UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________TO____________
COMMISSION FILE NO. 1-12905
EEX CORPORATION
(Exact name of Registrant as specified in its charter)
TEXAS 75-2421863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 CITYWEST BLVD.
SUITE 1400
HOUSTON, TEXAS 77042
(Address of principal executive office) (Zip Code)
(713) 243-3100
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of Common Stock of Registrant outstanding as of April 30, 2001:
42,220,393
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31
-------------------------------------
2001 2000
--------------- ---------------
(In thousands, except
per share amounts)
Revenues:
Natural gas............................................................... $39,486 $37,558
Oil, condensate and natural gas liquids................................... 16,927 20,775
Cogeneration operations................................................... 2,045 1,912
Other..................................................................... 804 623
--------- --------
Total................................................................. 59,262 60,868
--------- --------
Costs and Expenses:
Production and operating.................................................. 8,500 10,542
Exploration............................................................... 20,147 4,748
Depletion, depreciation and amortization.................................. 16,426 21,087
Loss on sales of property, plant and equipment............................ 302 560
Cogeneration operations................................................... 1,875 1,354
General, administrative and other......................................... 3,313 6,051
Taxes, other than income.................................................. 5,545 1,783
--------- --------
Total................................................................. 56,108 46,125
--------- --------
Operating Income............................................................. 3,154 14,743
Other Income--Net............................................................ 13 99
Interest Income.............................................................. 396 192
Interest and Other Financing Costs........................................... (7,812) (7,680)
--------- --------
Income (Loss) Before Income Taxes............................................ (4,249) 7,354
Income Taxes................................................................. -- 2,300
Minority Interest Third Party................................................ -- 825
--------- --------
Net Income (Loss)............................................................ (4,249) 4,229
Preferred Stock Dividends.................................................... 3,510 3,242
--------- --------
Net Income (Loss) Applicable to Common Shareholders.......................... $(7,759) $ 987
========= ========
Net Income (Loss) Per Share Available to Common Shareholders:
Basic..................................................................... $(0.19) $0.02
========= ========
Diluted................................................................... $(0.19) $0.02
========= ========
Weighted Average Shares Outstanding:
Basic..................................................................... 41,648 42,202
========= ========
Diluted................................................................... 41,648 42,236
========= ========
See accompanying notes.
2
EEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31 December 31
2001 2000
-------- -----------
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents.................................................... $ 23,729 $ 19,791
Accounts receivable--trade (net of allowance of $2,462 and $2,270)........... 39,689 57,539
Other........................................................................ 16,862 22,478
--------- ---------
Total current assets..................................................... 80,280 99,808
--------- ---------
Property, Plant and Equipment (at cost):
Oil and gas properties (successful efforts method)........................... 954,857 955,263
Other........................................................................ 8,183 8,160
--------- ---------
Total.................................................................... 963,040 963,423
Less accumulated depletion, depreciation and amortization.................... 301,986 323,875
--------- ---------
Net property, plant and equipment........................................ 661,054 639,548
--------- ---------
Deferred Income Tax Assets...................................................... 19,846 19,846
Other Assets.................................................................... 8,029 4,866
--------- ---------
Total.................................................................... $ 769,209 $ 764,068
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable--trade...................................................... $ 65,408 $ 76,999
Current portion of capital lease obligations................................. 20,964 13,351
Other........................................................................ 6,384 5,993
--------- ---------
Total current liabilities................................................ 92,756 96,343
--------- ---------
Bank Revolving Credit Agreement................................................. 125,000 75,000
Capital Lease Obligations....................................................... 176,865 192,283
Gas Sales Obligation............................................................ 76,367 83,490
Other Liabilities............................................................... 14,730 22,351
Minority Interest Third Party................................................... 5,000 5,000
Shareholders' Equity:
Preferred stock (10,000 shares authorized; 1,790 and 1,755 shares issued;
Liquidation preference of $178,990 and $175,481)......................... 18 18
Common stock ($0.01 par value; 150,000 shares authorized; 42,222 and
42,256 shares issued).................................................... 429 429
Paid in capital.............................................................. 748,324 744,782
Retained (deficit)........................................................... (452,925) (445,166)
Unamortized restricted stock compensation.................................... (951) (1,067)
Unearned compensation........................................................ (24) (349)
Other comprehensive income................................................... (7,334) -
Treasury stock, at cost (808 and 808 shares)................................. (9,046) (9,046)
--------- ---------
Total shareholders' equity............................................... 278,491 289,601
--------- ---------
Total.................................................................... $ 769,209 $ 764,068
========= =========
See accompanying notes.
3
EEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31
-------------------------------------
2001 2000
--------------- ---------------
(In thousands)
OPERATING ACTIVITIES
Net Income (Loss)............................................................. $ (4,249) $ 4,229
Dry hole cost................................................................. 54 (883)
Depletion, depreciation and amortization...................................... 16,426 21,087
Impairment of undeveloped leasehold........................................... 1,950 1,200
Deferred income taxes......................................................... - 2,300
Loss on sales of property, plant and equipment................................ 302 560
Other......................................................................... (10,365) (17,557)
Changes in current operating assets and liabilities:
Accounts receivable.......................................................... 17,850 (4,449)
Other current assets......................................................... 5,616 243
Accounts payable............................................................. (12,043) (3,018)
Other current liabilities.................................................... 391 372
--------- ---------
Net cash flows provided by operating activities............................ 15,932 4,084
--------- ---------
INVESTING ACTIVITIES
Additions of property, plant and equipment.................................... (40,366) (44,256)
Proceeds from dispositions of property, plant and equipment................... 182 5,642
Other (changes in accruals)................................................... (6,882) (21,640)
--------- ---------
Net cash flows used in investing activities................................ (47,066) (60,254)
--------- ---------
FINANCING ACTIVITIES
Borrowings under bank revolving credit agreement.............................. 60,000 120,000
Repayment of borrowings under bank revolving credit agreement................. (10,000) (55,000)
Borrowings under short-term financing agreement............................... - 15,000
Repayment of borrowings under short-term financing agreement.................. - (15,000)
Deliveries under the gas sales obligation..................................... (7,123) (4,704)
Minority interest third party................................................. - 825
Payments of capital lease obligations......................................... (7,805) (9,478)
--------- ---------
Net cash flows provided by financing activities............................ 35,072 51,643
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents............................ 3,938 (4,527)
Cash and Cash Equivalents at Beginning of Period................................ 19,791 15,053
--------- ---------
Cash and Cash Equivalents at End of Period...................................... $ 23,729 $ 10,526
========= =========
See accompanying notes.
4
EEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
included herein have been made.
2. The preferred stock has a stated value of $100 and a current dividend rate of
8% per year, payable quarterly. The 8% dividend rate will be adjusted to a
market rate, not to exceed 18%, in January 2006 or upon the earlier
occurrence of certain events, including a change of control. Prior to any
such adjustment of the dividend rate, EEX may, at its option, accrue
dividends or pay them in cash, shares of preferred stock or shares of common
stock. After any adjustment of the dividend rate, dividends must be paid in
cash.
EEX paid dividends in-kind on the preferred stock as follows:
Amount of Dividends Number of Preferred
Date (In millions) Shares Issued
---- -------------------- --------------------
March 31, 2001 $3.5 35,096
3. Payments under the gas sales obligation are amortized using the interest
method through final pay out. Payments made during the first quarter of 2001
related to this obligation were $7.1 million.
4. The Statement of Cash Flows for the three months ended March 31, 2001
reflects the impact of the adoption of SFAS No. 133, which resulted in a $7.3
million non-cash reduction in shareholders' equity.
5. EEX is involved in a number of legal and administrative proceedings incident
to the ordinary course of its business. In the opinion of management, based
on the advice of counsel and current assessment, any liability to EEX
relative to these ordinary course proceedings will not have a material
adverse effect on EEX's operations or financial condition.
The operations and financial position of EEX continue to be affected from
time to time in varying degrees by domestic and foreign political
developments as well as legislation and regulations pertaining to
restrictions on oil and gas production, imports and exports, natural gas
regulation, tax increases, environmental regulations and cancellation of
contract rights. Both the likelihood and overall effect of such occurrences
on EEX vary greatly and are not predictable.
EEX has taken and will continue to take into account uncertainties and
potential exposures in legal and administrative proceedings in periodically
establishing accounting reserves.
6. Earnings Per Share - The reconciliation between basic and diluted earnings
per common share is 34,000 shares related to the dilutive effect of stock
options for the three months ended March 31, 2000.
5
EEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Segment information has been prepared in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments
of an Enterprise and Related Information." EEX has determined that its
reportable segments are those that are based on EEX's method of internal
reporting and are consistent with its business strategy. EEX has four
reportable segments, which are primarily in the business of natural gas and
crude oil exploration and production: Deepwater Operations, Deepwater
FPS/Pipelines, Onshore/Shelf and International. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies (See Note 2 to the Consolidated Financial Statements in
Item 8 of EEX's 2000 Annual Report on Form 10-K). Financial information by
operating segment is presented below (in thousands):
DEEPWATER
---------------------------
OPERATIONS FPS/PIPELINES ONSHORE/SHELF INTERNATIONAL OTHER(a) TOTAL
---------- ------------- ------------- ------------- -------- -----
THREE MONTHS ENDED MARCH 31, 2001:
----------------------------------
Total Revenues............................... $ - $ - $ 51,523 $13,662 $ (5,923) $ 59,262
Production and operating costs............... - 149 4,793 3,558 - 8,500
Exploration costs............................ 15,270 - 4,324 553 - 20,147
Depletion, depreciation and amortization..... - 1,314 9,674 4,986 452 16,426
Other costs.................................. - 3 5,662(b) - 5,370 11,035
-------- -------- -------- ------- -------- --------
Operating Income (Loss)...................... (15,270) (1,466) 27,070 4,565 (11,745) 3,154
Interest Income and other.................... - - - - 409 409
Interest and other financing costs........... - (3,398) (1,992) - (2,422) (7,812)
-------- -------- -------- ------- -------- --------
Income (Loss) before income taxes............ $(15,270) $ (4,864) $ 25,078 $ 4,565 $(13,758) $ (4,249)
======== ======== ======== ======= ======== ========
Long-Lived Assets............................ $ 92,497 $144,778 $386,414 $33,345 $ 4,020 $661,054
======== ======== ======== ======= ======== ========
Additions to Long-Lived Assets............... $ 3,733 $ - $ 33,970 $ 2,640 $ 23 $ 40,366
======== ======== ======== ======= ======== ========
THREE MONTHS ENDED MARCH 31, 2000:
----------------------------------
Total Revenues............................... $ - $ - $ 43,149 $14,344 $ 3,375 $ 60,868
Production and operating costs............... - 198 7,009 3,335 - 10,542
Exploration costs............................ 2,088 - 2,040 620 - 4,748
Depletion, depreciation and amortization..... - 900 16,988 2,771 428 21,087
Other costs.................................. - - 1,777(b) - 7,971 9,748
-------- -------- -------- ------- -------- --------
Operating Income (Loss)...................... (2,088) (1,098) 15,335 7,618 (5,024) 14,743
Interest Income and other.................... - - - - 291 291
Interest and other financing costs........... - (3,489) (2,704) - (1,487) (7,680)
-------- -------- -------- ------- -------- --------
Income (Loss) before income taxes............ $ (2,088) $ (4,587) $ 12,631 $ 7,618 $ (6,220) $ 7,354
======== ======== ======== ======= ======== ========
Long-Lived Assets............................ $ 52,410 $147,847 $428,953 $60,636 $ 5,538 $695,384
======== ======== ======== ======= ======== ========
Additions to Long-Lived Assets............... $ 7,615 $ 4,597 $ 22,213 $ 2,769 $ 718 $ 37,912
======== ======== ======== ======= ======== ========
-------------
(a) Includes primarily Cogeneration Plant Operations, General and
Administrative, gains/loss on hedging and sale of assets.
(b) Includes taxes other than income.
8. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was adopted January 1, 2001. This statement 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 are accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The effect of adoption on January
1, 2001 was a decrease to shareholders' equity of approximately $20 million.
As of March 31, 2001, shareholders' equity decreased by $7.3 million in
accordance with the standard. The change from $20 million to $7.3 million was
due to the realization of $8 million of hedging contracts during the current
quarter and $4.7 million related to changes in the fair value of hedging
contracts due to changes in commodity prices.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this report, including statements of EEX's and
management's expectations, intentions, plans and beliefs, are "forward-looking
statements," within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, that are subject to certain events, risks and uncertainties
that may be outside EEX's control. See "Forward-Looking Statements--
Uncertainties and Risks."
RESULTS OF OPERATIONS
For the first quarter of 2001, EEX reported a net loss applicable to common
shareholders of approximately $8 million ($0.19 per share), versus net income
applicable to common shareholders of $1 million ($0.02 per share) for the same
period in 2000.
For the first quarter of 2001, total revenues were $59 million, 3% lower than
total revenues in the first quarter of 2000. Natural gas revenues for the first
quarter of 2001 were 5% higher than the same quarter of 2000. This increase was
due to a 52% increase in the average natural gas sales price offset by a 31%
decrease in production. The average natural gas sales price per Mcf was $3.90
for the first quarter of 2001, compared to $2.57 per Mcf for the same period
2000. The average gas sales price of $3.90 per Mcf for the first quarter 2001
includes hedging losses of $8 million and 5,117 billions of british thermal
units ("BBtu") delivered under fixed-price physical delivery contracts and the
gas sales obligation at an average price of $2.93 per MMBtu. The average natural
gas sales price of $2.57 per Mcf for the first quarter 2000 includes hedging
gains of $2 million and 3,513 BBtu delivered under the gas sales obligation at
an average price of $2.71 per MMBtu. Natural gas production for the first
quarter of 2001 was 10 billion cubic feet ("Bcf"), compared with 15 Bcf in the
same period of 2000. This 31% decrease in production is primarily a result of
the sale of the offshore shelf properties in the fourth quarter of 2000. Oil
revenues decreased 19% from the same period in 2000 due to a 12% decrease in
production, primarily as a result of the sale of the offshore shelf properties
and an 8% decrease in the average price to $25.16 from $27.26.
Costs and expenses for the first quarter of 2001 were $56 million, compared with
$46 million in 2000. Exploration expenses for the first quarter of 2001
increased to $20 million, compared to $5 million for the same period of 2000.
The increase was primarily due to $14 million in costs for stacking the Arctic I
rig and recognition of the net cost associated with the assignment of the rig
contract through May 2001. Depletion, depreciation and amortization for the
first quarter of 2001 was $16 million, $5 million lower than the same period of
2000, primarily due to the sale of the offshore shelf properties in the fourth
quarter of 2000, offset by an increased rate on the Mudi Field. Operating
expenses (production and operating, general, administrative and other, and taxes
other than income) were $17 million in the current quarter, 6% lower than the
same period of 2000. Lower production and operating expense and general,
administrative and other costs were offset by higher taxes other than income,
primarily severance taxes.
Total interest and other financing costs for the first quarter of 2001,
including interest income, preferred stock dividends and other income, were $11
million, unchanged from the same period of 2000.
7
EEX CORPORATION
SUMMARY OF SELECTED OPERATING DATA
FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Three Months Ended
March 31
----------------------------------
2001 2000
--------------- ---------------
Sales volume
Natural gas (Bcf) (a).................................................................. 10.1 14.6
Oil, condensate and natural gas liquids (MMBbls) (d)................................... 0.7 0.8
Total volumes (Bcfe) (a)........................................................... 14.2 19.2
Average sales price (b)
Natural gas (per Mcf) (c).............................................................. $ 3.90 $ 2.57
Oil, condensate and natural gas liquids (per Bbl)...................................... 24.86 27.12
Total (per Mcfe) (c)............................................................... 3.97 3.03
Average costs and expenses (per Mcfe) (c)
Production and operating (b)........................................................... $ 0.60 $ 0.55
Exploration............................................................................ 1.42 0.25
Depletion, depreciation and amortization............................................... 1.16 1.10
General, administrative and other...................................................... 0.23 0.31
Taxes, other than income............................................................... 0.39 0.09
---------------
(a) Billion cubic feet or billion cubic feet equivalent, as applicable. Ratio
of six Mcf of natural gas to one barrel of crude oil, condensate or natural
gas liquids.
(b) Before related production, severance and ad valorem taxes.
(c) One thousand cubic feet or one thousand cubic feet equivalent, as
applicable. Ratio of six Mcf of natural gas to one barrel of crude oil,
condensate or natural gas liquids.
(d) One million barrels of crude oil or other liquid hydrocarbons.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Net cash flows provided by operating activities in 2001 were $16 million, an
increase of $12 million over the same period of 2000, primarily due to decreases
in receivables and a favorable change in other liabilities, offset by expenses
associated with stacking the Arctic I rig and the assignment of the rig contract
during the first quarter 2001. Net cash flows used in investing activities in
2001 were $47 million, a $13 million decrease from cash flows used in investing
activities for the same period of 2000. Capital spending decreased $4 million
and changes in accruals decreased $15 million during the first quarter 2001.
These were offset by a decrease in proceeds from dispositions of property, plant
and equipment of $5 million. Net cash flows provided by financing activities in
2001 were $35 million, compared to $52 million for the same period of 2000, due
to lower borrowings during the first quarter 2001.
Capital Budget
Planned 2001 capital expenditures are estimated to be approximately $145
million, compared with actual expenditures of $181 million in 2000. Capital
expenditures for the first quarter of 2001 were $40 million. This program is in
excess of the Company's expected operating cash flows for 2001. The Company
expects to fund this capital program from operating cash flows, proceeds from
asset sales, increased borrowings under the revolving credit agreement and/or
additional funds from public and private equity or debt markets. In order to
continue its anticipated capital program, including appraisal and development of
the Llano complex, EEX will require substantial additional capital resources.
EEX's access to public or private equity or debt markets may be limited by
general market conditions in or volatility of the markets, general conditions
affecting the oil and gas industry, or by EEX's financial condition. No
assurances can be given that EEX will be able to secure funds in these markets
when necessary, or that such funds will be obtained on terms favorable to it.
If EEX were unable to secure funds when required for its activities, its
liquidity and ability to make capital investments would become impaired. See
"Forward-Looking Statements--Uncertainties and Risks" below.
8
Liquidity
EEX has a $350 million revolving credit line with a group of banks that matures
on June 27, 2002, of which $125 million was outstanding at March 31, 2001. The
revolving credit agreement limits, at all times, total debt, as defined in the
credit agreement, to the lesser of 60% of capitalization, as defined, or $1
billion, and prohibits liens on property except under certain circumstances. As
of March 31, 2001, the debt to capital ratio under the revolving credit
agreement was 54% and unused available credit was approximately $90 million.
The interest rate ranges from the London Inter-Bank Offered Rate (LIBOR) plus
0.55% to 1.30% per annum, plus a facility fee of 0.20% to 0.45% per annum,
depending upon the debt to capital ratio. As of April 30, 2001, the Company had
approximately $135 million outstanding under the revolving credit agreement.
As described in EEX's 2000 Annual Report on Form 10-K, preserving liquidity
under EEX's current revolving credit agreement, renewing or extending the
letters of credit and converting to the borrowing base facility involve many
risks and uncertainties in addition to those associated with access to public
and private equity and debt markets and described under "Capital Budget" above.
These risks and uncertainties are described in "Forward-Looking Statements--
Uncertainties and Risks" below. A significant adverse financial impact
resulting from the occurrence of any or all of these factors prior to EEX
obtaining additional equity or capital would severely impact EEX's liquidity and
its ability to carryout its planned activities. In the absence of such
additional equity or capital, EEX may choose to sell a substantial portion of
its assets to execute its financing plans. For a more detailed discussion, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources--Liquidity" in EEX's 2000 Annual
Report on Form 10-K.
FORWARD-LOOKING STATEMENTS--UNCERTAINTIES AND RISKS
Certain statements in this report, including statements of EEX's and
management's expectations, intentions, plans and beliefs, are "forward-looking
statements," within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and are subject to certain events, risks and uncertainties
that may be outside EEX's control. These forward-looking statements include
statements of management's plans and objectives for EEX's future operations and
statements of future economic performance; information regarding drilling
schedules, expected or planned production, future production levels of
international and domestic fields, EEX's capital budget and future capital
requirements, EEX's meeting its future capital needs, the level of future
expenditures for environmental costs and the outcome of regulatory and
litigation matters; and the assumptions underlying such forward-looking
statements. Actual results and developments could differ materially from those
expressed in or implied by such statements due to a number of factors,
including, without limitation, those described in the context of such forward-
looking statements and the risk factors set forth below and described from time
to time in EEX's other documents and reports filed with the Securities and
Exchange Commission.
Capital Liquidity and Funding Risk--EEX is exposed to many risks in preserving
liquidity under its existing revolving credit agreement, executing its plan to
raise additional capital to fund its investment plans (see the discussion in
Item 7, "Liquidity and Capital Resources--Capital Budget" in EEX's 2000 Annual
Report on Form 10-K), and converting from its revolving credit agreement to a
borrowing base loan in June 2002, a credit facility based on the value of its
proved reserves. The amount available under the revolving credit agreement is
limited by a debt to capital ratio; therefore, any event that decreases equity
will reduce liquidity. The principle risks associated with these plans and to
liquidity are described in additional detail below. Any decreases in
capitalization through losses incurred from dry hole expense, asset write-downs,
loss on sales or other reasons, or increases in borrowings or debt (as defined
in the revolving credit agreement) will increase the debt to capital ratio and
further limit available borrowings. If EEX is unable to secure additional
equity and capital expenditures continue at currently planned levels, available
borrowings under the revolving credit agreement may become severely limited or
unavailable.
FPS and Pipeline Marketing Risk--See the discussion under Item 1, "Strategy--
Realize Value from the Cooper Floating Production System ("FPS") and Pipelines"
and "U.S. Exploration and Development--Offshore--Cooper Floating Production
System ("FPS") and Pipelines" and Note 11 to Consolidated Financial Statements
in Item 8 of EEX's 2000 Annual Report on Form 10-K. Sale of the FPS and/or
Pipelines would result in a significant change in EEX's debt structure due to
the termination of the capital lease obligations associated with those assets.
EEX would also incur substantial early termination costs that would adversely
affect net income and reduce borrowing capacity. A disposition of the capital
lease would reduce the debt used in computing the debt to capital ratio and
increase the amount of funds available to EEX to borrow under its revolving
credit agreement. While management believes that it can realize the value of
the FPS and Pipelines in a development in the Llano complex or by sale, there
can be no assurance that this can be accomplished in the near term, or on
favorable financial terms.
9
Development of Greater Llano Complex--The value of EEX's investment in the Llano
complex and the Pipelines is dependent upon development of its Llano Field,
Jason discovery or other exploration success on its Llano complex leases. A
reduction in value of these assets due to adverse drilling results, limited
development plans or delays in development, reductions in estimated reserve
quantities, or adverse economic conditions, would reduce the capitalization used
in computing the debt to capital ratio which would decrease the amount of funds
available to EEX to borrow under its revolving credit agreement.
Arctic I - Rig Commitment--The majority of the commitment associated with the
Arctic I rig (See Note 17 to Consolidated Financial Statements in Item 8 and the
discussion under "U.S. Exploration and Development--Offshore, Deepwater Gulf of
Mexico Exploration" of EEX's 2000 Annual Report on Form 10-K) has been assumed,
for budget and planning purposes, to be funded by EEX's joint venture partners
in its Llano development and Llano complex appraisal program. Upon conclusion
of the current assignment to a third party, EEX intends to continue drilling in
the Llano complex with partners. If the joint venture partners elect not to
participate in these projects, and EEX cannot find other participants to share
the costs of drilling, EEX would incur expenditures greater than forecast and be
exposed to potentially higher dry hole cost. EEX currently has no firm
commitment from joint venture partners for the use of the rig. EEX may also
pursue additional subsidized contract assignments or stack the rig.
Effect of Adoption of SFAS No. 133--In January 2001, EEX adopted SFAS No. 133
(see the discussion in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Other Matters--New Accounting
Standard" of EEX's 2000 Annual Report on Form 10-K). This accounting standard
requires that EEX mark to market its hedge positions and report the result as an
adjustment to shareholders' equity as other comprehensive income. If future gas
prices are generally higher than EEX's contractual hedge prices, the resulting
decrease to shareholders' equity would decrease available credit under the
revolving credit agreement. To mitigate this potential loss of credit
availability, in December 2000, EEX converted a portion of its then existing
hedge positions into fixed-price physical delivery contracts.
Replacement of Revolving Credit Agreement--There can be no assurance that EEX
will be able to secure a new loan in June 2002 on favorable terms or that its
proved reserve value at the time will support the borrowings then outstanding.
In addition, conversion to a borrowing base may cause EEX to incur additional
costs associated with early termination of the Gas Sales Obligation and Minority
Interest Ownership associated with the acquisition of the Tesoro properties.
(See the discussion in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources--
Liquidity" and Notes 6 and 10 to Consolidated Financial Statements in Item 8 of
EEX's 2000 Annual Report on Form 10-K).
Expiration of Letters of Credit--There can be no assurance that EEX will be able
to renew or extend its letters of credit that support a portion of the capital
lease obligations for the FPS and Pipelines and may incur significantly
increased short term debt obligations should it fail to do so. (See the
discussion in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Liquidity"
in EEX's 2000 Annual Report on Form 10-K).
Encogen Obligation--In January 2002, the obligor of a production payment due to
EEX may elect to purchase a portion of the obligation (See the discussion in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Impairment of Assets" in EEX's 2000 Annual Report on Form 10-K).
If the obligor purchases this portion of the asset, or such purchase becomes
probable, in the opinion of management, then the Company would realize a loss on
the sale of approximately $18 million. Based upon available information,
management cannot predict at this time the likelihood that the obligor will
elect to purchase the additional volumes.
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 onshore, offshore and international
areas. 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.
10
Offshore Risks--EEX's Gulf of Mexico oil and gas reserves and exploration
prospects include properties located in water depths greater than 2,000 feet
where operations are by their nature more difficult than drilling operations
conducted on land in established producing areas. Deepwater drilling and
operations require the application of more advanced technologies that involve a
higher risk of mechanical failure and can result in significantly higher
drilling and operating costs which, in turn, can require greater capital
investment than anticipated and materially change the expected future value of
offshore development projects. The size of oil and gas reserves determined
through exploration and confirmation drilling operations must ultimately be
significant enough to justify the additional capital required to construct and
install production and transportation systems and drill development wells.
Development of any discoveries made pursuant to EEX's Deepwater exploration
program may not return any profit to it and could result in an economic loss.
Furthermore, offshore operations require a significant amount of time between
the discovery and the time the gas or oil is actually marketed, increasing the
market risk involved with such operations.
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 adjustments in reserve estimates could adversely affect EEX. Also, any
substantial decline in projected net revenues resulting from production of
reserves could have a material adverse effect on EEX's financial position and
results of operations.
Government Regulation--EEX's business is subject to certain federal, state and
local laws and regulations relating to the drilling for and the production of
oil and gas, as well as environmental and safety matters. Enforcement of or
changes to these regulations could have a material impact on EEX's operations,
financial condition and results of operations.
International Operations--EEX's interests in properties in countries outside the
United States are subject to the various risks inherent in foreign operations.
These risks may include, among other things, loss of property and equipment as a
result of expropriation, nationalization, war, insurrection and other political
risks, risks of increases in taxes and governmental royalties, renegotiations of
contracts with governmental entities, changes in laws and policies governing
operations of foreign-based companies and other uncertainties arising out of
foreign government sovereignty over EEX's international operations. EEX's
international operations may also be adversely affected by laws and policies of
the United States affecting foreign trade, taxation and investment. In addition,
in the event of a dispute arising from foreign operations, EEX may be subject to
the exclusive jurisdiction of foreign courts or may not be successful in
subjecting foreign persons to the jurisdiction of the courts of the United
States.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Hedging activity for the first quarter ended March 31, 2001, resulted in a loss
of $8 million for natural gas. The table below provides information about EEX's
hedging instruments as of March 31, 2001. The Notional Amount is equal to the
volumetric hedge position of EEX during the periods. The fair values of the
hedging instruments, which have been recorded in other comprehensive income, are
based on the difference between the applicable strike price and the New York
Mercantile Exchange future prices for the applicable trading months.
NOTIONAL AVERAGE FAIR VALUE AT
AMOUNT STRIKE PRICE MARCH 31, 2001
(BBTU) (1) (PER MMBTU) (2) (IN THOUSANDS)
---------- ------------------------- ---------------
FLOOR CEILING
-------- -------
Natural Gas Collars:
April 2001 - June 2001.............................. 1,365 $2.517 $3.277 $(2,570)
July 2001 - September 2001.......................... 2,760 3.210 4.723 (2,591)
October 2001 - December 2001........................ 2,760 3.242 4.962 (2,173)
January 2002 - March 2002........................... 1,350 3.854 6.137 -
April 2002 - June 2002.............................. 1,365 3.374 5.658 -
----- -------
Total............................................ 9,600 $(7,334)
===== =======
--------------
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Current Report on Form 8-K filed January 16, 2001 and dated December
19, 2000. (News Release dated December 19, 2000: EEX Drills
Successful Well at Jason Prospect; and News Release dated December 19,
2000: EEX to Sell Shelf Properties in the Gulf of Mexico.)
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EEX CORPORATION
(Registrant)
Dated: May 9, 2001 By: /s/ R. S. Langdon
------------------
R. S. Langdon
Executive Vice President,
Finance and Administration,
and Chief Financial Officer
14