================================================================================
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, 2002
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, 2002:
42,487,395
================================================================================
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31
----------------------------
2002 2001
------------ ------------
(In thousands, except
per share amounts)
Revenues:
Natural gas.............................................................. $ 36,331 $ 39,486
Oil, condensate and natural gas liquids.................................. 2,083 3,265
Cogeneration operations.................................................. 1,139 2,045
Other.................................................................... 958 804
------------ ------------
Total............................................................... 40,511 45,600
------------ ------------
Costs and Expenses:
Production and operating................................................. 6,238 4,942
Exploration.............................................................. 5,724 19,711
Depletion, depreciation and amortization................................. 12,130 11,440
(Gain) Loss on sales of property, plant and equipment.................... (17) 302
Cogeneration operations.................................................. 801 1,875
General, administrative and other........................................ 4,383 3,313
Taxes, other than income................................................. 1,857 5,545
------------ ------------
Total............................................................... 31,116 47,128
------------ ------------
Operating Income (Loss) from Continuing Operations........................... 9,395 (1,528)
Other Income--Net............................................................ 28 2
Interest Income ............................................................. 529 396
Interest and Other Financing Costs .......................................... (6,162) (7,812)
------------ ------------
Income (Loss) from Continuing Operations Before Income Taxes................. 3,790 (8,942)
Income Taxes................................................................. -- --
------------ ------------
Income (Loss) from Continuing Operations..................................... 3,790 (8,942)
Discontinued Operations:
Income from Discontinued Operations, Net of Income Taxes..................... 2,701 4,693
------------ ------------
Net Income (Loss)............................................................ 6,491 (4,249)
Preferred Stock Dividends.................................................... 3,799 3,510
------------ ------------
Net Income (Loss) Applicable to Common Shareholders.......................... $ 2,692 $ (7,759)
============ ============
Basic and Diluted Earnings Per Share:
Net Loss from Continuing Operations ..................................... $ (0.00) $ (0.30)
============ ============
Net Income from Discontinued Operations.................................. $ 0.06 $ 0.11
============ ============
Net Income (Loss) Applicable to Common Shareholders...................... $ 0.06 $ (0.19)
============ ============
Weighted Average Shares Outstanding:
Basic and Diluted ....................................................... 41,860 41,648
============ ============
See accompanying notes.
2
EEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31 December 31
2002 2001
----------- -------------
(In thousands)
ASSETS
------
Current Assets:
Cash and cash equivalents.................................................... $ 109,027 $ 136,618
Accounts receivable--trade (net of allowance of $2,781 and $2,780)........... 16,816 29,651
Natural gas hedging derivatives.............................................. -- 23,203
Assets held for sale (net of allowance of $1,650) ........................... 15,683 13,174
Other........................................................................ 3,496 1,871
----------- -----------
Total current assets.................................................... 145,022 204,517
----------- -----------
Property, Plant and Equipment (at cost):
Oil and gas properties (successful efforts method)........................... 890,302 873,008
Other........................................................................ 8,664 8,668
----------- -----------
Total................................................................... 898,966 881,676
Less accumulated depletion, depreciation and amortization.................... 376,406 362,128
----------- -----------
Net property, plant and equipment....................................... 522,560 519,548
----------- -----------
Net property, plant and equipment held for sale ................................. 16,342 18,107
Other assets..................................................................... 3,068 7,946
----------- -----------
Total................................................................... $ 686,992 $ 750,118
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable--trade...................................................... $ 30,048 $ 42,443
Bank revolving credit agreement.............................................. 325,000 325,000
Secured notes payable........................................................ 14,642 13,579
Liabilities held for sale ................................................... 3,500 6,132
Other........................................................................ 3,126 7,118
----------- -----------
Total current liabilities............................................... 376,316 394,272
----------- -----------
Secured Notes Payable............................................................ 86,122 100,764
Gas Sales Obligation............................................................. 52,463 59,937
Other Liabilities................................................................ 11,759 9,357
Minority Interest Third Party.................................................... 5,000 5,000
Shareholders' Equity:
Preferred stock (10,000 shares authorized; 1,937 and 1,899 shares issued;
Liquidation preference of $193,745 and $189,946)........................ 19 19
Common stock ($0.01 par value; 150,000 shares authorized; 42,487 and
42,496 shares issued)................................................... 432 432
Paid in capital.............................................................. 764,282 760,484
Retained (deficit)........................................................... (602,920) (605,612)
Unamortized restricted stock compensation.................................... (1,144) (1,403)
Other comprehensive income................................................... 3,749 35,954
Treasury stock, at cost (826 and 817 shares)................................. (9,086) (9,086)
----------- -----------
Total shareholders' equity.............................................. 155,332 180,788
----------- -----------
Total................................................................... $ 686,992 $ 750,118
=========== ===========
See accompanying notes.
3
EEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31
---------------------------
2002 2001
---------- ----------
(In thousands)
OPERATING ACTIVITIES
Net Income (Loss)............................................................ $ 6,491 $ (4,249)
Less: Income from discontinued operations .................................. 2,701 4,693
---------- ----------
Income (Loss) from continuing operations................................... 3,790 (8,942)
Adjustments to reconcile net income to net cash provided by operating
activities:
Dry hole cost................................................................ (6) 54
Depletion, depreciation and amortization..................................... 12,130 11,440
Impairment of undeveloped leasehold.......................................... 2,400 1,950
(Gain) Loss on sales of property, plant and equipment........................ (17) 302
Other ....................................................................... (1,937) (10,365)
Changes in current operating assets and liabilities:
Accounts receivable....................................................... 3,071 13,417
Other current assets...................................................... (1,625) 5,822
Accounts payable.......................................................... (7,324) (11,140)
Other current liabilities................................................. (3,992) 391
---------- ----------
Net cash flows provided by operating activities........................ 6,490 2,929
---------- ----------
INVESTING ACTIVITIES
Additions of property, plant and equipment................................... (17,560) (37,726)
Proceeds from dispositions of property, plant and equipment.................. 10,955 182
Other (changes in accruals).................................................. (5,748) (7,261)
---------- ----------
Net cash flows used in investing activities............................ (12,353) (44,805)
---------- ----------
FINANCING ACTIVITIES
Borrowings under bank revolving credit agreement............................. -- 60,000
Repayment of borrowings under bank revolving credit agreement................ -- (10,000)
Deliveries under the gas sales obligation.................................... (7,474) (7,123)
Payments of secured notes payable............................................ (13,579) --
Payments of capital lease obligations........................................ -- (7,805)
---------- ----------
Net cash flows (used in) provided by financing activities.............. (21,053) 35,072
---------- ----------
Cash (Used In) Provided By Discontinued Operations .............................. (675) 10,742
Net (Decrease) Increase in Cash and Cash Equivalents............................. (27,591) 3,938
Cash and Cash Equivalents at Beginning of Period................................. 136,638 19,791
---------- ----------
Cash and Cash Equivalents at End of Period....................................... 109,047 23,729
Less: Cash and Cash Equivalents of Discontinued Operations ..................... 20 20
---------- ----------
Cash and Cash Equivalents from Continuing Operations ............................ $ 109,027 $ 23,709
========== ==========
See accompanying notes.
4
EEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements present the
financial position, results of operations and cash flows of EEX Corporation
and its subsidiaries ("EEX" or the "Company"). These consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission governing interim financial disclosures.
These consolidated financial statements reflect all adjustments (consisting
of only normal recurring adjustments) that, in the opinion of management,
are necessary to fairly present the Company's financial position as of
March 31, 2002 and December 31, 2001, and the results of operations and
cash flows for the three months ended March 31, 2002 and 2001. Operating
results for the three months ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2002.
In the fourth quarter of 2001, the Company began marketing all of its
Indonesian assets. As a result, the results of operations of the Indonesian
subsidiaries (International segment) are presented as a discontinued
operation in accordance with Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS No. 144"). The historical financial statements have been restated to
give effect to this treatment.
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and accompanying notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
2. The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business.
The Company has incurred recurring net losses and has a substantial working
capital deficiency as of March 31, 2002. In addition, there are
uncertainties relating to the Company's ability to meet future expenditures
and cash flow requirements. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of these
uncertainties.
The Company is seeking to alleviate these conditions by renegotiating its
current revolving credit agreement that matures on June 27, 2002. The
Company exceeded the debt to capital ratio under the current revolving
credit agreement at March 31, 2002. Exceeding the debt to capital ratio and
the independent auditors' modification of their opinion on the financial
statements for the year ended December 31, 2001 as to the uncertainty
regarding EEX's ability to continue as a going concern are covenant
breaches under the current revolving credit agreement. One or more defaults
will allow the lenders to accelerate the maturity and declare all
borrowings under the current revolving credit agreement immediately
payable.
EEX is exploring various other options including the raising of additional
capital, the sale or merger of the Company or a sale of a significant
portion of its assets to repay the loan. No assurances can be provided that
the Company will be able to conclude a new credit agreement, obtain
additional waivers of covenant breaches, raise additional capital, or sell
or merge the Company. In the event these efforts are unsuccessful, EEX may
seek protection from its creditors and reorganization under the Federal
bankruptcy laws. In either case, EEX may not be able to continue its
business as presently constituted and planned. A liquidation of assets to
retire debt and preferred securities may result in minimal to no funds
remaining for the common shareholders.
The New York Stock Exchange may delist EEX's common stock, which could
result in decreased liquidity for the common shareholders. EEX currently
exceeds the minimum quantitative criteria of the Exchange for continued
listing, however, no assurances can be given that the Company will continue
to meet these criteria, or that the Exchange will not use other criteria or
information in considering whether to institute delisting proceedings.
3. On January 1, 2002, the Company adopted SFAS No. 144. Consequently, the
Indonesian operations are held for sale and presented as discontinued
operations. The assets and liabilities specifically related to this segment
have been classified as held for sale in the accompanying consolidated
balance sheets, which include working capital and fixed assets. These
assets have been recorded at their estimated fair market values and the
effect of any adjustments have been reflected in the net income from
discontinued operations.
5
EEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the fourth quarter of 2001, the Company began marketing all of its
Indonesian assets. In March 2002, the Company negotiated and signed two
stock purchase agreements subject to certain conditions to closing. On
April 26, 2002, the Company closed the sale of all of the shares of a
subsidiary that owns a 25% interest in the Tuban Concession, onshore Java,
to PT Medco Energi Internasional. The sale of the other Indonesian
subsidiary that owns a 15% interest in the Asahan Concession, offshore
Sumatra, is expected to close at a later date. Below is a summary of the
assets and liabilities held for sale (in thousands):
March 31 December 31
2002 2001
---------------- -----------------
Assets held for sale:
Cash................................................ $ 20 $ 20
Accounts receivable--trade.......................... 6,583 4,817
Inventory........................................... 2,715 2,142
Other ............................................. 6,365 6,195
---------------- -----------------
Total current assets held for sale............... $ 15,683 $ 13,174
================ =================
Liabilities held for sale:
Accounts payable--trade............................. $ 3,500 $ 6,132
================ =================
Refer to Footnote 8 - Segment Information - International segment for
results of operations for the three months ended March 31, 2002 compared to
March 31, 2001.
4. 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 and the liquidation preference on the preferred
stock is as follows:
Amount of Dividends Number of Preferred Liquidation Preference
Date (In millions) Shares Issued (In millions)
----------------------- ------------------------- --------------------------- ---------------------------
March 31, 2002 $3.8 37,990 $193.7
5. Payments under the gas sales obligation are amortized using the interest
method through final pay out using an interest rate of 9.5%. Payments made
during the first quarter of 2002 related to this obligation were $7
million.
6. The Statement of Cash Flows for the three months ended March 31, 2002
reflects approximately $2 million related to the early settlement of
several hedges as a non-cash transaction. This amount was reclassified from
other comprehensive income and recognized as revenues to match the
underlying sales transaction being hedged. In addition, the Statement of
Cash Flows also reflects the net change in the fair value of derivative
financial instruments which results in a non-cash decrease of approximately
$30 million to shareholders' equity.
7. 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
EEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. 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: Onshore,
Deepwater Operations, Deepwater FPS/Pipelines, and International. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (See Note 3 to the Consolidated
Financial Statements in Item 8 of EEX's 2001 Annual Report on Form 10-K).
EEX's reportable segments are managed separately because of their
geographic locations.
In the fourth quarter of 2001, the Company began marketing all of its
Indonesian assets. As a result, the results of operations of the Indonesian
subsidiaries (International segment) are presented as a discontinued
operation in accordance with SFAS No. 144. Historical segment information
has been restated to give effect to this treatment.
Financial information by operating segment is presented below (in
thousands):
Deepwater Continuing Discontinued
------------------------------ Operations Operations -
Onshore Operations FPS/Pipelines Other(a) Total International
------------- ------------- -------------- ------------- ------------- -------------
Three months ended March 31, 2002:
---------------------------------
Total revenues....................... $ 27,994 $ -- $ -- $ 12,517 $ 40,511 $ 10,408
Production and operating costs....... 5,589 353 296 -- 6,238 3,734
Exploration costs.................... 2,878 2,846 -- -- 5,724 380
Depletion, depreciation and
amortization..................... 10,580 -- 1,059 491 12,130 --
Impairment of producing oil and gas
properties as required per
SFAS 144......................... -- -- -- -- -- 3,600
Other costs.......................... 1,898 (b) -- -- 5,126 7,024 --
------------- ------------- -------------- ------------- ------------- -----------
Operating Income (Loss).............. 7,049 (3,199) (1,355) 6,900 9,395 2,694
Interest Income...................... -- -- -- 557 557 7
Interest and other financing costs... (1,364) -- (1,926) (2,872) (6,162) --
------------- ------------- -------------- ------------- ------------- -----------
Income (Loss) before income taxes.... $ 5,685 $ (3,199) $ (3,281) $ 4,585 $ 3,790 $ 2,701
============= ============= ============== ============= ============= ===========
Long-Lived Assets.................... $377,836 $ 72,971 $ 69,111 $ 2,642 $ 522,560 $ 16,342
============= ============= ============== ============= ============= ===========
Additions to Long-Lived Assets....... $ 10,876 $ 6,524 $ 115 $ 45 $ 17,560 $ 1,835
============= ============= ============== ============= ============= ===========
Three months ended March 31, 2001:
---------------------------------
Total revenues....................... $ 51,523 $ -- $ -- $ (5,923) $ 45,600 $ 13,662
Production and operating costs....... 4,793 -- 149 -- 4,942 3,558
Exploration costs.................... 4,324 15,270 -- 117 19,711 436
Depletion, depreciation and
amortization..................... 9,674 -- 1,314 452 11,440 4,986
Other costs.......................... 5,662 (b) -- 3 5,370 11,035 --
------------- ------------- -------------- ------------- ------------- -----------
Operating Income (Loss).............. 27,070 (15,270) (1,466) (11,862) (1,528) 4,682
Interest Income...................... -- -- -- 398 398 11
Interest and other financing costs... (1,992) -- (3,398) (2,422) (7,812) --
------------- ------------- -------------- ------------- ------------- -----------
Income (Loss) before income taxes.... $ 25,078 $(15,270) $ (4,864) $(13,886) $ (8,942) $ 4,693
============= ============= ============== ============= ============= ===========
Long-Lived Assets.................... $386,414 $ 92,497 $ 144,778 $ 4,224 $ 627,913 $ 33,141
============= ============= ============== ============= ============= ===========
Additions to Long-Lived Assets....... $ 33,970 $ 3,733 $ -- $ 23 $ 37,726 $ 2,640
============= ============= ============== ============= ============= ===========
_________________________
(a) Includes primarily Cogeneration Plant Operations, General and
Administrative, gains/loss on hedging and sale of assets.
(b) Includes taxes other than income.
7
EEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. 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 expiration or
exchanged for physical delivery contracts. The Company enters into the
majority of its hedging transactions with one counterparty and a netting
agreement is in place with that counterparty. 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.
The net gain related to financial hedging activities that was reclassified
to revenues to match the underlying sales transaction being hedged was
approximately $11 million for the quarter ended March 31, 2002, compared to
a loss of $8 million for the same period of 2001.
At March 31, 2002, EEX had outstanding natural gas swaps that were entered
into as hedges extending through December 31, 2003, to exchange payments on
36,590 BBtu of natural gas. At March 31, 2002, the weighted average strike
price and market price per MMBtu of natural gas were $3.48 and $3.57,
respectively. At March 31, 2002, the Company estimated, using a NYMEX price
strip as of that date, that the fair market value represented a net current
liability of approximately $0.2 million and a net noncurrent liability of
$2.4 million and accumulated other comprehensive loss of approximately $2.6
million. The Company realized no ineffectiveness in the first quarter of
2002.
At March 31, 2002, EEX had outstanding natural gas collars that were
entered into as hedges extending through October 2002 to exchange payments
on approximately 2 Bcf of natural gas. At March 31, 2002, the weighted
average floor and ceiling strike prices and market price per MMBtu of
natural gas were $2.95, $4.37 and $3.35, respectively. At March 31, 2002,
the Company estimated, using a NYMEX price strip as of that date, that the
fair market value represented a net current liability of approximately $0.5
million and accumulated other comprehensive loss of approximately $0.5
million. The Company recognized no ineffectiveness in the first quarter of
2002.
The Company may from time to time settle early derivative transactions.
Gains or losses are included in accumulated other comprehensive income
until they are recognized in revenues to match the underlying sales
transaction being hedged. In addition, the Company terminated several
financial hedges with Enron North America Corp. in December 2001. During
the first quarter of 2002, the Company reclassified approximately $2
million from accumulated other comprehensive income to revenues related to
these transactions. As of March 31, 2002, approximately $4 million remains
to be reclassified from other comprehensive income to revenues in 2002 and
approximately $3 million remains to be reclassified from other
comprehensive income to revenues in 2003.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations and all accompanying information should be read in conjunction with
the consolidated financial statements, accompanying notes and other financial
information included in this Quarterly Report on Form 10-Q and in the Company's
most recent Annual Report on Form 10-K for the year ended December 31, 2001.
Certain statements in this report, including statements of EEX 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. 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, the risks, uncertainties and critical accounting
policies and estimates described in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001, and described from time to time in EEX's other
documents and reports filed with the Securities and Exchange Commission. The
following discussion should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risks,
Uncertainties and Critical Accounting Policies and Estimates," in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS
EEX Corporation reported first quarter 2002 net income of approximately $3
million, or $0.06 per share, compared to a net loss of approximately $8 million,
or ($0.19) per share for the first quarter of 2001. The current quarter's
results include approximately $3 million in net income generated from the Mudi
Field in the Tuban Block in Indonesia, which is reported as a discontinued
operation under newly-adopted Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment of Long-Lived Assets," ("SFAS No. 144"). The
financial statements have been restated in accordance with SFAS No. 144 to
eliminate the impact of the discontinued Indonesian operations from continuing
operations. A discussion of results of continuing operations for the three
months ended March 31, 2002, compared to the three months ended March 31, 2001
follows:
RESULTS OF CONTINUING OPERATIONS
For the first quarter of 2002, EEX's results from continuing operations were
approximately break even, versus a net loss of approximately $12 million ($0.30
per share) for the same period in 2001.
For the first quarter of 2002, total revenues were $41 million, 11% lower than
total revenues in the first quarter of 2001. Natural gas revenues for the first
quarter of 2002 were 8% lower than the same quarter of 2001. This decrease was
due to a 12% decrease in the average natural gas sales price offset by a 5%
increase in production. Natural gas production for the first quarter of 2002 was
approximately 11 billion cubic feet ("Bcf"), compared with 10 Bcf in the same
period of 2001. The average natural gas sales price per thousand cubic feet
("Mcf") was $3.42 in the first quarter of 2002, compared with $3.90 in the same
period of 2001. The average natural gas sales price for the first quarter 2002
includes hedging gains of $11 million and 2,811 billion British thermal units
("BBtu") delivered under the gas sales obligation at an average price of $2.59
per million British thermal units ("MMBtu"). The average natural gas sales price
of $3.90 per Mcf for the first quarter 2001 includes hedging losses of $8
million and 5,117 BBtu delivered under fixed-price delivery contracts and the
gas sales obligation at an average price of $2.93 per MMBtu. Oil revenues for
the first quarter of 2002 decreased 36% from the same quarter of 2001. This
decrease was primarily due to a 31% decrease in the average oil sales price and
a 7% decrease in production. The average oil price per barrel during the first
quarter of 2002 was $19.08 compared to $27.69 for the same period of 2001.
Costs and expenses for the first quarter of 2002 were $31 million, compared with
$47 million in the same period of 2001. Operating expenses (production and
operating, general, administrative and other, and taxes other than income) were
$12 million in the current quarter, 10% lower than the first quarter of 2001.
Production and operating increased primarily due to increased workovers, and
general, administrative and other also increased. This increase was offset by a
decrease in taxes, other than income primarily due to lower gas prices.
Exploration expenses for the first quarter of 2002 were $6 million, compared to
$20 million for the same period of 2001. The first quarter of 2001 contained
approximately $14 million in costs associated with stacking of the Arctic I rig
and recognition of the net costs associated with the assignment of the Arctic 1
contract through May 2001. Depletion, depreciation and amortization for the
first quarter of 2002 was $12 million, $1 million higher than the same period of
2001.
9
Total interest and other financing costs for the first quarter of 2002,
including interest income, preferred stock dividends and other income, were $9
million, a $2 million decrease from the same period of 2001. This decrease is
primarily due to lower interest expense related to the debt associated with the
FPS and pipelines and the gas sales obligation offset slightly by higher
interest expense associated with increased borrowings under the revolving credit
agreement.
EEX CORPORATION
SUMMARY OF SELECTED OPERATING DATA
FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Three Months Ended
March 31
-------------------------------
2002 2001
-------------- ---------------
Sales volume
Natural gas (Bcf) (a)............................................... 10.6 10.1
Oil, condensate and natural gas liquids (MMBbls) (d)................ 0.1 0.1
Total volumes (Bcfe) (a)......................................... 11.3 10.9
Average sales price (b)
Natural gas (per Mcf) (c)........................................... $ 3.42 $ 3.90
Oil, condensate and natural gas liquids (per Bbl)................... 17.80 25.71
Total (per Mcfe) (c)............................................. 3.39 3.93
Average costs and expenses (per Mcfe) (c)
Production and operating (b)........................................ $ 0.55 $ 0.45
Exploration......................................................... 0.51 1.81
Depletion, depreciation and amortization............................ 1.07 1.05
General, administrative and other................................... 0.39 0.30
Taxes, other than income............................................ 0.16 0.51
_______________________
(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.
RESULTS OF DISCONTINUED OPERATIONS
For the first quarter of 2002, EEX reported net income from discontinued
Indonesian operations (International segment), net of tax, of approximately $3
million, $0.06 per share, versus net income of approximately $5 million, $0.11
per share, for the same period of 2001.
For the first quarter of 2002, oil revenues were $10 million, 24% lower than oil
revenues in the first quarter 2001. The average oil price per barrel during the
first quarter 2002 was $20.57 compared to $24.66 for the same period of 2001, a
decrease of approximately 17%. Oil production for the first quarter 2002
decreased 9%, compared to the same period in 2001. In accordance with SFAS No.
144, an impairment of approximately $4 million, net of tax, was recorded in the
first quarter of 2002, which represents the Company's current estimate of the
difference between the book value and the fair value of the assets held for
sale. In accordance with SFAS No. 144, depletion was suspended in the first
quarter of 2002. Depletion for the first quarter of 2001 was $5 million.
Net cash flows used for discontinued operations were $0.7 million during the
first quarter 2002, compared to net cash flows provided by discontinued
operations of $11 million for the same period 2001. This is primarily a result
of the timing and collection of receivables and payment of cash calls to the
operator.
10
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents and Cash Flows from Continuing Operations
The following summary table reflects the Company's cash flows from continuing
operations (in thousands):
Three Months Ended
March 31
----------------------------------
2002 2001
-------------- ---------------
Net cash provided by operating activities................ $ 6 $ 3
Net cash (used in) investing activities.................. (12) (45)
Net cash (used in) provided by financing activities...... (21) 35
As of March 31, 2002, the cash and cash equivalents balance was $109 million.
Net cash flows provided by operating activities from continuing operations for
the three months ended March 31, 2002 were approximately $6 million, an increase
of approximately $3 million over the same period of 2001. This increase was due
to full utilization of the Arctic I rig during the first quarter 2002.
Net cash flows used in investing activities for continuing operations for the
three months ended March 31, 2002 were approximately $12 million, a $32 million
decrease from cash flows used in investing activities for the same period of
2001. The decrease in investing activities is primarily due to lower capital
expenditures in 2002. The decrease is due to the completion of the Encogen
obligation in the first half of 2001 and reduced onshore spending due to capital
constraints. In addition, in January 2002, the Company received $11 million from
the sale of a part of the production payment associated with the Encogen
obligation.
Net cash flows used in financing activities for continuing operations for the
three months ended March 31, 2002 were approximately $21 million, compared to
net cash flows provided by financing activities of $35 million for the same
period of 2001. During the first quarter 2001, the Company borrowed $50 million.
Financing Activities
EEX has a $325 million revolving credit facility with a group of banks that
matures on June 27, 2002, of which $325 million was outstanding at March 31,
2002, all of which is classified as a current liability. The interest rate
ranges from the London Inter-Bank Offered Rate, or 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. The revolving credit agreement limits, at all times,
total debt, as defined in the agreement, to the lesser of 60% (72% from December
31, 2001 through April 30, 2002) of capitalization, as defined, or $1 billion,
and prohibits liens on property except under certain circumstances. As of March
31, 2002, the debt to capital ratio under the revolving credit agreement was
approximately 74%, exceeding the debt to capital ratio limitation. The opinion
of the independent auditors on the financial statements in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 contains a report
modification for a going concern uncertainty. As a result of exceeding the
permitted ratio and the going concern report modification, the Company is in
default under the revolving credit agreement. As of May 15, 2002, the lenders
have not accelerated the maturity of the facility. In addition, the default
under the revolving credit agreement may trigger cross-defaults under other
agreements to which the Company is a party. The default under the revolving
credit agreement or any cross-defaults triggered as a result thereof could
materially and adversely affect the Company's financial condition and its
results of operations.
The Company has reached agreement on the terms of a new credit agreement with
its agent banks. However, the terms are currently being circulated among, but
have not been approved by, the other lenders who are all parties to the existing
revolving credit agreement. Once approved by all of the lenders, the new credit
agreement will be subject to negotiation and execution of definitive
documentation.
If the current revolving credit agreement is not replaced with another borrowing
facility, EEX would be required to repay the amount outstanding under the
revolving credit agreement on June 27, 2002, or earlier if the lenders
accelerate the maturity because of an existing or future default. EEX is
exploring various other options including the raising of additional capital, the
sale or merger of the Company or a sale of a significant portion of its assets
to repay the loan. In the event these efforts are unsuccessful, EEX may seek
protection from its creditors and reorganization under the Federal bankruptcy
laws. No assurances can be given that EEX will be successful in completing an
acceptable financing plan or a sale or merger of the Company.
11
Future Capital Requirements
Capital expenditures for continuing operations for the three months ended March
31, 2002, were $18 million compared to $38 million for the three months ended
March 31, 2001. This decrease in capital spending during the first three months
of 2002 is primarily due to the completion of the Encogen obligation in the
first half of 2001 and reduced onshore spending due to capital constraints.
Capital expenditures for the remainder of 2002 are expected to be approximately
$32 million. The 2002 capital program assumes that a new credit agreement is
executed. If a new credit agreement is not obtained, the capital budget could be
curtailed.
Sources of Capital and Liquidity
Until EEX is able to secure a new credit agreement (of which no assurances can
be given), raise additional capital, sell or merge the Company, or sell a
significant portion of its assets, it will have no sources of funds except cash
and cash equivalents on hand, operating cash flows and proceeds from assets
sales to fund capital and operating expenses.
In April 2002, the Company received approximately $26 million from the sale of
the shares of a subsidiary that owns a 25% interest in the Tuban Concession. The
sale of another Indonesian subsidiary that owns a 15% interest in the Asahan
Concession is expected to close at a later date. The proceeds of this expected
sale will be less than $1 million.
EEX's access to public and private equity or debt markets may be limited by
general market conditions, volatility of the markets, general conditions
affecting the oil and gas industry, or 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 is required to sell assets to repay the revolving credit agreement,
operating cash flows will be significantly reduced and may be insufficient to
meet current expenses. If such a sale is conducted under distressed conditions,
EEX may not receive the same amount for the assets that would be obtained in an
orderly sale.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Hedging activity for the three months ended March 31, 2002 resulted in a gain of
approximately $11 million for natural gas. The table below provides information
about EEX's hedging instruments as of March 31, 2002. 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, 2002
(BBtu) (1) (Per MMBtu) (2) (In thousands)
--------------- ---------------------- ------------------
Floor Ceiling
--------- ---------
Natural Gas Collars:
April 2002 - June 2002...................... 1,820 $3.13 $4.93 $ (98)
July 2002 - September 2002.................. 460 2.40 2.73 (295)
October 2002 ............................... 155 2.40 2.73 (104)
--------------- ------------------
Total.................................. 2,435 $ (497)
=============== ==================
Notional Average Fair Value at
Amount Swap Price March 31, 2002
(BBtu) (1) (Per MMBtu) (2) (In thousands)
------------------- ------------------- ------------------
Natural Gas Swaps:
April 2002 - June 2002...................... 5,460 $3.15 $ 412
July 2002 - September 2002.................. 5,980 3.47 604
October 2002 - December 2002................ 5,980 3.99 263
January 2003 - March 2003................... 4,500 3.22 (1,459)
April 2003 - June 2003...................... 4,550 2.99 (949)
July 2003 - September 2003.................. 5,060 3.60 (685)
October 2003 - December 2003................ 5,060 3.90 (801)
------------------- ------------------
Total.................................. 36,590 $ (2,615)
=================== ==================
______________
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.
13
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 March 7, 2002 and dated February
22, 2002 (news releases dated February 22 and February 26, 2002
concerning fourth quarter and annual results and summary of
conference call on results).
14
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 15, 2002 By: /s/ R. S. Langdon
------------------------------
R. S. Langdon
Executive Vice President,
Finance and Administration,
and Chief Financial Officer
15