PAGE>
10.16 Form of Amendment to Change of Control Agreement executed by
certain executive officers of the Company, incorporated by
reference to Exhibit 10.16 to Registrant's Form 10-K for the
year ended December 31, 1998. (2)
10.17 Form of Employment Agreement executed by certain executive
officers of the Registrant, incorporated by reference to
Exhibit 10.20 to the Annual Report on Form 10-K for the year
ended December 31, 1996 of Enserch Exploration, Inc. (2)
10.18 Form of Amendment to Employment Agreement effective July 27,
1998 between Registrant and certain executive officers,
incorporated by reference to Exhibit 10.18 to Registrant's
Form 10-K for the year ended December 31, 1998. (2)
10.19 Second Amendment to Employment Agreement effective July 27,
1998, between Registrant and Thomas M Hamilton, incorporated
by reference to Exhibit 10.19 to Registrant's Form 10-K for
the year ended December 31, 1998. (2)
10.20 Form of Amendment to Restricted Stock Agreement effective
July 27, 1998, between Registrant and certain executive
officers, incorporated by reference to Exhibit 10.20 to
Registrant's Form 10-K for the year ended December 31, 1998.
(2)
10.21 Floating Drilling Rig Requirement Offshore Drilling Contract
dated October 15, 1998, between the Registrant and Global
Marine Drilling Company for the "Glomar Arctic I" floating
drilling unit, without appendices, incorporated by reference
to Exhibit 10.21 to Registrant's Form 10-K for the year ended
December 31, 1998. (2)
10.22 Purchase Agreement, dated as of December 22, 1998, by and
among Registrant and Warburg, Pincus Equity Partners, L.P., a
Delaware limited partnership, Warburg, Pincus Netherlands
Equity Partners I, C.V., a Dutch limited partnership,
Warburg, Pincus Netherlands Equity Partners II, C.V. a Dutch
limited partnership and Warburg, Pincus Netherlands Equity
Partners III, C.V., a Dutch limited partnership, incorporated
by reference to Exhibit 99.1 to Registrant's Form 8-K dated
December 22, 1998. (2)
10.23 Registration Rights Agreement dated January 8, 1999, by and
among Registrant and Warburg, Pincus Equity Partners, L.P.,
and affiliates, incorporated by reference to Exhibit 10.23 to
Registrant's Form 10-K for the year ended December 31, 1998.
(2)
10.24 Stock Purchase Agreement dated as of October 8, 1999 by and
between Tesoro Petroleum Corporation and Tesoro Gas Resources
Company, Inc., as Seller, and EEX Operating LLC, as Buyer,
incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999. (2)
10.25 First Amendment to Stock Purchase Agreement dated
December 16, 1999, effective October 8, 1999, among Tesoro
Petroleum Corporation, Tesoro Gas Resources Company, Inc.,
EEX Operating LLC and EEX Corporation, incorporated by
reference to Exhibit 99.1 to Registrant's Form 8-K dated
December 17, 1999. (2)
10.27 Purchase Agreement dated December 17, 1999 between Tesoro
Petroleum Corporation and Tesoro Gas Resources Company, Inc.
and EEX Operating LLC (sale of membership interests in Tesoro
Reserves, LLC), incorporated by reference to Exhibit 99.3 to
Registrant's Form 8-K dated December 17, 1999. (2)
10.28 Purchase Agreement dated December 17, 1999 between Tesoro
Petroleum Corporation and Tesoro Gas Resources Company, Inc.
and EEX Operating LLC (sale of membership interests in Tesoro
Southeast LLC), incorporated by reference to Exhibit 99.4 to
Registrant's Form 8-K dated December 17, 1999. (2)
<PAGE>
10.29 Natural Gas Prepaid Forward Sale Contract dated December 17,
1999 between EEX E&P Company, L.P. and Bob West Treasure
L.L.C., incorporated by reference to Exhibit 99.5 to
Registrant's Form 8-K dated December 17, 1999. (2)
10.30 Call Agreement dated December 17, 1999, between EEX Capital,
Inc. and Bob West Treasure L.L.C., incorporated by reference
to Exhibit 99.6 to Registrant's Form 8-K dated December 17,
1999. (2)
10.31 Subordinated Convertible Note dated December 17, 1999, from
EEX Reserves Funding LLC to EEX Corporation, incorporated by
reference to Exhibit 99.7 to Registrant's Form 8-K dated
December 17, 1999. (2)
10.32 EEX Corporation Undertaking dated December 17, 1999,
incorporated by reference to Exhibit 99.8 to Registrant's
Form 8-K dated December 17, 1999. (2)
21 Subsidiaries of the Registrant. (1)
23.1 Consent of Ernst & Young LLP. (1)
23.2 Consent of Netherland, Sewell & Associates, Inc. (1)
27 Financial Data Schedule-December 31, 1999. (1)
- ----------------------------
(1) Filed herewith.
(2) Incorporated by reference.
<PAGE>
EXHIBIT 3.1
ARTICLES OF AMENDMENT TO THE
RESTATED ARTICLES OF INCORPORATION
OF
EEX CORPORATION
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following Articles of
Amendment to its Restated Articles of Incorporation:
FIRST: The name of the corporation is EEX Corporation.
SECOND: Article Four (A) of the Restated Articles of Incorporation of the
corporation is hereby deleted and replaced in its entirety with the following:
"(A) Authorized Capital Stock.
(i) The aggregate number of shares of all classes of stock the Company
shall have authority to issue is 160,000,000 consisting of and divided
into:
(a) one class of 150,000,000 shares of Common Stock, par value $0.01
per share (the "Common Stock"); and
(b) one class of 10,000,000 shares of Preferred Stock, no par value
(the "Preferred Stock"), which may be divided into and issued in
one or more series, as hereinafter provided.
(ii) Reverse Stock Split. Effective as of the close of business on
the date of filing this amendment to the Restated Articles of Incorporation
(the "Effective Time"), the filing of this amendment shall effect a reverse
stock split (the "Reverse Stock Split") pursuant to which each three (3)
shares of Common Stock of the corporation issued and outstanding, shall be
combined into one (1) validly issued, fully paid and nonassessable share of
Common Stock of the corporation. The number of authorized shares, the
number of shares of treasury stock and the par value of the Common Stock
shall not be affected by the Reverse Stock Split. Each stock certificate
that prior to the Effective Time represented shares of Common Stock shall,
following the Effective Time, represent the number of shares into which the
shares of Common Stock represented by such certificate shall be combined.
Fractional shares that occur as a result of the foregoing shall be
purchased by the corporation based upon the closing price reported for the
Common Stock on the New York Stock Exchange on the date of filing this
amendment."
THIRD: This amendment to the Restated Articles of Incorporation was
adopted by the shareholders of the corporation on December 8, 1998.
<PAGE>
FOURTH: The number of shares of the corporation outstanding at the
time of such adoption was 127,150,427; and the number of shares entitled to vote
thereon was 127,150,427.
FIFTH: The number of shares voted for such amendment was 97,771,506;
and the number of shares voted against such amendment was 19,490,902.
Dated December 8, 1998.
EEX CORPORATION
By:(s) J. K. Hartrick
-------------------------------
J. K. Hartrick
Senior Vice President, General Counsel
and Corporate Secretary
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
EEX CORPORATION
ARTICLE 1 SECTION ONE
EEX Corporation, a Texas corporation (the "Company") formerly named Enserch
Exploration, Inc. and formerly named Lone Star Energy Plant Operations, Inc.,
pursuant to the provisions of Article 4.07 of the Texas Business Corporation
Act, as amended, hereby adopts Restated Articles of Incorporation without
amendments as set forth below.
SECTION TWO
The Restated Articles of Incorporation accurately copy the Articles of
Incorporation and all amendments and supplements thereto that are in effect
immediately prior hereto (collectively, the "Old Articles"), including the
Statement of Resolution filed on September 11, 1996 establishing and designating
the $200 Series A Junior Participating Preferred Stock, but except that the
number of directors currently constituting the Board of Directors and the names
and addresses of the persons now serving as directors is inserted in lieu of
similar information in the Old Articles and the name of each incorporator is
omitted.
SECTION THREE
The Restated Articles of Incorporation were adopted by resolution of the
Board of Directors of the Company on February 24, 1998.
SECTION FOUR
The Old Articles are hereby superseded by the following Restated Articles
of Incorporation, which accurately copy the entire text thereof except as above
set forth:
<PAGE>
1.01 RESTATED ARTICLES OF INCORPORATION
OF
EEX CORPORATION
ARTICLE ONE
The name of the corporation (the "Company") is EEX Corporation.
ARTICLE TWO
The period of its duration is perpetual.
ARTICLE THREE
The purposes for which the Company is organized are:
(1) To engage in all phases of the gas and oil business and related activities,
including without limitation engaging in exploration, drilling,
development, and production of gas and oil properties;
(2) To store, transport, buy and sell, gas, oil, salt, brine and other mineral
solutions and liquefied minerals;
(3) To explore for, produce, purchase and sell, store, process and manufacture,
transport and distribute gas, oil and all other minerals;
(4) To manufacture, produce, purchase or otherwise acquire, sell or dispose of,
distribute, mortgage, pledge, lease, repair, install, operate, deal in and
with, whether as principal or agent, products, goods, appliances, wares,
merchandise, fixtures, plants, structures, machinery, and materials of
every kind and description, to lend money for the carrying out of such
purposes, and to take and hold real and personal property for the payment
of such funds so loaned;
(5) To engage in the business of operation and maintenance of cogeneration and
other power production projects; and
(6) To transact any or all lawful business for which corporations may be
incorporated under the Texas Business Corporation Act, as amended and in
effect from time to time (the "TBCA").
<PAGE>
ARTICLE FOUR
(A) Authorized Capital Stock. The aggregate number of shares of all classes
of stock the Company shall have authority to issue is 410,000,000
consisting of and divided into:
(i) one class of 400,000,000 shares of Common Stock, par value $0.01 per
share (the "Common Stock"); and
(ii) one class of 10,000,000 shares of Preferred Stock, no par value (the
"Preferred Stock"), which may be divided into and issued in one or more
series, as hereinafter provided.
(B) Series. The Preferred Stock may be divided into and issued in, at any time
and from time to time, one or more series as the Board of Directors shall
determine pursuant to the authority hereby vested in it. The Board of
Directors shall have the authority to establish series of unissued shares
of Preferred Stock, at any time and from time to time, by fixing and
determining the designations, preferences, limitations and relative rights
of the shares of the series, subject to and within the limitations of the
TBCA and the Articles of Incorporation, including without limitation the
following:
(a) the number of shares constituting the series and the distinctive
designation of that series;
(b) the dividend rate on shares of the series, the dividend payment dates,
whether dividends shall be cumulative (and, if so, from which date or
dates), non-cumulative, or partially cumulative, and the relative rights of
priority, if any, of payment of dividends on the shares of the series;
(c) the amount payable to the holders of shares of the series upon any
voluntary or involuntary liquidation of the Company;
(d) the preference in the assets of the Company over any other class,
classes or series of shares upon the voluntary or involuntary liquidation
of the Company;
(e) whether the shares of the series are redeemable at the option of the
Company, the shareholder or another person or upon occurrence of a
designated event and, if so, the price payable upon redemption of shares of
the series and the terms and conditions on which such shares are
redeemable;
(f) the provisions of the sinking fund, if any, for the redemption or
purchase of shares of the series;
(g) the voting rights, if any, of the shares of the series;
<PAGE>
(h) the terms and conditions, if any, on which such shares may be
converted, at the option of the Company, the shareholder or another person
or upon occurrence of a designated event, into shares of any other class or
series;
(i) the terms and conditions, if any, on which such shares may be
exchanged, at the option of the Company, the shareholder or another person
or upon occurrence of a designated event, for shares, obligations,
indebtedness, evidences of ownership, rights to purchase securities or
other securities of the Company or one or more other domestic or foreign
corporations or other entities or for other property or for any combination
of the foregoing; and
(j) any other special rights and qualifications, limitations or
restrictions permitted by the TBCA to be granted to or imposed on the
series.
Any of the designations, preferences, limitations and relative rights of
the shares of any series so established may be made dependent upon facts
ascertainable outside the Articles of Incorporation, which facts may include
future acts of the Company, provided that the manner in which such facts shall
operate upon the designations, preferences, limitations and relative rights of
the shares of any series shall be set forth in the resolution or resolutions
establishing the series.
All shares within the same series of Preferred Stock shall be identical
except as to the date of issue and the dates from which dividends on shares of
the series issued on different dates will cumulate, if cumulative. The Board of
Directors shall have the authority to increase or decrease the number of shares
within each series of Preferred Stock; provided, that the Board of Directors may
not decrease the number of shares within a series to less than the number of
shares within such series that are then outstanding.
(C) Preemptive Rights. No shareholder of the Company shall by reason of the
shareholder's holding shares of any class or series have any preemptive or
preferential right to purchase or subscribe to any shares of any class or series
of the Company, now or hereafter to be authorized, or any notes, debentures,
bonds or other securities convertible into or carrying options or warrants to
purchase shares of any class or series, now or hereafter to be authorized,
whether or not the issuance of any such shares, or such notes, debentures, bonds
or other securities, would adversely affect the dividend or voting rights of
such shareholders, other than such rights, if any, as the Board of Directors in
its discretion may fix; and the Board of Directors may issue shares of any class
or series of the Company, or any notes, debentures, bonds or other securities
convertible into or carrying options or warrants to purchase shares of any class
or series, without offering any such shares of any class or series, either in
whole or in part, to the existing shareholders of any class or series.
(D) Subordination of Common Stock. The Common Stock shall be subject and
subordinate to the rights, privileges and preferences of any series of Preferred
Stock to the extent set forth in the resolution or resolutions of the Board of
Directors establishing the series.
<PAGE>
(E) Other Provisions Applicable to Capital Stock.
(a) Each outstanding share of Common Stock shall be entitled to one vote
on each matter submitted to a vote at a meeting of shareholders,
except as otherwise provided by the TBCA or as set forth in the
resolution or resolutions of the Board of Directors establishing any
series of Preferred Stock.
(b) At each election for directors of the Company ("Directors"), every
shareholder entitled to vote at such election shall have the right to
vote the number of shares owned by such shareholder for as many
persons as there are Directors to be elected and for whose election
such shareholder has a right to vote; provided that cumulative voting
in the election for Directors is prohibited.
(c) In the event of any dissolution, liquidation or winding up of the
Company, but subject to the rights of the holders of any series of
Preferred Stock, holders of Common Stock shall be entitled to receive
pro rata all of the remaining assets of the Company available for
distribution to its shareholders.
(d) Subject to the rights of the holders of Preferred Stock as set forth
in the resolution or resolutions of the Board of Directors
establishing any series of Preferred Stock, dividends may be paid upon
Common Stock to the exclusion of Preferred Stock out of any assets of
the Company available therefor.
_____________________________
As adopted by the Board of Directors of the Company effective
September 11, 1996:
"RESOLVED, that pursuant to the authority conferred upon the Board
of Directors of this Company by the provisions of the Restated Articles of
Incorporation of this Company, the Board of Directors hereby creates a new
series of Preferred Stock of the Company which shall consist of 1,000,000
shares of no par value, which shall be designated and known as $200 Series
A Junior Participating Preferred Stock, and that in addition to the
preferences, rights, voting powers and the restrictions or qualifications
of all shares of Preferred Stock regardless of series, described and
expressed in the Restated Articles of Incorporation of the Company, the
Board of Directors hereby declares that the shares of the $200 Series A
Junior Participating Preferred Stock shall have the terms, conditions,
rights and preferences, as follows:
1. Designation. The shares of such series shall be designated "$200
Series A Junior Participating Preferred Stock" (herein called "Series A
Preferred Stock").
2. Number. The number of shares of Series A Preferred Stock shall be
1,000,000, which number may be increased or decreased by resolution adopted by
the Board of Directors:
<PAGE>
provided, however, that no decrease shall reduce the number of authorized shares
of Series A Preferred Stock to less than the number of shares then issued and
outstanding plus the number of shares issuable upon the exercise of outstanding
rights, options for warrants or upon conversion of outstanding securities issued
by the Company.
3. Dividends. Subject to the rights of the holders of any shares of any
other series of Preferred Stock (or any similar stock) of the Company with
respect to dividends, but in preference to the holders of shares of the Common
Stock, par value $0.01 per share (the "Common Stock"), the Company or of any
other class or series of stock of the Company ranking junior to the Series A
Preferred Stock, the holders of shares of Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, dividends for each Quarterly Dividend
Period (as hereinafter defined) equal (rounded to the nearest cent) to the
greater of (a) $20 or (b) subject to the provision for adjustment hereinafter
set forth, 200 times the aggregate per share amount of all cash dividends, and
200 times the aggregate per share amount (payable in cash, based upon the fair
market value at the time the non-cash dividend or other distribution is declared
as determined in good faith by the Board of Directors) of all non-cash dividends
or other distributions other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared (but not withdrawn) on the Common Stock during the
immediately preceding Quarterly Dividend Period, or, with respect to the first
Quarterly Dividend Period, since the first issuance of any share or fraction of
a share of Series A Preferred Stock. In the event the Company shall at any time
after September 10, 1996 (the "Rights Declaration Date") (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
As used herein "Quarterly Dividend Period" shall mean a period of three
months which shall commence on February 1, May 1, August 1 and November 1 in
each year (or in the case of original issuance, from the date of original
issuance) and shall end on and include the day next preceding the first date of
the next Quarterly Dividend Period. The first day of each such Quarterly
Dividend Period shall be the dividend payment date for the regular quarterly
dividend payable for the preceding Quarterly Dividend Period, except that the
first dividend on shares of Series A Preferred Stock shall be payable on the
quarterly payment date next succeeding the expiration of 30 days after the date
of initial issue of any shares of the Series A Preferred Stock.
Dividends on the Series A Preferred Stock, if any, shall be cumulative so
that no dividend (other than a dividend payable in Common Stock) or other
distribution shall be paid or declared or made on, and no amounts shall be
applied to the purchase or redemption of, the
<PAGE>
Common Stock or any other class of stock ranking junior to the Series A
Preferred Stock as to dividends or assets unless (i) full cumulative dividends
for all past Quarterly Dividend Periods have been paid or declared and set apart
for payment, and full cumulative dividends for then current Quarterly Dividend
Period shall have been or simultaneously therewith shall be paid and declared on
outstanding Series A Preferred Stock, and (ii) after giving effect to such
payment of dividend, other distribution, purchase or redemption, the aggregate
capital of the Company applicable to all capital stock outstanding ranking
junior to the Series A Preferred Stock as the dividends or assets plus the
consolidated surplus of the Company and its subsidiaries shall exceed the
aggregate amount payable on involuntary dissolution, liquidation or winding up
of the Company on all shares of the Series A Preferred Stock and all stock
ranking prior to on a parity with the Series A Preferred Stock as the dividends
or assets to be outstanding after the payment of such dividend, other
distribution, purchase or redemption. Determinations made with respect to the
declaration and payment of dividends and other distributions shall be made in
accordance with the provisions of the Texas Business Corporation Act, as amended
and in effect at the time (the "TBCA").
4. Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of the Series A Preferred
Stock shall, subject to the prior and superior rights of the holders of any
shares of any other series of Preferred Stock (or any similar stock) of the
Company, be entitled to receive the greater of (a) $200 per share, or (b) an
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to 200 times the aggregate amount to be distributed per share to holders
of Common Stock, plus in either instance accrued dividends to the date of
distribution, whether or not earned or declared. In the event the Company shall
at any time after the Rights Declaration Date (i) declare any dividend on Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event pursuant to clause
(b) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
No distribution shall be made to the holders of shares of Common Stock or
any other stock ranking junior to the Series A Preferred Stock upon liquidation,
distribution or winding up, unless, prior thereto, the holders of Shares of
Series A Preferred Stock shall have received the amounts set forth above. If the
assets available for distribution to holders of shares of Series A Preferred
Stock shall not be sufficient to pay in full the amounts so determined to be
payable on all shares of the Series A Preferred Stock in the event of such
voluntary or involuntary dissolution, liquidation or winding up, as the case may
be, then assets available for payment shall be distributed ratably among the
holders of the Series A Preferred Stock of all series in accordance with the
amounts so determined to be payable on the shares of each series in the event of
voluntary or involuntary dissolution, liquidation or winding up, as the case may
be, in proportion to the full preferential amounts to which they are
respectively entitled. After
<PAGE>
payment to the holders of the Series A Preferred Stock of the full preferential
amounts hereinbefore provided for, the holders of Series A Preferred Stock will
have no other rights or claims to any of the remaining assets of the Company
either upon distribution of such assets or upon dissolution, liquidation or
winding up. The sale of all or substantially all of the property of the Company
to, or the merger or consolidation of the Company into or with, any other
corporation, or the purchase or redemption by the Company of any shares of its
Preferred Stock, or its Series A Preferred Stock or its Common Stock or any
other class of its stock shall not be deemed to be a distribution of assets or a
dissolution, liquidation or winding up for the purpose of this paragraph.
5. Optional Redemption. So long as full cumulative dividends on all
outstanding shares of Series A Preferred Stock for all dividend periods ending
on or prior to the date fixed for redemption shall have been paid or declared
and set apart for payment and subject to any applicable requirements of Texas
law and the rights of the holders of any shares of any other series of Preferred
Stock (or any similar stock) of the Company, the Company shall have the option
to redeem the whole or any part of the Series A Preferred Stock at any time on
at least 30 days notice in accordance with the provisions of the procedures for
redemptions set forth in the TBCA at a redemption price equal to the greater of
(a) $200 and (b), subject to the provision for adjustment hereinafter set forth,
200 times the "current per share market price" of the Common Stock on the date
of mailing of the notice of redemption, together with unpaid accumulated
dividends to the date of such redemption. In the event the Company shall at any
time after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount to which holders of shares of Series A
Preferred Stock were otherwise entitled immediately prior to such event under
the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event. The "current per share market price" on any date shall be deemed to be
the average of the closing price per share of such Common Stock for the 10
consecutive "trading days" (as such term is hereinafter defined) immediately
prior to such date. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed or admitted to trading on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the last quoted price or, if not so quoted the
average of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ") or such other system then in use or, if on any such
date the Common Stock is not quoted by any such organization, the average of the
closing bid and
<PAGE>
asked prices as furnished by a professional market maker making a market in the
Common Stock selected by the Board of Directors of the Company. If on such date
no such market maker is making a market in the Common Stock, the fair value of
the Common Stock on such date as determined in good faith by the Board of
Directors of the Company shall be used. The term "trading day" shall mean a day
on which the principal national securities exchange on which the Common Stock is
listed or admitted to trading is open for transaction of business or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking
institutions in the State of New York are not authorized or obligated by law or
executive order to close.
6. Treasury Shares. So long as any shares of the Series A Preferred Stock
are outstanding, shares of the Series A Preferred Stock which are purchased,
redeemed or otherwise acquired by the Company shall not be reissued, or
otherwise disposed of, as shares of Series A Preferred Stock.
7. Conversion. Other than as set forth above, the Series A Preferred
Stock shall not have any conversion or exchange rights.
8. Voting Rights.
(A) Each share of Series A Preferred Stock shall entitle the holder
thereof to 200 votes on all matters submitted to a vote of the shareholders of
the Company. In the event the Company shall at any time after the Rights
Declaration Date, (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such as
the number of votes to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Series A Preferred Stock shall have no voting rights other than
the voting rights set forth herein, in the Restated Articles of Incorporation of
the Company or as otherwise provided by Texas law.
9. Consolidation, Merger, etc. In case the Company shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or converted or changed into other stock or
securities, cash and/or other property, then in any such case proper provision
shall be made so that each share of Series A Preferred Stock shall at the same
time be similarly exchanged for or converted or changed into an amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
200 times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, for which or into which each
share of Common Stock is exchanged for or converted or changed. In the event
the Company shall at any time after the Rights
<PAGE>
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
conversion or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
10. Amendment. No change shall be made in any of the rights or
preferences of the Series A Preferred Stock at the time outstanding without the
affirmative vote of at least two-thirds of the votes entitled to be cast with
respect to the shares of the Series A Preferred Stock outstanding on the record
date for such meeting in addition to any other vote, if any, as may be required
for such change under the applicable provisions of the Restated Articles of
Incorporation and the laws of the State of Texas at the time applicable
thereto."
ARTICLE FIVE
The street address of the Company's registered office is 2500 City West
Blvd., Suite 1400, Houston, Texas 77042, and the name of its registered agent at
that address is Janice K. Hartrick.
ARTICLE SIX
(A) Number. The number of Directors constituting the Board of Directors
of the Company shall be fixed from time to time by the Board of Directors by the
affirmative vote of not less than a majority of the Continuing Directors (as
defined in Article Ten) but shall not be less than three (3), subject to such
rights to elect additional Directors under such specified circumstances as may
be granted to holders of Preferred Stock,
(B) Required Vote to Elect Directors. With respect to the election of
Directors, the act of the shareholders electing the Directors shall be a vote of
the holders of a majority of the outstanding shares entitled to vote in the
election of Directors.
(C) Term. Directors shall hold office until their respective successors
shall have been elected and qualified.
(D) Removal. Directors may be removed from office, with or without cause,
only by the affirmative vote of the holders of not less than a majority of the
outstanding shares entitled to vote in the election of Directors, if notice of
the intention to act upon such matter shall have been given in the notice
calling for the meeting.
(E) Vacancies; Increase in Number of Directors. Subject to such rights
to elect Directors under specified circumstances as may be granted to holders of
Preferred Stock,
<PAGE>
newly created directorships resulting from any increase in the number of
Directors and any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other reason shall be filled solely by
the affirmative vote of a majority of the Continuing Directors, even though less
than a quorum of the Board of Directors. No decrease in the number of Directors
constituting the Board of Directors shall shorten the term of any incumbent
Director.
(F) Current Directors. The number of Directors constituting the Board of
Directors is five (5), subject to being increased or decreased as set forth
above. The names and addresses of the persons who are to serve as Directors and
their classification are:
Name Address
---- -------
T. M Hamilton 2500 City West Blvd., Suite 1400, Houston, Texas 77042
F. S. Addy 2500 City West Blvd., Suite 1400, Houston, Texas 77042
B. A. Bridgewater, Jr. 2500 City West Blvd., Suite 1400, Houston, Texas 77042
F. M. Lowther 2500 City West Blvd., Suite 1400, Houston, Texas 77042
M. P. Mallardi 2500 City West Blvd., Suite 1400, Houston, Texas 77042
ARTICLE SEVEN
To the fullest extent permitted by law, a Director shall not be liable to
the Company or its shareholders for monetary damages for any act or omission in
his capacity as a Director. Any repeal or modification of this Article shall be
prospective only and shall not adversely affect any limitation of the personal
liability of a Director existing at the time of the repeal or modification. The
provisions of this Article shall not be deemed to limit or preclude
indemnification of a Director by the Company for any liability of a Director
that has not been eliminated by the provisions of this Article.
ARTICLE EIGHT
(A) Power to Alter, Amend or Repeal Bylaws. The power to alter, amend,
suspend or repeal the Bylaws or to adopt new Bylaws shall be vested in, and
shall require the affirmative vote of not less than a majority of the Continuing
Directors (as defined in Article Ten); provided that any Bylaw or amendment
thereto as adopted by the Board of Directors may be altered, amended, suspended
or repealed by the affirmative vote of the holders of not less than 66 2/3% of
the outstanding Voting Stock (as defined in Article Ten) or a new Bylaw in lieu
thereof may be adopted by vote of such shareholders. No Bylaw that has been
altered, amended or adopted by such a vote of the shareholders may be altered,
amended or repealed by vote of the Directors until two years shall have expired
since such action by such vote of shareholders.
(B) Bylaw Stock Ownership Restrictions. The Board of Directors shall
have the power and authority, from time to time, to adopt, alter or amend the
Bylaws to add or amend
<PAGE>
such provisions as in their judgment may be necessary or appropriate to ensure
that the Company and its shareholders satisfy the citizenship or other
requirements imposed by any federal or state law relating to the ownership,
possession or leasing of gas, oil or other minerals, land, vessels or any other
property, licenses or rights of any nature whatsoever in which the Company or
any of its subsidiaries may have or hereafter have, or seek to have, any right
or interest. Without limiting such general powers, the Board of Directors shall
have the power and authority, from time to time, to adopt, alter or amend the
Bylaws to add or amend provisions that for such purpose impose restrictions on
the transfer or registration of transfer of the shares of the Company, including
without limitation restrictions that:
(1) obligate the holders of the restricted shares to offer to the
Company or to any other holders of shares of the Company or to any other
person or to any combination of the foregoing, a prior opportunity, to be
exercised within a reasonable time, to acquire the restricted shares;
(2) provide that the Company or the holders of any class of shares
of the Company must consent to any proposed transfer of the restricted
shares or approve the proposed transferee of the restricted shares before
the transfer may be effected;
(3) prohibit the transfer of the restricted shares to designated
persons or classes of persons; or
(4) maintain any tax or other status or advantage to the Company.
ARTICLE NINE
(A) No Shareholder Written Consent Action. Any action required or
permitted to be taken by the shareholders of the Company must be effected at a
duly called annual or special meeting of such holders and may not be effected by
any consent in writing by such holders.
(B) Special Meetings of Shareholders. Subject to such rights to call
special meetings of shareholders under specified circumstances as may be granted
to holders of Preferred Stock, special meetings of shareholders may be called
only by the Chairman of the Board or the President of the Company, at the
request in writing or by vote of not less than a majority of the Continuing
Directors (as defined in Article Ten) or at the request of the holders of not
less than 50% of the outstanding shares entitled to vote at the meeting, and not
by any other persons. Any request for a special meeting made by the Board of
Directors shall state the purpose or purposes of the proposed meeting, and
business transacted at the meeting shall be confined to the objects stated in
the notice of the meeting.
<PAGE>
ARTICLE TEN
In addition to any other vote of shareholders required by the TBCA, the
Articles of Incorporation or otherwise, the affirmative vote of the holders of
not less than 80% of the outstanding shares of "Voting Stock" (as hereinafter
defined) of the Company, including the affirmative vote of the holders of not
less than 50% of the outstanding shares of Voting Stock not "Beneficially
Owned"(as hereinafter defined), directly or indirectly, by any "Related Person"
(as hereinafter defined), shall be required for the approval or authorization of
any "Business Combination" (as hereinafter defined) in which any Related Person
has an interest (except proportionately as a shareholder of the Company);
provided, that the 50% voting requirement referred to above shall not be
applicable if the Business Combination is approved by the affirmative vote of
the holders of not less than 90% of the outstanding shares of Voting Stock;
provided further that the 80% requirement referred to above shall not be
applicable if:
(1) The Board of Directors by a vote of not less than a majority of
the "Continuing Directors" (as hereinafter defined) then holding office (a)
expressly approved in advance the acquisition of outstanding shares of
Voting Stock that resulted in the Related Person becoming a Related Person
or (b) approved the Business Combination prior to the Related Person
involved in the Business Combination having become a Related Person;
(2) The Business Combination is solely between the Company and
another corporation, 100% of the Voting Stock of which is owned, directly
or indirectly, by the Company; or
(3) All of the following conditions have been met: (a) the Business
Combination is a merger or consolidation, the consummation of which is
proposed to take place within one (1) year after the date of the
transaction that resulted in the Related Person becoming a Related Person
and the cash or fair market value of the property, securities or other
consideration to be received per share by holders of Common Stock in the
Business Combination is not less than the highest per share price (with
appropriate adjustments for recapitalizations and for stock splits, reverse
stock splits and share dividends, and including any brokerage commissions,
transfer taxes and soliciting dealer fees) paid by the Related Person in
acquiring any of its holdings of Common Stock; (b) the consideration to be
received by such holders is either cash or, if the Related Person shall
have acquired the majority of its holdings of Common Stock with a form of
consideration other than cash, the same form of consideration with which
the Related Person acquired such majority; (c) after such Related Person
has become a Related Person and prior to consummation of such Business
Combination: (i) except as approved by a majority of the "Continuing
Directors" (as hereinafter defined), there shall have been no failure to
declare and pay at the regular date therefor any full quarterly dividends
(whether or not cumulative) on any outstanding shares of Preferred Stock,
(ii) there shall have been no reduction in the annual rate of dividends
paid per share on the Company's Common Stock (adjusted as appropriate for
recapitalizations
<PAGE>
and for stock splits, reverse stock splits and share dividends) except as
approved by a majority of the Continuing Directors, (iii) such Related
Person shall not have become the Beneficial Owner of any additional shares
of Voting Stock of the Company except as part of the transaction that
resulted in such Related Person becoming a Related Person, and (iv) such
Related Person shall not have received the benefit, directly or indirectly
(except proportionately as a shareholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax credits or
other tax advantages provided by the Company, whether in anticipation of or
in connection with such Business Combination or otherwise; and (d) a proxy
statement, that complies with the requirements of the "Exchange Act" (as
hereinafter defined) and the rules and regulations thereunder (or any
subsequent provisions replacing the Exchange Act, rules or regulations),
shall be mailed to all shareholders of record not less than forty (40) days
prior to the consummation of the Business Combination for the purpose of
soliciting shareholder approval of the Business Combination and shall
contain at the front thereof, in a prominent place, any recommendations as
to the advisability (or inadvisability) of the Business Combination that
the Continuing Directors, or any of them, may choose to state and, if
deemed advisable by a majority of the Continuing Directors, an opinion of a
reputable investment banking firm as to the fairness (or unfairness) of the
terms of such Business Combination from the point of view of the remaining
shareholders of the Company (such investment banking firm to be selected by
a majority of the Continuing Directors and to be paid a reasonable fee for
its services by the Company upon receipt of such opinion).
For the purposes of this Article:
"Affiliate," when used to indicate a relationship to a specified
person, shall mean a person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common
control with, the specified person.
"Associate," when used to indicate a relationship with a specified
person, shall mean (a) any corporation, partnership or other organization
of which the specified person is an officer or partner or is, directly or
indirectly, the Beneficial Owner of five percent or more of any class of
equity securities, (b) any trust or other estate in which the specified
person has a substantial beneficial interest or as to which the specified
person serves as trustee or in a similar fiduciary capacity, (c) any
relative or spouse of the specified person, or any relative of that spouse,
who has the same home as the specified person or who is a director or
officer of the Company or any of its parents or Subsidiaries, and (d) any
person who is a director or officer of the specified person or any of its
parents or subsidiaries (other than the Company or any Subsidiary of the
Company).
"Beneficial Owner" and "Beneficially Own," when used with reference
to any Voting Stock, shall mean
<PAGE>
(a) that the person or any of its Affiliates or Associates
beneficially owns, directly or indirectly, within the meaning of Rule 13d-3
under the Exchange Act as in effect on September 10, 1996;
(b) that the person or any of its Affiliates or Associates has (i)
the right to acquire (whether that right is exercisable immediately or only
after the passage of time and whether that right is contingent or absolute)
pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote pursuant to any agreement, arrangement
or understanding (but neither that person nor any such Affiliate or
Associate shall be deemed to be the Beneficial Owner of any shares of
Voting Stock solely by reason of a revocable proxy granted with respect to
shares for a particular meeting of shareholders pursuant to a public
solicitation of proxies for that meeting, if neither that person nor any
such Affiliate or Associate is otherwise deemed the Beneficial Owner of
those shares); or
(c) that are beneficially owned, directly or indirectly, within the
meaning of Rule 13d-3 under the Exchange Act as in effect on September 10,
1996 by any other person with which the person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose
of acquiring, holding, voting (other than solely by reasons of a revocable
proxy given in response to public proxy or consent solicitation made
pursuant to the applicable rules under the Exchange Act) or disposing of
any shares of Voting Stock; provided, however, that in the case of any
employee stock ownership or similar plan of the Company or of any
Subsidiary in which the beneficiaries thereof possess the right to vote any
shares of Voting Stock held by that plan, no such plan and no trustee with
respect thereto (or any Affiliate of that trustee), solely by reason of
that capacity as trustee, shall be deemed for the purposes hereof to
Beneficially Own any shares of Voting Stock held under any such plan.
"Business Combination" shall mean (a) any merger, consolidation or
share exchange involving the Company or a Subsidiary, (b) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of all or any
"Substantial Part" (as hereinafter defined) of the assets either of the
Company (including without limitation any voting securities of a
Subsidiary) or of a Subsidiary, (c) any sale, lease, exchange, transfer or
other disposition of assets having a fair market value of $5,000,000 or
more to the Company or a Subsidiary, (d) the issuance or transfer by the
Company or a Subsidiary (other than by way of a pro rata distribution to
all shareholders) of any securities of the Company or a Subsidiary, (e) any
reclassification of securities (including any reverse stock split) or
recapitalization by the Company, the effect of which would be to increase
the voting power (whether or not currently exercisable) of a Related
Person, (f) any plan or proposal for the liquidation or dissolution of the
Company, (g) any series or combination of transactions having, directly or
indirectly, the same effect as any of the foregoing, and (h) any agreement,
contract or other arrangement providing, directly or indirectly, for any of
the foregoing.
<PAGE>
"Continuing Director" shall mean any member of the Board of Directors
who is not an Affiliate or Associate of a Related Person and who was a
member of the Board of Directors immediately prior to the time that the
Related Person became a Related Person, and any successor to a Continuing
Director who is not an Affiliate or Associate of the Related Person and is
recommended to succeed a Continuing Director by a majority of Continuing
Directors then serving as members of the Board of Directors. Provisions
hereof requiring approval by Continuing Directors shall not be deemed
satisfied unless there is at least one Continuing Director.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"other consideration to be received," for purposes of subparagraph
(3) of this Article, shall include without limitation Common Stock retained
by the Company's existing public shareholders in the event of a Business
Combination in which the Company is the surviving corporation.
"person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, limited
liability company, corporation, company, institution, entity, party or
governmental authority.
"Related Person" shall mean and include any person or "group" of
persons (as such term is used in Regulation 13D-G under the Exchange Act),
and each Affiliate and Associate of any such person, that individually or
collectively is the Beneficial Owner in the aggregate of not less than 10%
of the outstanding Voting Stock, other than the Company or any employee
benefit plan(s) sponsored by the Company.
"Subsidiary" shall mean, with respect to any person, a person in
which the person directly or indirectly owns at least a majority of the
outstanding voting securities or other equity interests having the power,
under ordinary circumstances, to elect a majority of the directors, or
otherwise to direct the management and policies, of such person, and any
person that is affiliated with such person.
"Substantial Part" shall mean more than 5% of the book value of the
total assets of the person in question as of the end of the most recently
completed fiscal year or, in the case of Voting Stock of a Subsidiary, 10%
or more of the outstanding shares of such Subsidiary's Voting Stock.
"Voting Stock" shall mean all outstanding shares of capital stock of
the Company or other person entitled to vote generally in the election of
Directors, considered for the purposes of this Article as a single class.
If the Company has Voting Stock entitled to more or less than one vote for
any such share, each reference in this Article to a proportion or
percentage of shares of Voting Stock shall be calculated by
<PAGE>
reference to the portion or percentage of votes entitled to be cast by the
holders of such shares.
For the purpose of this Article, a majority of the Continuing Directors
shall have the power to determine, on the basis of information known to them,
of: (a) the number of shares of Voting Stock of which any person is the
Beneficial Owner, (b) whether a person is a Related Person, (c) whether a person
is an Affiliate or Associate of another person, (d) whether a person has an
agreement, arrangement or understanding with another as to the matters referred
to in the definition of Beneficial Owner herein, (e) whether the assets subject
to any Business Combination constitute a Substantial Part, (f) whether any
Business Combination is one in which a Related Person has an interest (except
proportionately as a shareholder of the Company), (g) the fair market value of
property other than cash or stock, (h) the highest per share price in accordance
with this Article, (i) whether the applicable conditions set forth in this
Article have been met with respect to any Business Combination, and (j) such
other matters with respect to which a determination is required under this
Article.
A majority of the Continuing Directors then in office shall have the right
to demand that any person who those Directors reasonably believe is a Related
Person (or holds of record shares of Voting Stock Beneficially Owned by any
Related Person) supply the Company with complete information about (a) the
record owner(s) of all shares Beneficially Owned by the persons who those
Directors reasonably believe is a Related Person, (b) the number of, and class
or series of, shares Beneficially Owned by any such person who those Directors
reasonably believe is a Related Person and held of record by each such record
owner and the number(s) of the stock certificates(s) evidencing such shares and
(c) any other factual matter relating to the applicability or effect of this
Article as may reasonably be requested of such person, and that person shall
furnish that information within ten days after receipt of the demand.
ARTICLE ELEVEN
The provisions set forth in Articles Six, Eight and Nine hereof may not be
amended, altered, changed, repealed or rescinded in any respect unless such
action is approved by the affirmative vote of the holders of not less than 75%
of all shares of "Voting Stock" (as defined in Article Ten), considered for
purposes of this Article as one class; the amendment, alteration, change, repeal
or recision of this Article and Article Ten hereof shall require both such 75%
vote and the affirmative vote of the holders of not less than 50% of such Voting
Stock, excluding the vote of any shares owned by a "Related Person" (as defined
in Article Ten), if any (such 50% voting requirement shall not be applicable if
such amendment, alteration, change, repeal or recision is approved by the
affirmative vote of the holders of not less than 90% of such Voting Stock). The
voting requirement contained in this Article and in Articles Six, Eight, Nine
and Ten hereof shall be in addition to voting requirements imposed by law, other
provisions of these Articles of Incorporation or any designation of preferences
in favor of certain classes or series of classes of shares of capital stock of
the Company.
<PAGE>
EXECUTED as of the 24th day of February, 1998.
EEX CORPORATION
By: (s) J. K. Hartrick
----------------------------
J. K. Hartrick
Senior Vice President,
General Counsel and
Secretary
<PAGE>
BYLAWS OF EEX CORPORATION
A TEXAS CORPORATION
PURPOSE AND SCOPE OF BYLAWS
These Bylaws shall constitute the private laws of EEX CORPORATION, a
corporation duly incorporated under the laws of the State of Texas (herein
called the "Company"), for the administration and regulation of the affairs of
the Company.
In the event any provision of these Bylaws is or may be in conflict with
any applicable law of the United States or the State of Texas, or of any order,
rule, regulation, decree or judgment of any governmental body or power or court
having jurisdiction over the Company, or over the subject matter to which such
provision of these Bylaws applies or may apply, such provision of these Bylaws
shall be inoperative to the extent only that the operation thereof unavoidably
conflicts with such law or order, rule, regulation, decree or judgment, and
shall in all other respects be in full force and effect.
ARTICLE I
Offices
Section 1. The registered office of the Company shall be at such place in
the State of Texas, and the registered agent of the Company at the registered
office shall be such person or corporation as the Board of Directors may from
time to time designate.
Section 2. The Company may also have offices at such other places both
within and without the State of Texas as the Board of Directors may from time to
time determine or the business of the Company may require.
ARTICLE II
Meetings of Shareholders
Section 1. All meetings of the shareholders shall be held at the
registered office of the Company or at such other place either within or without
the State of Texas as shall be designated from time to time by the Board of
Directors.
Section 2. The annual meeting of shareholders shall be held at such hour
and on such date in May of each year as the Board of Directors may from time to
time designate for the purpose of the election of Directors and the transaction
of such other business as may properly be brought before the meeting.
Section 3. Special meetings of the shareholders may only be called by the
Chairman of the Board or the President, at the request in writing or by vote of
not less than a majority of the
<PAGE>
Continuing Directors (as defined in Article Ten of the Restated Articles of
Incorporation of the Company) of the Board of Directors, or the holders of not
less than 50% of all the outstanding shares entitled to vote at the meetings,
and not by any other persons. Business transacted at all special meetings shall
be confined to the subjects stated in the notice of meeting.
Section 4. Written or printed notice stating the place, day and hour of
the meeting, and, in case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than ten (10) nor more
than sixty (60) days before the date of the meeting, either personally or by
mail, by or at the direction of the Chairman, the Corporate Secretary, or the
officer or person calling the meeting, to each shareholder of record entitled to
vote at such meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail addressed to the shareholder at his
address as it appears on the stock transfer books of the Company, with postage
thereon prepaid.
Section 5. The officer or agent having charge of the stock transfer books
for shares of the Company shall make, at least ten (10) days before each meeting
of shareholders, a complete list of the shareholders entitled to vote at such
meeting or any adjournment thereof, arranged in alphabetical order, with the
address of and the number of shares held by each, which list, for a period of
ten (10) days prior to such meeting, shall be kept on file at the registered
office of the Company and shall be subject to inspection by any shareholder at
any time during usual business hours. Such list shall also be produced and kept
open at the time and place of the meeting and shall be subject to the inspection
of any shareholder during the whole time of the meeting. The original stock
transfer books shall be prima-facie evidence as to who are the shareholders
entitled to examine such list or transfer books or to vote at any meeting of
shareholders.
Section 6. The holders of a majority of the shares issued and outstanding
and entitled to vote thereat, present in person or represented by written proxy,
shall constitute a quorum at all meetings of the shareholders for the
transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 7. Each outstanding share, of any class, shall be entitled to as
many votes per share as the Articles of Incorporation shall provide, on each
matter submitted to a vote at a meeting of shareholders, except to the extent
that the voting rights of the shares of any class or classes are limited or
denied by the Articles of Incorporation or these Bylaws. The vote for the
election of Directors and, upon demand by any shareholder, the vote upon any
question before the meeting shall be by ballot. Cumulative voting is expressly
prohibited.
Section 8. At any meeting of the holders, every shareholder having the
right to vote shall be entitled to vote in person or by proxy executed in
writing by such shareholder or by his duly authorized attorney-in-fact. No proxy
shall be valid after eleven (11) months from the date of its execution unless
otherwise provided in the proxy. All proxies shall be revocable unless expressly
provided therein to be irrevocable and are coupled with an interest and shall be
filed with the
<PAGE>
Corporate Secretary of the Company prior to or at the time of the meeting at
which they are to be voted.
Section 9. When a quorum is present at any meeting, matters brought before
the meeting shall be determined by the shareholders in the following manner: (a)
with respect to any matter, other than the election of Directors or a matter for
which the affirmative vote of a specified portion of the shares entitled to vote
is required by the statutes or the Articles of Incorporation, the act of the
shareholders shall be the affirmative vote of the holders of a majority of the
shares entitled to vote on, and voted for or against, that matter at a meeting
of shareholders at which a quorum is present and (b) with respect to the
election of Directors, the act of the shareholders electing the Directors shall
be a majority of all outstanding shares entitled to vote in the election of
Directors, unless in each case the question is one upon which, by express
provision of the statutes or of the Articles of Incorporation or of these
Bylaws, a different vote is required, in which case such express provision shall
govern and control the decision of such question. The shareholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
Section 10. The Chairman shall preside at all meetings of the
shareholders. In his absence, the President or an officer of the Company
designated by the Board of Directors shall preside and perform the duties of the
Chairman at such meeting. He shall appoint two inspectors of voting to serve at
each such meeting. Before acting at any meeting, the inspectors shall be sworn
faithfully to execute their duties with strict impartiality and according to the
best of their ability. The inspectors shall determine the number of shares
outstanding, the voting power of each, the shares represented at the meeting,
the existence of a quorum, the qualification of the voters, the authenticity,
validity and effect of proxies, receive votes and ballots, hear and determine
all challenges and questions in any way arising in connection with the vote,
count and tabulate all votes and determine and announce the result of the
voting.
Section 11. At an annual meeting of the shareholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board, otherwise properly brought before the meeting by or at the direction
of the Board, or otherwise properly brought before the meeting by a shareholder.
In addition to any other applicable requirements, for business to be properly
brought before an annual meeting by a shareholder, the shareholder must have
given timely notice thereof in writing to the Corporate Secretary. To be timely,
a shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company, not less than fifty (50) days nor
more than seventy-five (75) days prior to the meeting; provided, however, that
in the event that less than sixty-five (65) days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be so received not later than the close of
business on the 15th day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made. A
shareholder's notice to the Corporate Secretary shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and record address of the shareholder proposing such business, (iii) the class
and number of shares of the Company which are beneficially
<PAGE>
owned by the shareholder, and (iv) any material interest of the shareholder in
such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures set
forth in this Section 11; provided, however, that nothing in this Section 11
shall be deemed to preclude discussion by any shareholder of any business
properly brought before the annual meeting in accordance with said procedure.
The chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 11, and if he should
so determine, he shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
Section 12. Only persons who are nominated in accordance with the
following procedures shall be eligible for election as Directors. Nominations of
persons for election to the Board of Directors of the Company may be made at a
meeting of shareholders by or at the direction of the Board of Directors by any
nominating committee or person appointed by the Board or by any shareholder of
the Company entitled to vote for the election of Directors at the meeting who
complies with the notice procedures set forth in this Section 12. Such
nominations, other than those made by or at the direction of the Board, shall be
made pursuant to timely notice in writing to the Corporate Secretary. To be
timely, a shareholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Company not less than fifty (50) days nor
more than seventy-five (75) days prior to the meeting; provided, however, that
in the event that less than sixty-five (65) days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be so received not later than the close of
business on the 15th day following the date on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such shareholder's
notice to the Corporate Secretary shall set forth (a) as to each person whom the
shareholder proposes to nominate for election or re-election as a Director, (i)
the name, age, business address and residence address of the person, (ii) the
principal occupation or employment of the person, (iii) the class and number of
shares of capital stock of the Company which are beneficially owned by the
person, and (iv) any other information relating to the person that is required
to be disclosed in solicitations for proxies for election of Directors pursuant
to Regulation 14A under the Securities Exchange Act of 1934 as amended; and (b)
as to the shareholder giving the notice (i) the name and record address of
shareholder and (ii) the class and number of shares of capital stock of the
Company which are beneficially owned by the shareholder. The Company may require
any proposed nominee to furnish such other information as may reasonably be
required by the Company to determine the eligibility of such proposed nominee to
serve as Director of the Company. No person shall be eligible for election as a
Director of the Company unless nominated in accordance with the procedures set
forth herein.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
<PAGE>
ARTICLE III
Directors
Section 1. The powers of the Company shall be exercised under the
authority of, and the business and affairs of the Company shall be managed under
the direction of, its Board of Directors who may do all such lawful acts and
things as are not by statute or by the Articles of Incorporation or by these
Bylaws directed or required to be exercised or done by the shareholders.
Section 2. The number of Directors constituting the board of Directors of
the Company shall be fixed from time to time by the Board of Directors by the
affirmative vote of not less than a majority of the Continuing Directors (as
defined in Article Ten of the Restated Articles of Incorporation of the
Company), but shall not be less than three (3), subject to such rights to elect
additional Directors under such specified circumstances as may be granted to
holders of Preferred Stock. Directors need not be shareholders or residents of
the State of Texas. A person shall be ineligible to be a Director of the
Company after the date of the annual meeting of shareholders of the Company that
occurs after such person's seventieth birthday. Unless he shall resign or
become ineligible, each Director shall hold office until his successors shall be
elected and shall qualify.
The Directors shall be classified with respect to the time for which they
shall severally hold office by dividing them into three classes, which classes
shall consist of an equal, or as near to equal as possible, number of Directors.
At the 1998 annual meeting of shareholders, the Director or Directors of the
first class shall be elected for a term expiring at the next annual meeting of
shareholders to be held in 1999; the Director or Directors of the second class
shall be elected for a term expiring at the next annual meeting of shareholders
to be held in 2000; and the Director or Directors of the third class shall be
elected for a term expiring at the next annual meeting of shareholders to be
held in 2001. At each annual meeting, commencing with the annual meeting in
1998, the successor or successors to the class of directors whose term shall
expire in that year shall be elected to hold office for the term of three years,
so that the term of one class of Directors shall expire in each year. Any
increase or decrease in the number of Directors constituting the Board of
Directors shall be apportioned among the classes so as to maintain the number of
directors in each class as near as possible to one-third the whole number of
Directors as so adjusted.
Section 3. Any Director may resign at any time either by oral tender of
resignation at any meeting of the Board of Directors or by giving written notice
thereof to the Corporate Secretary. Resignations shall take effect when tendered
or at the time specified in the tender and, unless otherwise specified, the
acceptance of a resignation shall not be necessary to make it effective.
<PAGE>
Section 4. Any Director may be removed only for cause at any special
meeting of the shareholders by the affirmative vote of the holders of record of
not less than 66-2/3% of the shares then entitled to vote at an election of
Directors, if notice of the intention is act upon such matter shall have been
given in the notice calling for such meeting. Any vacancy occurring in the
Board of Directors shall be filled by the affirmative vote of a majority of the
remaining Directors even though such remaining Directors shall be less than a
quorum of the Board of Directors; provided that the Board of Directors may not
fill more than two such directorships between annual meetings of shareholders.
A Director elected to fill a vacancy shall hold office for the remaining term of
the class to which such directorship is assigned. Any directorship to be filled
by reason of an increase in the number of Directors as provided in Section 2
hereof shall be filled solely by the affirmative vote of not less than a
majority of the continuing Directors for a term of office continuing until the
next annual meeting of shareholders.
Section 5. The Board of Directors, by resolution adopted by a majority of
the full Board of Directors, may designate from among its members one or more
committees, each of which shall be comprised of one or more of its members, and
may designate one or more of its members as alternate members of any committee,
who may, subject to any limitations imposed by the Board of Directors, replace
absent or disqualified members at any meeting of that committee. Any such
committee, to the extent provided in such resolutions or in the Articles of
Incorporation or the Bylaws, shall have and may exercise all of the authority of
the Board of Directors, provided that no committee of the Board of Directors
shall have the authority of the Board of Directors in reference to: (1) amending
the Articles of Incorporation, except that a committee may, to the extent
provided in the resolution designating that committee or in the Articles of
Incorporation or the Bylaws, exercise the authority of the Board of Directors
vested in it in accordance with Article 2.13 of the Texas Business Corporation
Act ("Act"); (2) proposing a reduction of the stated capital of the Company in
the manner permitted by Article 4.12 of the Act; (3) approving a plan of merger
or share exchange of the Company; (4) recommending to the shareholders the sale,
lease, or exchange of all or substantially all of the property and assets of the
Company otherwise than in the usual and regular course of its business; (5)
recommending to the shareholders a voluntary dissolution of the Company or a
revocation thereof, (6) amending, altering, or repealing the Bylaws of the
Company or adopting new Bylaws of the Company; (7) filling vacancies in the
Board of Directors; (8) filling vacancies in or designating alternate members of
any such committee; (9) filling any directorship to be filled by reason of an
increase in the number of Directors; (10) electing or removing officers of the
Company or members or alternate members of any such committee; (11) fixing the
compensation of any member o alternate members of such committee; or (12)
altering or repealing any resolution of the Board of Directors that by its terms
provides that it shall not be so amendable or repealable; and, unless such
resolution designating a particular committee, the Articles of Incorporation, or
the Bylaws expressly so provide, no committee of the Board of Directors shall
have the authority to authorize a distribution or to authorize the issuance of
shares of the Company.
<PAGE>
MEETINGS OF THE BOARD OF DIRECTORS
Section 6. The Directors of the Company may hold their meetings, both
regular and special, either within or without the State of Texas.
Section 7. The first meeting of each newly elected Board of Directors
shall be held without further notice immediately following the annual meeting of
shareholders, and at the same place, unless by unanimous consent of the
Directors then elected and serving such time or place shall be changed.
Section 8. Regular meetings of the Board of Directors may be held with or
without notice at such time and place as shall from time to time be determined
by the Board of Directors.
Section 9. Special meetings of the Board of Directors may be called on
twenty-four (24) hours' notice to each Director, or such shorter period of time
as the person calling the meeting deems appropriate in the circumstances, either
personally, or by mail, or by telegram; special meetings shall be called by the
Chairman or, in the event of the inability of the Chairman to act, the President
or the Corporate Secretary in like manner and on like notice on the written
request of two Directors. Neither the business to be transacted at, nor the
purpose of, any special meeting need be specified in a notice or waiver of
notice.
Section 10. At all meetings of the Board of Directors, the presence of a
majority of the number of Directors constituting the Board of Directors shall
constitute a quorum for the transaction of business and the act of a majority of
the Directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors. Any action required or permitted to be taken at a
meeting of the Board of Directors may be taken without a meeting if a consent in
writing, setting forth the action so taken, is signed by all members of the
Board of Directors. If a quorum shall not be present at any meeting of the
Directors, the Directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present.
Section 11. The Board of Directors shall have authority to establish, from
time to time, the amount of compensation which shall be paid to its members for
their services as Directors.
ARTICLE IV
Notices
Section 1. Whenever under the provisions of the statutes or of the
Articles of Incorporation or of these Bylaws, notice is required to be given to
any Director or shareholder, and no provision is made as to how such notice
shall be given, it shall not be construed to mean notice, but any such notice
may be given in writing, by mail, postage prepaid, addressed to such Director or
shareholder at such address as appears on the books of the Company. Any notice
required or permitted to be given by mail shall be deemed to be given at the
time when the same shall be thus deposited in the United States mails as
aforesaid.
<PAGE>
Section 2. Whenever any notice is required to be given to any shareholder
or Director of the Company under the provisions of the statutes or of the
Articles of Incorporation, or of these Bylaws, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether before or after
the time stated in such notice, shall be equivalent to the giving of such
notice. Attendance of a Director at a meeting shall constitute a waiver of
notice of such meeting, except when a Director attends a meeting for the express
purpose, in writing filed at the meeting, of objecting to the transaction of any
business on the grounds that the meeting is not lawfully called or held.
ARTICLE V
Officers
Section 1. The officers of the Company shall be a Chairman, a President,
one or more Executive Vice Presidents, Senior Vice Presidents or Vice
Presidents, a General Counsel, a Controller, a Corporate Secretary and a
Treasurer, all of whom shall be elected by the Board of Directors. Any two or
more offices may be held by the same person. Each such officer shall have such
authority and perform such duties in the management of the Company as may be
determined by resolution of the Board of Directors.
Section 2. The Board of Directors may elect or appoint such other officers
and agents as it shall deem necessary, who shall hold their offices for such
term and who shall have such authority and perform such duties as may be
prescribed by the Board of Directors or the Chairman. The power to appoint such
other officers and agents may be delegated by the Board of Directors to the
Chairman to the extent the Board may delineate by resolution.
Section 3. Each officer of the Company shall hold office until his
successor is chosen and qualified in his stead or until his death or until his
resignation, retirement or removal from office. Any officer or agent elected or
appointed by the Board of Directors may be removed by the Board of Directors
whenever in its judgment the best interests of the Company will be served
thereby, but such removal shall be without prejudice to the contract rights, if
any, of the person so removed. Election or appointment of an officer or agent
shall not of itself create contract rights.
Section 4. The Chairman shall be the chief executive officer of the
Company. He shall, subject to the direction and control of the Board of
Directors, be their representative and medium of communication. He shall see
that all orders, resolutions and policies adopted by the Board of Directors are
carried into effect. He shall preside at all meetings of shareholders and at all
meetings of the Board of Directors. He shall be in complete charge with
attendant responsibility and accountability of the entire Company and its
affairs.
Section 5. The President shall be the chief operating officer of the
Company. He shall, subject to the direction of the Chairman, have responsibility
for such operations and functions assigned to him; and in the absence of the
Chairman, shall preside at all meetings of the shareholders and at all meetings
of the Board of Directors.
<PAGE>
Section 6. Each Executive Vice President shall have such powers and
responsibilities, and shall perform such duties, as delineated by the Board or
by the Chairman. They shall be directly responsible to such officer as the
Chairman may from time to time prescribe.
Section 7. The Senior Vice President, Chief Financial Officer, shall have
such powers and responsibilities and shall perform such duties, as delineated by
the Board of Directors or by the Chairman. He shall be responsible to the
Chairman in said performance.
Section 8. Other Senior Vice Presidents shall have such powers and
responsibilities, and shall perform such duties, as delineated by the Board or
by the Chairman. They shall be directly responsible to such officer as the
Chairman may from time to time prescribe.
Section 9. The General Counsel shall have general control over all matters
of a legal nature concerning the Company and shall perform such duties as
delineated by the Board or by the Chairman. He shall be directly responsible to
the Chairman in said performance.
Section 10. Each Vice President shall have such powers and
responsibilities, and shall perform such duties, as may be delineated by the
Board or the Chairman. They shall be directly responsible to such officer as the
Chairman may from time to time prescribe.
Section 11. The Controller shall be in general control of the accounts of
the Company, shall be responsible for the making of adequate audits, shall
prepare and interpret required accounting, financial and statistical statements,
and shall be directly responsible to such officer and perform such other duties
as the Board or Chairman may from time to time prescribe.
Section 12. The Corporate Secretary shall attend all meetings of the Board
of Directors and shareholders and act as secretary thereof and shall record all
votes and the minutes of all proceedings of the Board of Directors and
shareholders in a book for that purpose maintained and kept in his custody. He
shall keep in his custody the seal of the Company and shall in general perform
all the duties incident to the office of Secretary of a Company. He shall act as
Transfer Agent of the Company and/or Registrar of its capital stock and other
securities; provided that the Board of Directors may by resolution appoint one
or more other persons or corporations as Transfer Agents and/or Registrars or as
Co-Transfer Agents and/or Co-Registrars. He shall be directly responsible to
such officer and shall perform such other duties as the Board or Chairman may
from time to time prescribe.
Section 13. The Treasurer shall have custody of all the funds and
securities of the Company and shall keep full and accurate accounts of receipts
and disbursements. He may endorse checks, notes and other obligations on behalf
of the Company for collection and shall deposit the same, together with all
monies and other valuable effects, to the credit of the Company in banks or
depositories as the Board of Directors may designate by resolution or as may be
established in accordance with Article VIII of these Bylaws. He shall be
directly responsible to such officer as the Chairman may from time to time
designate and shall perform all duties incident to the office of Treasurer of a
Company or as the Board or Chairman shall designate.
<PAGE>
Section 14. The Board of Directors may appoint one or more Assistant
Corporate Secretaries, Assistant Treasurers and Assistant Controllers and such
other appointive officers as may be appropriate and required. They shall be
directly responsible to such officer and shall perform such duties as the Board
or Chairman may from time to time designate.
ARTICLE VI
Certificates Representing Shares
Section 1. The shares of stock of the Company shall be deemed personal
estate, and shall be transferable only on the books of the Company in such
manner as these Bylaws prescribe.
Section 2. Every shareholder in the Company shall be entitled to have a
certificate or certificates representing the number of shares owned by him. The
certificates of shares of stock of the Company shall be numbered and shall be
entered in the books of the Company as they are issued. They shall exhibit the
holder's name and number of shares, and shall be signed by the Chairman, the
President or a Vice President, and the Treasurer or an Assistant Treasurer and
bear the corporate seal; but the signatures of such officers and the seal of the
Company upon such certificates may be facsimiles, engraved or printed where such
certificate is signed by a duly authorized Transfer Agent or Co-Transfer Agent
and a Registrar or Co-Registrar.
Section 3. The Board of Directors may make such rules and regulations as
it may deem expedient concerning the issue, transfer, conversion, and
registration of certificates for shares of the capital stock of the Company.
Section 4. The Board of Directors may direct a new certificate
representing shares to be issued in place of any certificate theretofore issued
by the Company alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate to be lost or
destroyed. When authorizing such issue of a new certificate, the Board of
Directors, in its discretion and as a condition precedent to the issuance
thereof, may require the owner of such lost or destroyed certificate, or his
legal representative, to advertise the same in such manner as it shall require
and/or give the Company a bond in such form, in such sum, and with such surety
or sureties as it may direct as indemnity against any claim that may be made
against the Company and its Transfer Agents and Registrars and its Co-Transfer
Agents and Co-Registrars with respect to the certificate alleged to have been
lost or destroyed.
Section 5. Transfers of shares of stock shall be made on the books of the
Company only by the person named in the certificate or by attorney, lawfully
constituted in writing, and upon surrender of the certificate therefor.
Section 6. The Board of Directors may close the stock transfer books of
the Company for a period not to exceed sixty (60) days for the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive payment of any
distribution and share dividend, or in order to make a determination of
shareholders for any purpose, provided that if such books shall be closed for
the purpose of determining
<PAGE>
shareholders entitled to notice of or to vote at a shareholders' meeting, such
books shall be closed for at least ten (10) days immediately preceding such
meeting. In lieu of so closing the stock transfer books, the Board of Directors
may fix a date in advance, not exceeding sixty (60) days preceding the date of
any meeting of shareholders, or the date for the payment of any distribution and
share dividend or the date for the allotment of rights, or the date when any
change or conversion or exchange of capital stock shall go into effect, as a
record date for the respective determination of the shareholders entitled to
notice of, and to vote at, any such meeting, or entitled to receive payment of
any such distribution and share dividend, or to any such allotment of rights, or
to exercise rights in respect of any such change, conversion or exchange of
capital stock and in such case such shareholders and only such shareholders as
shall be shareholders of record on the date so fixed shall be entitled to such
notice of, and to vote at, such meeting, or to receive payment of such
distribution and share dividend, or to receive such allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares of stock on the books of the Company after any such record date fixed as
aforesaid. In the absence of any designation with respect thereto by the Board
of Directors, the date upon which the notice of a meeting is mailed or
resolutions declaring a distribution and share dividend are adopted shall be the
record date for such determination in regard to meetings of shareholders or
declarations of distributions and share dividends.
Section 7. The Company shall be entitled to treat the holder of record of
any share or of stock as the holder in fact thereof and, accordingly, shall not
be bound to recognize any equitable or other claim to or interest in such share
on the part of any other person, whether or not it shall have express or other
notice thereof, save as expressly provided by the laws of Texas.
Section 8. Bonds, debentures and other evidence of indebtedness of the
Company shall be signed by the Chairman, the President or any Vice President and
the Treasurer or an Assistant Treasurer and shall bear the corporate seal and
when so executed shall be binding upon the Company, but not otherwise. The seal
of the Company thereon may be facsimile, engraved or printed, and where any such
bond, debenture or other evidence of indebtedness is authenticated with the
manual signature of an authorized officer of the Company or trustee appointed or
named by an indenture of trust or other agreement under which such security is
issued, the signature of any of the Company's officers authorized to execute
such security may be facsimile.
Section 9. In case any officer who signed, or whose facsimile signature
has been placed on any certificate representing shares of stock, bond, debenture
or evidence of indebtedness of this Company shall cease to be an officer of the
Company for any reason before the same has been issued or delivered by the
Company, such certificate, bond, debenture or evidence of indebtedness may
nevertheless be issued and delivered as though the person who signed it or whose
facsimile signature had been placed thereon had not ceased to be such officer.
ARTICLE VII
Deeds and Other Instruments of Conveyance
Section 1. Deeds and other instruments of the Company conveying land or
any interest in land shall be signed by the Chairman, the President or a Vice
President or attorney-in-fact of the
<PAGE>
Company when authorized by appropriate resolution of the Board of Directors or
shareholders, and when required by law, shall be attested by the Corporate
Secretary or an Assistant Corporate Secretary and shall bear the corporate seal,
and when so executed shall be binding upon the Company, but not otherwise.
ARTICLE VIII
Checks, Drafts and Bills of Exchange
Section 1. The Chairman or the President of the Company may from
time to time establish General Bank Accounts, Depository Bank Accounts, and such
Special Bank Accounts as in the judgment of either of them may be needed in
carrying on and dispatching the business of the Company. All checks, drafts and
bills of exchange issued in the name of the Company and calling for the payment
of money out of said General Accounts, Depository Accounts, or Special Accounts
of the Company shall be signed by the Controller or Assistant Controller, or
such agents and employees as the Chairman or the President may from time to time
designate and authorize to sign for the Controller, and countersigned by the
Treasurer or any Assistant Treasurer, or such agents and employees as the
Chairman or the President may from time to time designate and authorize to sign
for the Treasurer; and when so designated by the Chairman or the President, the
signature of the Treasurer or an Assistant Treasurer may be affixed by the use
of a check-signing machine; provided that for the purpose of transferring funds
from any bank or depository at which the Company has funds on deposit to any
other bank or depository of the Company for credit to the Company's account, a
form of check having plainly printed upon its face "DEPOSITORY TRANSFER CHECK,"
and being by its wording payable to a bank or depository for credit to the
account of the Company, is hereby authorized, and such checks shall require no
signature other than the name of the Company printed at the lower right corner;
and further provided that checks, drafts and bills of exchange issued in the
name of the Company in the amount of $25,000.00 or less need bear only one
signature and that being the signature of the Treasurer or an Assistant
Treasurer, affixed either manually or by the use of a check-signing machine, or
the manual signature of such agents and employees as the Chairman or the
President may from time to time designate and authorize to sign for the
Treasurer; and provided further that checks and drafts issued in the name of the
Company and calling for the payment of production revenue or royalties need bear
only one signature and that being the signature of the Treasurer or an Assistant
Treasurer, affixed either manually or by the use of a check-signing machine, or
the manual signature of such agents and employees as the Chairman or the
President may from time to time designate and authorize to sign for the
Treasurer; and provided further that checks and drafts issued in the name of the
Company and calling for payment of money out of Special Bank Accounts
established for the payment of dividends need bear only one signature and that
being the signature of the Treasurer or an Assistant Treasurer, affixed either
manually or by the use of a check-signing machine, or the manual signature of
such agents and employees as the Chairman or the President may from time to time
designate and authorize to sign for the Treasurer; and further provided that no
person authorized to sign checks or drafts may sign a check or draft payable to
himself. When in such applicable manner, but not otherwise, every check, draft
or bill of exchange issued in the name of the Company and calling for the
payment of money out of the General Bank Accounts, Depository Bank Accounts, and
Special Bank Accounts of the Company shall be valid and enforceable according to
its wording, tenor and effect, but not otherwise.
<PAGE>
Provided, however, that for the purpose of transferring funds between accounts
of the Company, from accounts of the Company to accounts of subsidiaries and
affiliates, from accounts of the Company for the purpose of investment of
corporate funds, and from accounts of the Company for the payment of dividends,
the Treasurer or an Assistant Treasurer, or such agents and employees as the
Chairman or the President may from time to time designate and authorize, may
make such transfer of funds by bank wire transfers through oral or written
instructions; and for the purpose of transferring funds from accounts of the
Company to accounts of other third parties, the Company may make such transfers
by electronic funds transfer, irrespective of amount, when authorized by oral,
computer-generated or written instructions which are given by any two of the
Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, or
such other agents or employees as the Chairman and President may from time to
time authorize to act for the Treasurer or Controller.
Section 2. The Treasurer of the Company may establish special bank
accounts designated as Agent's Account in such bank or banks as in his judgment
may be needed in carrying on and dispatching the business of the Company,
provided that the Treasurer in establishing and maintaining such accounts shall
keep only such funds therein and in such amount as may be required for the local
needs of such accounts and provided that checks or drafts issued against or
drawn on such accounts shall be valid and binding on the Company according to
their wording, tenor and effect when signed by either the Treasurer of the
Company or by such agent or employee of the Company as may be designated by the
Treasurer in writing to such bank or when signed in such manner and by such
agent or employee of the Company as may be designated by the Chairman or the
President of the Company; and further provided that checks and drafts issued in
the name of the Company against funds in such Agent's Account in the amount of
$1,000.00 or more must be countersigned by two persons authorized to sign such
checks or drafts.
ARTICLE IX
Fiscal Year
Section 1. The fiscal year shall begin on the first day of January in each
year.
ARTICLE X
Distributions and Share Dividends
Section 1. Distributions and share dividends upon the outstanding shares
of the Company, subject to the provisions of the Articles of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting. Distributions may be paid in cash or property, and share dividends may
be paid in shares of the authorized but unissued shares or in treasury shares,
of the Company subject to the provisions of the Articles of Incorporation.
<PAGE>
ARTICLE XI
Reserves
Section 1. There may be created by resolution of the Board of Directors
out of the earned surplus of the Company such reserve or reserves as the
Directors from time to time, in their discretion, think proper to provide for
contingencies, or to equalize dividends, or to repair or maintain any property
of the Company, or for such other purpose as the Directors shall think
beneficial to the Company, and the Directors may modify or abolish any such
reserve in the manner in which it was created.
ARTICLE XII
Seal
Section 1. The Company's seal shall have inscribed thereon the name of
the Company and the words "Corporate Seal, Texas." Said seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
ARTICLE XIII
Indemnification
Section 1. The Company shall indemnify, and advance or reimburse
reasonable expenses incurred by, any person who (1) is or was a director or
officer of the Company or (2) while a director or officer of the Company, its
divisions or subsidiaries, is or was serving at the request of the Company,
pursuant to a resolution adopted by the Board of Directors, as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another foreign or domestic corporation, partnership, joint
venture, sole proprietorship, trust, employee benefit plan or other enterprise,
to the fullest extent that a Company may or is required to grant indemnification
to, or advance or reimburse reasonable expenses incurred by, a director under
the Act. The Company, pursuant to a resolution adopted by the Board of
Directors, may indemnify any such persons to such further extent as permitted by
law.
Section 2. The Company, pursuant to a resolution adopted by the Board of
Directors, may indemnify, and advance or reimburse reasonable expenses incurred
by, any other person to the fullest extent permitted under the Act.
Section 3. Action by the Board of Directors to amend, modify or terminate
ARTICLE XIII, Section 1 or Section 2, shall be prospective from the effective
date of such action and any rights or obligations resulting from an event or
events occurring prior thereto shall be governed by the provisions of Section 1
or Section 2, as the case may be, of this ARTICLE XIII as of the date of such
event or events.
<PAGE>
ARTICLE XIV
Amendments
Section 1. The power to alter, amend, suspend or repeal the Bylaws or to
adopt new Bylaws shall be vested in, and shall require the approval of, the
majority of Continuing Directors then in office; provided, however, that any
Bylaw or Amendment thereto as adopted by the Board of Directors may be altered,
amended, suspended or repealed by the vote of the holders of 662/3% of the
shares entitled to vote for the election of Directors or a new Bylaw in lieu
thereof may be adopted by vote of such shareholders. No Bylaw which has been
altered, amended or adopted by such a vote of the shareholders may be altered,
amended, suspended or repealed by vote of the Directors until two years after
such action by vote of the shareholders.
ARTICLE XV
Restrictions on Foreign Ownership
Section 1. The purpose of this Article XV is to limit ownership and
control of shares of any class of capital stock of the Company by persons who
are not Eligible Citizens in order to permit the Company or any of its
Subsidiaries to conduct its business as a U.S. Mineral Lessee. The Board of
Directors is hereby authorized to adopt such resolutions, and to effect any and
all other measures reasonably necessary or desirable (consistent with applicable
law and the provisions of the Articles of Incorporation) to fulfill the purpose
and implement the restrictions of this Article XV, including without limitation,
requiring, as a condition precedent to the transfer of shares on the records of
the Company, representations and other proof as to the identity of existing or
prospective shareholders and persons on whose behalf of shares of any class of
capital stock of the Company or any interest therein or right thereof are or are
to be held and as to whether or not such persons are Eligible Citizens.
Section 2. Any transfer, or attempted or purported transfer, of any shares
of any class of capital stock issued by the Company or any interest therein or
right thereof, which would result in the ownership or control by one or more
non-Eligible Citizens of the shares of any class of capital stock of the Company
or of any interest or right therein will, until such condition no longer exists,
be void and will be ineffective as against the Company and the Company will not
recognize the purported transferee as a shareholder of the Company for any
purpose other than the transfer of such shares to a person who is an Eligible
Citizen provided, however, that such shares may nevertheless be deemed to be
shares held or owned by non-Eligible Citizens for the purposes of this Article
XV.
Section 3. No shares of the outstanding capital stock of the Company or
any class thereof transferred to, or acquired or held by, a non-Eligible Citizen
shall be entitled to receive or accrue any rights with respect to any dividends
or other distributions of assets declared payable or paid to the holders of such
capital stock during such period. Furthermore, no shares held by or for the
benefit of any non-Eligible Citizen will be entitled to vote with respect to any
matter submitted to stockholders of the Company so long as such condition
exists.
Section 4. If at any time (i) the Company is named, or is threatened to be
named, as a party in a judicial or administrative proceeding that seeks the
cancellation or forfeiture of any property,
<PAGE>
lease, right or license in which the Company has an interest or (ii) if, in the
opinion of the Board of Directors, the Company's ability to hold any property,
lease, right or license would be prohibited or restricted because of the
nationality, citizenship, residence, or other status, of any shareholder of the
Company (or, in the case of a shareholder which is a Company, partnership or
association, of any shareholder, owner, partner or member of such shareholder),
the Company may redeem the shares held by such shareholder at the then Current
Market Price and upon such terms as shall be determined by the Board of
Directors, in their sole discretion.
Section 5. "Current Market Price" per share of capital stock of the
Company on any date is the average of the Quoted Prices of such class of capital
stock during the four trading weeks before the date in question. In the absence
of one or more such quotations, the Board of Directors shall determine the
current market price on the basis of such quotations as it considers
appropriate.
"Eligible Citizen" means any person (including a Company, partnership or
other entity) whose ownership, holding or control of shares in the Company would
not, by reason of such person's citizenship or the citizenship of its members or
owners or otherwise, (1) disqualify the Company or any of its Subsidiaries from
owning, acquiring, holding, possessing, or leasing oil, gas or other minerals,
mineral deposits, land, vessels or any other property, licenses, or rights of
any nature whatsoever in federal lands or leases under federal laws and
regulations in effect from time to time, or (2) violate any other qualifications
as the Board of Directors deems in its reasonable discretion are necessary or
appropriate to permit the Company and its Subsidiaries to engage in any other
business activities for which there may be qualifications or restrictions on
shareholders of the Company or any of its Subsidiaries applicable under federal
or state law. A person is an Eligible Citizen if the applicable following
requirement is met: (1) for an individual, that he is native-born, naturalized
or a derivative Citizen of the United States or otherwise qualifies as a United
States citizen; (2) for a Company, that is organized or existing under the laws
of the United States, a state, the District of Columbia or United States
territory or possession, that at least 75% of the ownership interest in, and the
voting power over, the Company is held by Eligible Citizens, that the Company's
president or other chief executive officer and the chairman of its board of
directors are United States citizens and that no more than a minority of the
number of directors required to constitute a quorum are non-United States
citizens; (3) for a partnership, that all of the interests in the partnership,
are owned by Eligible Citizens; (4) for a trust, that each of its trustees and
each of its beneficiaries is an Eligible Citizen; and (5) for an association,
joint venture, or other entity, that all members, venturers or other equity
participants are Eligible Citizens and that such association, joint venture or
other entity is capable of holding leases or other interest in federal minerals
or lands under the laws of the United States.
"Quoted Price" means, with respect to any class of capital stock of the
Company, the last reported sales price regular way or, in case no such reported
sale takes place on such day, the average of the closing bid and asked prices
regular way for such day, in each case on the principal national securities
exchange on which the shares of such class of capital stock are listed or
admitted to trading or, if not listed or admitted to trading, the last sale
price regular way for such shares as published by NASDAQ, or if such last price
is not so published by NASDAQ or if no such sale takes place on such day, the
mean between the closing bid and asked prices for such shares as published by
NASDAQ or in the absence of any of the foregoing, the fair market value as
determined by the Board of Directors.
<PAGE>
"Subsidiary" means any Company more than 50% of the outstanding capital
stock of which is owned by the Company or any Subsidiary of the Company.
"U.S. Mineral Lessee" means any Company or other entity directly or
indirectly owning, acquiring, holding, possessing, or leasing oil, gas or other
minerals, mineral deposits, lands, vessels or any other property, licenses, or
rights of any nature whatsoever in federal lands or leases under federal laws
and regulations in effect from time to time, including, without limitation, the
Mineral Leasing Act of 1920, as amended, 30 U.S.C.A. (S)181 et seq.
<PAGE>
Exhibit 10.5
FIFTH AMENDMENT TO CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is among: EEX
CORPORATION (formerly known as ENSERCH EXPLORATION, INC.), a corporation formed
under the laws of the State of Texas (the "Company"); each of the Lenders (as
defined in the Credit Agreement as hereafter defined) that is a signatory
hereto; THE CHASE MANHATTAN BANK, a New York banking corporation (in its
individual capacity, "Chase"), as administrative agent for the Lenders (in such
capacity, together with its successors in such capacity, the "Administrative
Agent"); as auction agent for the Lenders (in such capacity, together with its
successors in such capacity, the "Auction Agent"); and as book runner for the
Lenders (in such capacity, together with its successors in such capacity, the
"Book Runner"); The First National Bank of Chicago, a national banking
association (in its individual capacity, "First Chicago") and as syndication
agent for the Lenders (in such capacity, together with its successors in such
capacity, the "Syndication Agent"); Citibank, N.A. a national banking
association (in its individual capacity, "Citibank") and as a documentation
agent for the Lenders (in such capacity, together with its successors in such
capacity, a "Documentation Agent"); Canadian Imperial Bank of Commerce as a
documentation agent for the Lenders (in such capacity, together with its
successors in such capacity, a "Documentation Agent") and The Bank of New York,
The Bank of Nova Scotia, Bankers Trust Company, NationsBank of Texas, N.A. and
Royal Bank of Canada as co-agents (in such capacity, together with their
successors in such capacity, the Co-Agents").
R E C I T A L S
---------------
A. The Company, the Agents, and the Lenders have entered into that
certain Credit Agreement dated as of May 1, 1995 as amended by First Amendment
to Credit Agreement dated as of September 16, 1996, by Second Amendment to
Credit Agreement dated as of June 27, 1997, by Third Amendment to Credit
Agreement dated as of September 25, 1997 and by Fourth Amendment to Credit
Agreement dated as of December 15, 1997 (collectively, the "Credit Agreement"),
pursuant to which the Lenders have agreed to make certain loans and extensions
of credit to the Company upon the terms and conditions as provided therein; and
B. The Company, the Agents, and the Lenders now desire to make certain
amendments to the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration and the mutual benefits, covenants and agreements herein
expressed, the parties hereto now agree as follows:
1. All capitalized terms used in this Amendment and not otherwise defined
herein shall have the meanings ascribed to such terms in the Credit Agreement.
2. The definitions of "Agents", "Agreement", and "Applicable Margin" in
Section 1.02 of the Credit Agreement are hereby amended to read as follows:
"Agents" shall mean the Administrative Agent, the Syndication Agent,
the Documentation Agents, the Book Runner, the Auction Agent and the Co-
Agents.
<PAGE>
"Agreement" shall mean this Credit Agreement as amended by First
Amendment, Second Amendment, Third Amendment, Fourth Amendment and Fifth
Amendment as the same may from time to time be amended or supplemented.
"Applicable Margin" shall mean the following rates per annum as are
applicable based upon the Debt to Capital Ratio calculated as of the last
day of a fiscal quarter of the Company to be effective for any Committed
Loan outstanding or for the facility fee during the period from the
Financial Statement Delivery Date following such fiscal quarter to but not
including the next succeeding Financial Statement Delivery Date:
DEBT TO CAPITAL RATIO
---------------------
25%* 35%* 45%*
but but but
25%** 35%** 45%** 55%** 55%**
---- ---- ---- ----- -----
- ------------------------------------------------------------------------------
Facility Fee .200% .250% .300% .400% .450%
- ------------------------------------------------------------------------------
Eurodollar Loans .550% .750% .950% 1.100% 1.300%
- ------------------------------------------------------------------------------
Base Rate Loans 0% 0% 0% 0% 0%
- ------------------------------------------------------------------------------
* greater than or equal to
** less than
4. Section 1.02 of the Credit Agreement is hereby supplemented, where
alphabetically appropriate, with the addition of the following definition:
"Fifth Amendment" shall mean that certain Fifth Amendment to Credit
Agreement dated as of March 31, 1999, among the Company, the Lenders and
the Agents."
5. The second sentence of Section 11.01 of the Credit Agreement is hereby
amended to read as follows:
"The Syndication Agent, the Documentation Agents, the Book Runner and
Co-Agents, in such capacities, shall have no duties or responsibilities and
shall incur no liabilities under the Loan Documents."
6. This Amendment shall become binding on the Lenders when, and only when,
the Administrative Agent shall have received each of the following in form and
substance satisfactory to the Administrative Agent or its counsel:
(a) counterparts of this Amendment and the attached Ratification
executed by the Company, the Guarantors and the Majority Lenders;
(b) a certificate of the Secretary or an Assistant Secretary of the
Company setting forth resolutions of its board of directors with respect to
the authorization of the Company to execute, deliver and perform this
Amendment; and
2
<PAGE>
(c) such other documents as it or its counsel may reasonably request.
7. The parties hereto hereby acknowledge and agree that, except as
specifically supplemented and amended, changed or modified hereby, the Credit
Agreement shall remain in full force and effect in accordance with its terms.
8. The Company hereby reaffirms that as of the date of this Amendment, the
representations and warranties contained in Article VII of the Credit Agreement
are true and correct on the date hereof as though made on and as of the date of
this Amendment, except as such representations and warranties are expressly
limited to an earlier date.
9. THIS AMENDMENT (INCLUDING, BUT NOT LIMITED TO, THE VALIDITY AND
ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF TEXAS, OTHER THAN THE CONFLICT OF LAWS RULES THEREOF.
10. This Amendment may be executed in two or more counterparts, and it
shall not be necessary that the signatures of all parties hereto be contained on
any one counterpart hereof; each counterpart shall be deemed an original, but
all of which together shall constitute one and the same instrument. Delivery
of an executed signature page of this Amendment by facsimile transmission shall
be effective as delivery of a manually executed counterpart hereof.
[SIGNATURES BEGIN NEXT PAGE]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of March 31, 1999.
COMPANY: EEX CORPORATION (formerly known as
ENSERCH EXPLORATION, INC.)
By: /s/ J. T. Leary
--------------------------------
Name: J. T. Leary
Title: Vice President, Finance, and
Treasurer
LENDER AND ADMINISTRATIVE AGENT, THE CHASE MANHATTAN BANK
BOOK RUNNER AND
AUCTION AGENT:
By: /s/ Peter M. Ling
--------------------------------
Name: Peter M. Ling
Title: Vice President
LENDER AND SYNDICATION THE FIRST NATIONAL BANK OF
AGENT CHICAGO
By: /s/ Ronald L. Dierker
--------------------------------
Name: Ronald L. Dierker
Title: Vice President
LENDER AND DOCUMENTATION CITIBANK, N.A.
AGENT:
By: /s/ J. Christopher Lyons
--------------------------------
Name: J. Christopher Lyons
Title: Attorney-in-fact
LENDER AND DOCUMENTATION CANADIAN IMPERIAL BANK OF
AGENT: COMMERCE
By: /s/ Michael A. G. Corkum
--------------------------------
Name: Michael A. G. Corkum
Title: Assistant General Manager
4
<PAGE>
LENDER: THE BANK OF NEW YORK
By: /s/ Raymond J. Palmer
--------------------------------
Name: Raymond J. Palmer
Title: Vice President
LENDER: THE BANK OF NOVA SCOTIA
By: /s/ F. C. H. Ashby
--------------------------------
Name: F. C. H. Ashby
Title: Senior Manager Loan Operations
LENDER: BANKERS TRUST COMPANY
By: /s/ Marcus M. Tarkington
--------------------------------
Name: Marcus M. Tarkington
Title: Principal
LENDER: NATIONSBANK OF TEXAS, N.A.
By: /s/ Paul A. Squires
--------------------------------
Name: Paul A. Squires
Title: Senior Vice President
LENDER: ROYAL BANK OF CANADA
By: /s/ Gil J. Benard
--------------------------------
Name: Gil J. Benard
Title: Senior Manager
LENDER: CREDIT AGRICOLE INDOSUEZ
(Formerly Caisse Nationale De Credit
Agricole)
By: /s/ Brian D. Knezeak
--------------------------------
Name: Brian D. Knezeak
Title: First Vice President
By: /s/ Michael R. Quiray
--------------------------------
Name: Michael R. Quiray
Title: Vice President
Senior Relationship Manager
5
<PAGE>
LENDER: THE FUJI BANK, LTD.
By: /s/ Raymond Ventura
--------------------------------
Name: Raymond Ventura
Title: Vice President & Manager
LENDER: THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY
By: /s/ Mike Oakes
--------------------------------
Name: Mike Oakes
Title: Senior Vice President
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, HOUSTON OFFICE
(Authorized Representative)
LENDER: THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
By: /s/ Sadao Muraoka
--------------------------------
Name: Sadao Muraoka
Title: Head of Southwest Region
LENDER: MELLON BANK, N.A.
By: /s/ Roger E. Howard
--------------------------------
Name: Roger E. Howard
Title: Vice President
LENDER: THE SANWA BANK, LIMITED
By: /s/ Clyde Redford
--------------------------------
Name: Clyde Redford
Title: Vice President
LENDER: TORONTO DOMINION (TEXAS), INC.
By: /s/ Carol Brandt
--------------------------------
Name: Carol Brandt
Title: Vice President
LENDER: UBS AG, STAMFORD BRANCH
as successor to Union Bank of Switzerland,
6
<PAGE>
Houston Agency
By: /s/ Paul R. Morrison
--------------------------------
Name: Paul R. Morrison
Title: Executive Director
By: /s/ Andrew N. Taylor
--------------------------------
Name: Andrew N. Taylor
Title: Associate Director
LENDER: THE BANK OF TOKYO-MITSUBISHI, LTD.
By: /s/ Ichiro Otani
--------------------------------
Name: Ichiro Otani
Title: Deputy General Manager
LENDER: DRESDNER BANK AG NEW YORK
AND GRAND CAYMAN BRANCHES
By: /s/ Michael E. Higgins
--------------------------------
Name: Michael E. Higgins
Title: Vice President
By: /s/ Wendy Astell
--------------------------------
Name: Wendy Astell
Title: Assistant Treasurer
LENDER: CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ Philipe Soustra
--------------------------------
Name: Philipe Soustra
Title: Senior Vice President
7
<PAGE>
RATIFICATION
------------
Each of the undersigned (a "Guarantor") hereby agrees that its liabilities
under its respective Guaranty Agreement guaranteeing the indebtedness,
obligations and liabilities under that certain Credit Agreement dated May 1,
1995, as amended, shall remain enforceable against such Guarantor in accordance
with the terms of its Guaranty Agreement and shall not be reduced, altered,
limited, lessened or in any way affected by the execution and delivery of this
Fifth Amendment to Credit Agreement. Each Guarantor hereby confirms and
ratifies its liabilities under its Guaranty in all respects.
EEX CORPORATION (formerly known as
ENSERCH EXPLORATION, INC.)
By: /s/ J. T. Leary
--------------------------------
Name: J. T. Leary
Title: Vice President, Finance, and
Treasurer
EEX OPERATING LLC
By: EEX Corporation, as sole manager
By: /s/ J. T. Leary
--------------------------------
Name: J. T. Leary
Title: Vice President, Finance, and
Treasurer
EEX OPERATING LP
By: EEX Corporation, as general partner
By: /s/ J. T. Leary
--------------------------------
Name: J. T. Leary
Title: Vice President, Finance, and
Treasurer
8
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF EEX CORPORATION: STATE OF INCORPORATION/ORGANIZATION
EEX Operating LLC Delaware
EEX Operating L.P. Delaware
EEX Capital, Inc. Delaware
Enserch International Oil & Gas, Inc. Texas
EEX International, Inc. Texas
Corpus Christi Energy Co. Delaware
Corpus Christi Hydrocarbons Co. Delaware
Enserch Far East Ltd. Cayman Islands
EEX Asahan Ltd. Cayman Islands
EEX Turkey B.V. Netherlands
EEX New Zealand Ltd. Cayman Islands
EEX Exploration and Production Company LLC Delaware
EEX E&P Company, L.P. Delaware
EEX Reserves Funding LLC Delaware
EEX Reserves Company LLC Delaware
EEX Natural Gas Company Delaware
EEX Gathering Company Delaware
EEX Pipeline Company, L.P. Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-24595 registering 6,313,432 shares of common stock pursuant to
the Employee Stock Purchase and Savings Plan, Employee Stock Option Plan,
Revised and Amended 1996 Stock Incentive Plan, Non-Qualified Stock Option
Agreement and Restricted Stock Agreement and Form S-8 No. 333-41979 registering
1,500,000 shares of common stock pursuant to the 1997 Non-Officer Stock Option
Plan, and Form S-3 No. 333-64427 for the registration of EEX Corporation debt
securities, preferred stock, warrants, and common stock, and Form S-8
No. 333-81203 registering 2,500,000 shares of common stock pursuant to the
Amended and Restated 1998 Stock Incentive Plan) of EEX Corporation of our report
dated February 11, 2000, with respect to the consolidated financial statements
of EEX Corporation included in this Annual Report (Form 10-K) for the year ended
December 31, 1999.
ERNST & YOUNG LLP
Houston, Texas
March 13, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the filing of the Annual Report on Form 10-K, for the
year ended December 31, 1999, for EEX Corporation in accordance with the
requirements of the Securities Exchange Act of 1934. We consent to the
inclusion in such Annual Report of our reserve reports incorporated therein,
references to our name in the form and context in which they appear, and the
incorporation by reference thereof into the company's Registration Statements on
Form S-8 (Nos. 333-24595, 333-41979 and 333-81203) and on Form S-3
(No. 333-64427).
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Frederic D. Sewell
--------------------------------
Frederick D. Sewell
President
Dallas, Texas
March 13, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPLICABLE
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 20,053
<SECURITIES> 0
<RECEIVABLES> 28,248
<ALLOWANCES> 1,791
<INVENTORY> 0
<CURRENT-ASSETS> 61,038
<PP&E> 1,267,411
<DEPRECIATION> (576,914)
<TOTAL-ASSETS> 780,784
<CURRENT-LIABILITIES> 91,908
<BONDS> 205,634
0
16
<COMMON> 424
<OTHER-SE> 294,423
<TOTAL-LIABILITY-AND-EQUITY> 780,784
<SALES> 0
<TOTAL-REVENUES> 177,374
<CGS> 0
<TOTAL-COSTS> 246,768
<OTHER-EXPENSES> (95)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,686
<INCOME-PRETAX> (80,856)
<INCOME-TAX> 6,891
<INCOME-CONTINUING> (99,914)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99,914)
<EPS-BASIC> (2.37)
<EPS-DILUTED> (2.37)
</TABLE>
