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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, 2000

                                       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

                               ----------------

                                EEX CORPORATION
             (Exact name of Registrant as specified in its charter)

                               ----------------

<TABLE>
<S>                                                    <C>
                 Texas                                         75-2421863
     (State or other jurisdiction of                       (I.R.S. Employer
      incorporation or organization)                    Identification Number)

           2500 CityWest Blvd.                                   77042
               Suite 1400                                     (Zip Code)
             Houston, Texas
(Address of principal executive office)
</TABLE>

                                 (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,
2001: $170,821,125.

   Shares of the Registrant's Common Stock outstanding as of March 1, 2001:
42,216,105 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 2001 annual meeting of shareholders.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                   FORM 10-K

                                 ANNUAL REPORT
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                               TABLE OF CONTENTS

                               ----------------

<TABLE>
<CAPTION>
                                                                           Page
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<S>                                                                        <C>
                                 PART I


ITEM 1. Business.........................................................    3
          General........................................................    3
          History........................................................    3
          Strategy.......................................................    3
          U.S. Exploration and Development--Onshore......................    4
          U.S. Exploration and Development--Offshore.....................    6
          International Exploration and Development......................    8
          Plant Operations Business......................................    8
          Sales of Natural Gas and Crude Oil.............................    8
          Competition....................................................    9
          Government Regulation..........................................    9
          Employees......................................................   11
          Offices........................................................   11
          Forward-Looking Statements--Uncertainties and Risks............   11
ITEM 2. Properties.......................................................   14
ITEM 3. Legal Proceedings................................................   17
ITEM 4. Submission of Matters to a Vote of Security Holders..............   17


                                 PART II


ITEM 5. Market for Registrant's Common Equity and Related Stockholder
        Matters..........................................................   18
ITEM 6. Selected Financial and Operating Data............................   19
ITEM 7. Management's Discussion and Analysis of Financial Condition and
        Results of Operations............................................   21
          Results of Operations..........................................   21
          Liquidity and Capital Resources................................   23
          Other Matters..................................................   26
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk......   26
ITEM 8. Financial Statements and Supplementary Data......................   28
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.............................................   57


                                PART III


ITEM 10. Directors and Executive Officers of the Registrant..............   58
ITEM 11. Executive Compensation..........................................   58
ITEM 12. Security Ownership of Certain Beneficial Owners and Management..   58
ITEM 13. Certain Relationships and Related Transactions..................   58


                                 PART IV


ITEM 14. Exhibits, Financial Statement Schedules and Reports on
         Form 8-K........................................................   59
</TABLE>

                                       2
<PAGE>

                                    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 through subsidiary and affiliate entities of ENSERCH
Corporation ("ENSERCH"). From 1985 to 1994, the business was conducted 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.

   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 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 ENSERCH's 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 and the engagement of a new senior
management team in 1997 resulted in a significant restructuring of the
Company's assets, operations and strategy. At the end of 1999, the Company
acquired the domestic exploration and production operations of Tesoro
Petroleum Corporation. This acquisition supplemented existing production,
lengthened average reserve life, provided reinvestment opportunities in faster
payback projects and resulted in a stronger foundation from which to pursue
exploration potential in the 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:

   Grow the Onshore U.S. Business--During 1999, the Company concluded that a
combination of its onshore U.S. 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 year 2000 capital program was invested into
drilling projects on these combined properties with very favorable results.
The Company's drilling program was successful in 43 out of 54 wells drilled.
EEX's estimate of total proved reserve additions and revisions (including
minority interest) from the onshore program is approximately 120 billion cubic
feet equivalent of natural gas (Bcfe), or 267%, of the 45 Bcfe produced during
the year. All reserve additions were achieved through the drilling program.
After production and asset sales, onshore reserves (including minority
interest) increased by approximately 15%. These reserve additions and
revisions, achieved at a very economic finding and development cost of
approximately $0.68 per Mcfe, and high natural gas prices, generated
considerable economic value. The Company intends to use a significant portion
of its 2001 capital budget to grow the onshore business through exploration,
acquisition of producing properties and/or investments in new leaseholds.


                                       3
<PAGE>

   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
70,000 barrels of oil and 140 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 developments at Llano and the greater Llano complex. The Company
is presently evaluating options to realize the value of the FPS. See U.S.
Exploration and Development--Offshore--Deepwater Gulf of Mexico Appraisal and
Development and Cooper Floating Production System ("FPS") and Pipelines.

   Explore the Deep Potential of EEX's 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). During early 1997, EEX's focus in the Deepwater Gulf of
Mexico shifted from the shallower Pleistocene plays 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. The
exploratory and appraisal well funds from Enterprise due under this agreement
were fully paid as of December 31, 2000. Development funds under this
agreement are contingent on approval of development plans. 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. EEX believes that its announced Deepwater discovery, Llano, is
economically viable and has included proved reserves for this field in its
year-end reserve determination.

   In late 1998, the Company began geologic and geophysical studies to
identify reserve potential in formations deeper than that conventionally
pursued on the Gulf of Mexico Shelf ("Deep Shelf"). The Company believes it is
economically more attractive to explore this potential than to explore in and
around existing mature fields (the "Conventional Shelf"). The Company has sold
its producing fields and a substantial portion of its undeveloped leasehold in
the Conventional Shelf and intends to focus technical resources on defining
this deeper exploration potential. 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.

   Realize Value from International Assets--The Company plans to continue
limited exploration and development activities in the Tuban Block in Indonesia
and has evaluated 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--Onshore

   In October 1999, EEX entered into an agreement to acquire Tesoro Petroleum
Corporation's domestic exploration and production operations in a stock
purchase transaction. EEX established an office in San Antonio, Texas, staffed
largely by former Tesoro employees, to operate its Onshore U.S. assets. 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

                                       4
<PAGE>

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. The net cost of the acquisition was $219 million.

   Onshore operations are located in four oil and gas producing trends: Gulf
Coast of Texas and Louisiana, the Val Verde Basin in southwest Texas, the East
Texas Basin and the Texas Panhandle. EEX pursues a strategy of "growth through
the drillbit" by extending the proved producing trends both laterally and to
deeper horizons through its exploration expertise and drilling program. EEX
builds its onshore drilling inventory through leasing, farmouts and targeted
producing property acquisitions.

   During 2000, EEX, through its subsidiaries, invested approximately $82
million in capital and cash exploration expense to increase production and add
reserves in their onshore producing assets. This investment program focused
primarily on the assets acquired in December 1999 and in the Vaquillas Ranch
Field (EEX 100% interest). At year-end 2000, production was approximately 126
million cubic feet equivalent of natural gas (MMcfe) per day.

   Approximately 68% (256 Bcfe) of the Company's onshore net proved reserve
volume is located in 35 producing fields in the Texas Gulf Coast, including
the Bob West Field, the Company's largest onshore field. Highlights from year
2000 activity regarding Bob West Field and other major Gulf Coast producing
assets follow:

   Bob West Field. The Bob West Field, which was discovered in 1990, was part
of the Tesoro acquisition. It is located in the southern part of the Wilcox
trend in Starr and Zapata Counties, Texas. In 2000, 4 wells were completed and
placed on production. As of December 31, 2000, a fifth well was in the process
of completion. The field's production for the year averaged approximately 28
MMcfe per day (net). The Company owns non-operated working interest in the
field that ranges from 33% to 70%. In addition, the Company owns a non-
operated 70% interest in the field's central gas processing facility which has
a gross capacity of 350 MMcf per day and a 50% interest in the Starr-Zapata
Pipeline, a 26-mile, 20-inch pipeline through which gas from the field area is
transported to market. The Company also owns a non-operated 25% interest in
the field's central compression facility.

   Vaquillas Ranch Field. Vaquillas Ranch Field (EEX 100% interest) is
operated by EEX and located in Webb County, Texas in the southern part of the
Wilcox trend. In the fourth quarter of 1999, the Company began a redevelopment
program that carried over into 2000. In 2000, 11 wells were drilled with 10
resulting in production to sales. In addition, since the beginning of the
redevelopment program in the fourth quarter of 1999, eighteen workovers of
existing wells were performed. As a result of the 2000 redevelopment program,
proved reserves increased 20 Bcfe, and by year-end, net production increased
approximately 138% from the beginning of the year. Net production for the year
averaged approximately 12 MMcfe per day.

   Fashing Field. Fashing Field is located in Atascosa County, Texas and has
produced 1.57 trillion cubic feet (gross) of gas from the Edwards Lime since
its discovery in 1956. In 2000, the Company completed a field study that
indicated the potential for additional reserves, and the Company expects to
begin testing the concept in 2001. Net production for the year averaged
approximately 9 MMcfe per day. The Company owns working interest in the field
that ranges from 47% to 100%. EEX plans to drill 3 wells in this field in
2001.

   Dinn Ranch Field. Dinn Ranch Field is located in Duval County, Texas in the
Wilcox trend and was part of the Tesoro acquisition. In 2000, 4 wells were
completed adding 13 Bcfe to proved reserves. Three of the wells began
producing during the year. The fourth well was waiting on a pipeline as of
year-end. Net production was 3 MMcfe per day at year-end. The Company owns
working interest in the field ranging from 35% to 50%.

   The Val Verde Basin in Texas contains approximately 15% (56 Bcfe) of the
Company's onshore net proved reserve volume. The two major EEX fields in this
Basin are Vinegarone East and Langtry.


                                       5
<PAGE>

   Vinegarone East Field. The Vinegarone East Field (EEX 75% interest) is
operated by EEX and located in Edwards County, Texas and produces from
Pennsylvanian aged sands. During the year, 12 wells were drilled with 10
resulting in producing wells. For the year, the average net production was 16
MMcfe per day. Production from the field is carried to sales through an 11-
mile, 6-inch pipeline owned (75% interest) and operated by the Company.

   Langtry Field. The Langtry Field (EEX 45% interest) is located in Val Verde
County, Texas and was the Company's most significant onshore exploration
discovery in 2000. Three wells have been successfully tested at rates from 5
to 7 MMcfe per day from Pennsylvanian aged sands during the year and a fourth
well was drilling at year-end. The proved reserve addition from the discovery
was 12 Bcfe. A 23-mile pipeline with a 3-mile spur to Vinegarone East Field is
being constructed to transport the production to sales. Completion of the line
and initiation of sales from the field is expected in the second quarter of
2001.

   EEX also owns onshore properties located in East Texas and the Texas
Panhandle region.

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 No. 1 discovery well to 27,864 feet into
Miocene age sands and encountered hydrocarbons. Well logs indicated the
presence of approximately 200 feet of net pay.

   In January 2000, the Company decided to abandon the Mackerel well on
Mississippi Canyon Block 620 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.

   In July 2000, EEX entered into an agreement with Murphy Oil Corporation to
farmout its 40% working interest in the Mason Prospect in return for a carried
18% working interest in the initial exploration well on the prospect. The
Mason Prospect on Garden Banks Block 562 is located approximately 10 miles
south of the Llano complex. The exploration well, operated by Murphy Oil
Corporation, began drilling in mid-August and encountered water-filled sands
and some indications of hydrocarbons. It has been temporarily abandoned while
a side-track operation is being evaluated.

   In September 2000, EEX began drilling an exploratory well test of its Jason
Prospect (EEX 100% interest) at Garden Banks Block 344. This well is located
approximately 6 miles east-northeast from the Llano Field and is one of
several untested fault blocks in the Llano complex. In December 2000, the well
reached a total depth of approximately 21,000 feet and encountered
hydrocarbon-bearing intervals totaling approximately 100 feet of net pay.
Evaluation of this discovery by well logs, bottom pressure tests, fluid
samples and side-wall cores indicates that the Jason discovery warrants
appraisal. EEX is currently considering its options in the Llano complex,
including further appraisal at Jason. The Jason discovery may provide another
opportunity to utilize EEX's FPS and Pipeline assets.

   At the end of 2000, EEX had one Deepwater rig under contract. The Global
Marine semi-submersible rig, the Arctic I, was delivered to EEX in July 1999,
to begin a three-year contract which has a current operating rate of
approximately $135,000 per day. This rig was stacked at the conclusion of the
Jason well and, in early February 2001, was assigned to another operator at a
rate of $55,000 per day for a minimum period of 50 days and a maximum period
of approximately 110 days. The difference between the contract rate and the
assignment rate will be reflected as exploration expense in the first quarter
of 2001. Upon conclusion of the assignment period, the Company anticipates
that this rig will be used to drill, appraise and develop its Deepwater
program during the remaining contract period. The Company has not received
approval from partners to employ the Arctic I rig on any new wells. EEX may
seek the participation of new joint venture partners to share the expense of
subsequent well(s), elect to bear 100% of the costs or decide to "stack" the
rig at a total cost of approximately $140,000 per day net. In addition, EEX
may seek another assignment of the rig to another operator for a period less
than the remainder of the lease term at a subsidized rate.


                                       6
<PAGE>

   In December 1999, EEX entered into an agreement to terminate a second rig
under contract, the R&B Falcon C. Kirk Rhein, Jr., at a net cost to EEX of $4
million which was charged to exploration expense in 1999. This amount was paid
in January 2000.

   EEX participated in the Minerals Management Service sponsored Outer
Continental Shelf lease sale number 175, adding 5 Deepwater blocks to the
leasehold inventory at a net cost of approximately $0.2 million. At year-end,
EEX held interests in 85 blocks in the Deepwater Gulf of Mexico, 43 of which
were operated by EEX.

   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 No. 2 (EEX
30% interest), 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 No. 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 and the capabilities of the rig then being used.

   In October 1999, EEX began drilling a second Llano appraisal well to test
the north-western flank of the reservoir. This well, Llano No. 3 (EEX 30%
interest), located on Garden Banks Block 386, was drilled to a depth of
approximately 25,500 feet in July 2000, encountering hydrocarbons in the Lower
Pliocene and Miocene-aged sands. Based upon log analysis, the well encountered
approximately 340 feet of net pay. The well was temporarily abandoned so that
it can be completed later as a producing well. This second appraisal well is
located approximately one mile to the northwest of the discovery well.

   EEX currently estimates ultimate potential gross Llano reserves in excess
of 200 million barrels of oil equivalent. Following an engineering evaluation
of the field and possible development options, EEX included 61 million barrels
of oil equivalent ("MMBoe") gross (16 MMBoe net) of proved undeveloped
reserves in its 2000 year-end reserves, based primarily upon data from the
three wells drilled in the Llano field. EEX and the other participants in the
Llano leases are in discussions on a plan of development for Llano, as well as
on further exploration in the Llano complex. A plan of development would
normally include additional wells, production and transportation facilities,
and will require regulatory approvals. EEX has recommended using the Pipelines
as part of a plan of development. No assurances can be given that an agreement
will be reached among the parties regarding a plan of development for Llano or
further actions in the Llano complex.

   Cooper Floating Production System ("FPS") and Pipelines--The FPS and
Pipelines have a combined carrying value of approximately $146 million net to
EEX at December 31, 2000, generally reflecting the highest valued use of the
assets. During 2000, EEX continued its efforts to place into service the FPS
that completed refurbishment and became ready for service in the first half of
2000. EEX completed a marketing evaluation for potential uses of the FPS in
mid-2000. The study indicated that the highest valued use of the FPS is as a
production facility in a project that requires such capability in the near
term (avoiding delays associated with design and fabrication). EEX is
evaluating an option to place the FPS in service in the Llano complex as part
of a Llano field development plan, Jason development or other capacity. EEX
and its 40% co-owner in the FPS are also proceeding with a joint marketing
effort. Because of the uniqueness of the FPS and the characteristics of its
markets, it is difficult to assess its ultimate market value in a potential
sale or that of the Pipelines.

   The Pipelines are also not in use at this time. EEX believes that the
Pipelines have utility as support infrastructure for anticipated developments
at Llano and the greater Llano complex, including potential development of the
Jason discovery.

   Gulf of Mexico Shelf (Including Texas State Waters)--During 2000, EEX
completed a sale of certain properties on the Gulf of Mexico Shelf. Primarily
as a result of a decision to shift capital spending from the Shelf to higher
potential onshore programs, the remaining Shelf properties continued to
experience production declines.

   During 2000, EEX participated as a non-operating working interest owner in
3 wells on the Shelf, of which none were successful. None of these wells were
associated with EEX's strategy to pursue Deep Potential on the Shelf.

                                       7
<PAGE>

   In December 2000, EEX sold its interests in approximately 100 Gulf of
Mexico Shelf blocks to W&T Offshore, Inc., substantially all of EEX's Shelf
production. These properties contained estimated proved reserves of 58 billion
cubic feet equivalent of natural gas as of October 1, 2000, and had an average
daily production of 32 million cubic feet equivalent (net) during the third
quarter. At closing, EEX received $42.7 million. The agreed purchase price of
$60.3 million was adjusted for estimated net revenues after October 1 of $16.3
million and preferential purchase rights exercised by others of $1.3 million.
This transaction resulted in a loss on the sale of approximately $3.0 million.
The sale eliminated substantially all of EEX's accrued abandonment liability.
As part of this sale, EEX retained the rights to deeper, non-producing
horizons in ten of these blocks where the Company believes there is deep
exploration potential.

   EEX participated in the Minerals Management Service sponsored Outer
Continental Shelf lease sale number 175, adding 16 Shelf blocks to the
leasehold inventory at a net cost of approximately $2.9 million. At year-end,
EEX held interests in 26 blocks in the Shelf, 14 of which were operated by
EEX. These Shelf blocks contain EEX's deep exploration prospects.

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, production from the field
decreased 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. After a preliminary evaluation of the field and its
production, in the second quarter of 2000, the carrying value of the asset was
reduced by $12 million. The depletion, depreciation and amortization rate
("DD&A rate") for the field was increased. Higher oil prices and the mechanism
of the production-sharing agreement contributed to these changes by lowering
the number of barrels necessary to recover costs. During 2000, the operator
developed and implemented a plan to increase water handling and drill
additional production wells to restore production. Three additional infill
wells were drilled that increased production to approximately 12,000 gross
barrels per day by year-end. As a result of this program and lower than
forecast oil prices, EEX expects the DD&A rate for this field to decrease in
2001.

   Indonesia (Offshore Sumatra) Asahan Block--In 1997, EEX acquired a 60%
interest in 4,200 square kilometers in the Asahan block. 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. This well is expected to be
drilled in 2001. 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.

   New Zealand--Two wells have been drilled by another operator resulting in
the Pohokura Field discovery, offsetting EEX's North Taranaki block in New
Zealand. Preliminary information indicates that a portion of this field may be
located in EEX's block. EEX has entered into an agreement to farmout its
interest in the Waiau Basin block in southern New Zealand in return for a
carried interest in an exploration well and a 25% working interest in the
block. The well is expected to spud in the second quarter of 2001.

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 megawatts ("MW") cogeneration facility located in
Sweetwater, Texas and (ii) "Encogen Northwest," a 160 MW cogeneration facility
located in Bellingham, Washington. EEXPS operates and maintains the facilities
under the 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. EEX is
negotiating an agreement to sell its two remaining management contracts. This
sale is expected to close by the end of the second quarter of 2001.

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

                                       8
<PAGE>

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 14 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 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

                                       9
<PAGE>

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 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.

                                      10
<PAGE>

   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.

   The FERC issued Order No. 639 on April 10, 2000, promoting the open and
nondiscriminatory access mandates of the Outer Continental Shelf Lands Act
among Outer Continental Shelf gas transportation service providers that are
not subject to FERC jurisdiction under the Natural Gas Act. Order No. 639
imposes certain reporting requirements upon non-exempt gas transportation
service providers and provides a forum for complaints of discriminatory and
anticompetitive shipping practices on the Outer Continental Shelf.

   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, 2001, EEX had 162 full-time employees, 118 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.

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

                                      11
<PAGE>

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"), 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 above 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. 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 obligation 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.

   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 above under "U.S. Exploration and Development--Offshore,
Deepwater Gulf of Mexico Exploration") 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
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 133--In January 2001, EEX adopted SFAS 133 (see
the discussion in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Other Matters--New Accounting Standard").
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

                                      12
<PAGE>

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).

   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 obligation 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").

   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"). 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.

   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

                                      13
<PAGE>

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.

Item 2. Properties

   In 2000, 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, 2000:

<TABLE>
<CAPTION>
                                            Proved Reserves at December 31, 2000
                                            ------------------------------------
                                                          Oil and Gas
                                              Natural Gas   Liquids     Total
                                               (MMcf)(1)  (MBbls)(2)  (MMcfe)(3)
                                            ------------- ----------- ----------
   <S>                                        <C>         <C>         <C>
   Gulf of Mexico--Deepwater.................    28,236     11,298      96,022
   Onshore and Gulf of Mexico Shelf..........   354,373      3,139     373,207
                                                -------     ------     -------
     Total Domestic..........................   382,609     14,437     469,229
   International.............................       --      10,680      64,082
                                                -------     ------     -------
   Total.....................................   382,609     25,117     533,311
                                                =======     ======     =======
   Minority Interest (4).....................   102,301        599     105,898
                                                =======     ======     =======
</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 12 to
    Consolidated Financial Statements in Item 8 for additional information on
    Minority Interest.

                                      14
<PAGE>

   See Note 22 to Consolidated Financial Statements in Item 8 for additional
information on oil and gas reserves.

   During 2000, EEX filed Form EIA-23 with the Department of Energy reflecting
reserve estimates for the year 1999. Such reserve estimates were not
materially different from the 1999 reserve estimates reported in Note 22 to
Consolidated Financial Statements in Item 8.

   Developed and undeveloped lease acreage as of December 31, 2000 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...........  23,040     6,912      438,312   155,867
   Onshore and Gulf of Mexico Shelf....  94,598    44,301      383,994   236,045
                                        -------    ------    --------- ---------
     Total Domestic.................... 117,638(2) 51,213(2)   822,306   391,912
   International.......................   5,000     1,250(3) 3,676,653 2,452,045
                                        -------    ------    --------- ---------
     Total............................. 122,638    52,463    4,498,959 2,843,957
                                        =======    ======    ========= =========
   Minority Interest (4)...............  25,834    12,020      107,613    56,330
                                        =======    ======    ========= =========
</TABLE>
--------
(1) Represents the proportionate interest of EEX in the gross acres under
    lease.
(2) Does not include 23,040 gross/6,884 net acres (developed Deep) or 25,000
    gross/7,563 net acres (developed Shelf) wherein EEX only owns rights below
    the deepest producing reservoir. This acreage is included within the
    "Undeveloped Acres" figures.
(3) EEX owns 25% interest by virtue of the Production Sharing Contract.
(4) Included in Onshore and Gulf of Mexico Shelf above. See Note 12 to
    Consolidated Financial Statements in Item 8 for additional information on
    Minority Interest.

   EEX purchased approximately 82,218 net acres in 21 offshore blocks (5
Deepwater and 16 Shelf) at Federal OCS Lease Sale 175 held March 15, 2000.
Additionally, EEX acquired 5,760 net acres from Shell Deepwater Development in
the third quarter of 2000. The total number of blocks in which EEX had an
interest at year-end was 111 (does not include 2 blocks in which EEX has only
an ORRI), with an average working interest of 43.86%. EEX operates 57 of these
blocks.

   During 2000, EEX canceled, or allowed to expire, 41 Gulf of Mexico blocks
and sold its interest in approximately 100 other blocks in the Gulf of Mexico.

   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. Additionally, EEX owns a large, international concession that is
committed for drilling by a third party in 2001. While it is probable that
drilling will occur, thus holding the concession, EEX cannot warrant that the
third party will perform. The primary terms during which the undeveloped
acreage can be retained by payment of delay rentals, or by drilling
operations, without the establishment of oil and gas reserves expire as
follows:

<TABLE>
<CAPTION>
                                         Undeveloped Acres Expiring
                             ---------------------------------------------------
                                 Gulf of
                                Mexico--     Onshore and GOM
                                Deepwater         Shelf         International
                             --------------- --------------- -------------------
                              Gross    Net    Gross    Net     Gross      Net
                             ------- ------- ------- ------- --------- ---------
<S>                          <C>     <C>     <C>     <C>     <C>       <C>
2001........................  57,600  17,482  85,176  44,156 1,862,429   980,263
2002........................  34,560  12,960 107,956  54,506       --        --
2003 and later.............. 346,152 125,425 190,862 137,383 1,814,224 1,471,782
                             ------- ------- ------- ------- --------- ---------
  Total..................... 438,312 155,867 383,994 236,045 3,676,653 2,452,045
                             ======= ======= ======= ======= ========= =========
</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.

                                      15
<PAGE>

   Drilling activity during the three years ended December 31 is set forth
below:

<TABLE>
<CAPTION>
                                                    2000      1999       1998
                                                 ---------- --------- ----------
                                                 Gross Net  Gross Net Gross Net
                                                 ----- ---- ----- --- ----- ----
   <S>                                           <C>   <C>  <C>   <C> <C>   <C>
   Exploratory Wells:
     Productive.................................  6.0   2.2  2.0  1.5  5.0   2.3
     Dry........................................  8.0   2.2  7.0  3.6  9.0   3.4
                                                 ----  ----  ---  --- ----  ----
       Total.................................... 14.0   4.4  9.0  5.1 14.0   5.7
                                                 ====  ====  ===  === ====  ====
   Development Wells:
     Productive................................. 44.0  28.7  2.0  0.8 35.0  17.1
     Dry........................................  8.0   4.9  --   --   3.0   1.2
                                                 ----  ----  ---  --- ----  ----
       Total.................................... 52.0  33.6  2.0  0.8 38.0  18.3
                                                 ====  ====  ===  === ====  ====
</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, 2000, EEX was participating in 12 wells (6.9 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.

   The Company owned interest in productive gas and oil wells at December 31,
2000 as follows:

<TABLE>
<CAPTION>
                                                              Gas        Oil
                                                          ----------- ----------
                                                          Gross  Net  Gross Net
                                                          ----- ----- ----- ----
   <S>                                                    <C>   <C>   <C>   <C>
   Gulf of Mexico--Deepwater.............................   --    --   4.0   1.9
   Onshore and Gulf of Mexico Shelf...................... 407.0 230.5 15.0   9.2
                                                          ----- ----- ----  ----
     Total Domestic...................................... 407.0 230.5 19.0  11.1
   International.........................................   --    --  14.0   7.0
                                                          ----- ----- ----  ----
     Total............................................... 407.0 230.5 33.0  18.1
                                                          ===== ===== ====  ====

   The Company has ownership in wells with dual completions in single
boreholes at December 31, 2000 as follows:

<CAPTION>
                                                              Gas        Oil
                                                          ----------- ----------
                                                          Gross  Net  Gross Net
                                                          ----- ----- ----- ----
   <S>                                                    <C>   <C>   <C>   <C>
   Gulf of Mexico--Deepwater.............................   --    --   --    --
   Onshore and Gulf of Mexico Shelf......................  21.0  14.4  --    --
                                                          ----- ----- ----  ----
     Total Domestic......................................  21.0  14.4  --    --
   International.........................................   --    --   --    --
                                                          ----- ----- ----  ----
     Total...............................................  21.0  14.4  --    --
                                                          ===== ===== ====  ====
</TABLE>


                                      16
<PAGE>

   Additional information relating to the oil and gas activities of EEX is set
forth in Note 22 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. In June 2000, EEX subleased
approximately 23,000 square feet in Houston. This sublease expires in November
2001. EEX subleases approximately 19,000 square feet of office space for its
office in San Antonio, Texas, expiring in December 2005.

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.

   The previously-reported matter of Gracy Fund, et al. v. EEX Corporation, et
al., was settled by an agreement in June 2000 which resulted in the Court's
Order and Final Judgment, and related orders, dated December 28, 2000.

   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.

Item 4. Submission of Matters to a Vote of Security Holders

   None.

                                      17
<PAGE>

                                    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>
                                                    2000             1999
                                               --------------- -----------------
                                                 High    Low     High     Low
                                               -------- ------ -------- --------
   <S>                                         <C>      <C>    <C>      <C>
   First Quarter.............................. $4 5/16  $2 1/4 $7 11/16 $4 5/8
   Second Quarter.............................  6 1/4    2 1/8  7 11/16  4 7/8
   Third Quarter..............................  6 7/8    4 1/2  7 1/8    2 15/16
   Fourth Quarter.............................  5 13/16  3      4 1/16   2 1/2
</TABLE>

   At March 1, 2001, EEX had 42,216,105 outstanding shares of common stock
held by 10,770 shareholders of record.

   There were no dividends declared on the Company's common stock in 2000 or
1999. 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.

                                      18
<PAGE>

Item 6. Selected Financial and Operating Data

                                EEX CORPORATION

                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                               As of or for the Year Ended December 31
                           ---------------------------------------------------
                             2000      1999      1998      1997        1996
                           --------  --------  --------  ---------  ----------
                              (In thousands, except per share amounts)
<S>                        <C>       <C>       <C>       <C>        <C>
INCOME STATEMENT DATA
  Revenues................ $262,412  $177,374  $219,052  $ 314,213  $  338,146
                           ========  ========  ========  =========  ==========
  Net (Loss) Applicable to
   Common Shareholders.... $(10,418) $(99,914) $(40,926) $(216,103) $  (36,801)
                           ========  ========  ========  =========  ==========
  Basic and Diluted Net
   (Loss) per Share (a)... $  (0.25) $  (2.37) $  (0.97) $   (5.12) $    (0.87)
                           ========  ========  ========  =========  ==========
BALANCE SHEET DATA
    Total Assets.......... $764,068  $780,784  $565,070  $ 807,789  $1,195,454
                           ========  ========  ========  =========  ==========
CAPITAL STRUCTURE
  Short-term borrowings... $    --   $    --   $    --   $   5,000  $      --
  Capital lease
   obligations............  205,634   222,444   233,318    241,735     244,985
  Long-term debt..........   75,000       --        --      25,000     115,000
  Gas sales obligation....   83,490   105,000       --         --          --
  Company-obligated
   mandatorily redeemable
   preferred securities of
   subsidiary.............      --        --        --         --      150,000
  Minority interest in
   preferred stock of
   subsidiary.............      --        --        --     100,000         --
  Minority interest third
   party..................    5,000     3,050       --         --          --
  Shareholders' equity....  289,601   294,863   234,300    274,663     490,406
                           --------  --------  --------  ---------  ----------
    Total................. $658,725  $625,357  $467,618  $ 646,398  $1,000,391
                           ========  ========  ========  =========  ==========
</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.

                                       19
<PAGE>

                                EEX CORPORATION

                            SELECTED OPERATING DATA

<TABLE>
<CAPTION>
                                        As of or for the Year Ended December 31
                                        ---------------------------------------
                                           2000    1999   1998   1997    1996
                                        --------- ------ ------ ------ --------
<S>                                      <C>      <C>    <C>    <C>    <C>
Sales volume
  Natural gas (Bcf)(a)..................     55.1   41.0   57.9   84.5    100.5
  Oil, condensate and natural gas
   liquids (MMBbls)(e)..................      2.8    4.6    5.8    5.4      5.7
    Total volumes (Bcfe)(a).............     71.9   68.5   92.7  116.9    135.0
Average sales price(b)
  Natural gas (per Mcf)(c).............. $   3.14 $ 2.28 $ 2.21 $ 2.36 $   2.17
  Oil, condensate and natural gas
   liquids (per Bbl)....................    28.26  16.45  13.15  18.53    18.65
    Total (per MMcfe)(c)................     3.51   2.46   2.20   2.57     2.40
Average costs and expenses (per
 MMcfe)(c)
  Production and operating(b)........... $   0.55 $ 0.57 $ 0.51 $ 0.42 $   0.52
  Exploration(d)........................     0.47   0.62   0.49   0.60     0.69
  Depletion, depreciation and
   amortization.........................     1.31   1.01   1.09   1.24     1.26
  General, administrative and other.....     0.27   0.41   0.26   0.24     0.26
  Taxes, other than income..............     0.15   0.07   0.12   0.15     0.16
Net Wells Drilled
  Total.................................       38      6     24     57      109
  Productive............................       31      2     19     44       84
Proved Reserve Data (at year-end)
  Natural gas (Bcf)(a)..................    382.6  362.8  203.6  460.2  1,216.2
  Oil, condensate and natural gas
   liquids (MMBbls)(e)..................     25.1   17.5   26.2   23.8     59.2
    Total (Bcfe)(a).....................    533.3  468.1  360.6  603.2  1,571.5
Standardized Measure of Discounted
  Future Net Cash Flows (in millions)... $1,283.3 $436.3 $275.9 $619.1 $1,715.1
</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. Realized prices reflect results net of
    hedged transactions.
(d) Excludes unusual and non-recurring expenses.
(e) One million barrels of crude oil or other liquid hydrocarbons.

                                      20
<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.

   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 2000 net loss of $10 million ($0.25 per share), versus a net
loss of $100 million ($2.37 per share) in 1999 and a net loss of $41 million
($0.97 per share) in 1998.

   In 2000, results of operations were impacted by two major items. The first
item was a $12 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," incurred during the second quarter associated with a
reassessment of the Mudi Field in Indonesia. The second major item was a loss
on sales of property, plant and equipment of $7 million pre-tax.

   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, 2000 and 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.

2000 Results of Operations Compared With 1999

   Revenues for 2000 were $262 million, $85 million (48%) higher than 1999.
Natural gas revenues, 85% higher than 1999, were impacted by a 34% increase in
production primarily due to the acquisition of the Tesoro onshore properties
in December 1999 and an increase in the unhedged average price of 53%, offset
by production decline on properties located in the Gulf of Mexico Shelf. The
average unhedged natural gas sales price per thousand cubic feet (Mcf) was
$3.51 in 2000, compared with $2.29 in 1999. The unhedged gas price includes
the effects of the Gas Sales Obligation representing approximately 13 Bcf of
gas delivered in 2000 at an average realized price of $2.51 per Mcf. The
average natural gas sales price per Mcf (after hedging losses of $20.2
million) was $3.14 in 2000, compared to $2.28 in 1999, an increase of 38%.
Natural gas production for 2000 was 55 billion cubic feet (Bcf), compared with
41 Bcf in 1999. Oil revenues increased 4% due to higher average oil prices,
offset by lower production. A 70% increase in the unhedged average oil price
was offset by a $0.1 million oil hedging loss for the year 2000, compared to a
$1.3 million oil hedging loss for the year 1999. Crude oil production
decreased 40% to 2,726 thousand barrels (MBbls) in 2000 from 4,528 MBbls in
1999.

   Costs and expenses, excluding the unusual items described above, were $204
million in 2000, compared to $192 million in 1999, a 7% increase. Operating
expenses (production and operating, general and administrative

                                      21
<PAGE>

and taxes other than income) were $70 million in 2000, 4% lower than 1999,
resulting from property sales and the favorable impact from restructuring
measures implemented over the last year, specifically lower G&A cost, offset
by higher taxes, other than income, associated with increased gas production
from the onshore operations. Exploration expenses for 2000 include $4 million
for dry hole costs, compared to $51 million in 1999. Depletion, depreciation
and amortization was $94 million in 2000, $25 million higher than 1999 due to
higher production volumes resulting from the Tesoro onshore property
acquisition and increased rates at the Mudi Field, offset by asset sales and
production decline primarily on properties located in the Gulf of Mexico
Shelf.

   Total interest and other financing costs, including interest income,
preferred stock dividends, minority interest and other income, were $47
million, a $24 million increase from 1999, resulting primarily from an
increase in interest expense due to amounts outstanding under the revolving
credit agreement and the Gas Sales Obligation, and by a decrease in interest
income due to lower cash balances during 2000.

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 Mcf was $2.28 in 1999, compared with $2.21 in
1998. Natural gas production for 1999 was 41 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 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 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. Depletion,
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 complex.

   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.

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 second quarter of 2000,
EEX recorded a $12 million pre-tax charge for impairment of the Mudi Field in
Indonesia. The Company re-evaluated the carrying value following a production
decline below that forecast at year-end 1999. In the fourth quarter of 2000,
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. Based on this analysis, no additional impairments for producing
properties were considered appropriate in 2000.

   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,

                                      22
<PAGE>

Ltd. ("Encogen") and determined that a provision for possible future losses
was not appropriate in 2000. 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 1999 or 2000.
At December 31, 2000, the Company had a future volumetric delivery obligation
of approximately 5 Bcf of natural gas to Encogen; the total production payment
due EEX was approximately 29 Bcf net of royalty. In January 2001, the obligor
elected to repurchase approximately 8 Bcfe of the production payment. Further
evaluation of the carrying value of the asset following this retirement
indicated that no impairment was appropriate. See "Forward-Looking
Statements--Uncertainties and Risks--Encogen Obligation" in Item 1.

   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 complex, the estimated
future cash flows from the assets would exceed the carrying value of
approximately $146 million. Further, the Company continues to evaluate other
potential uses for these facilities. Based on these analyses, no additional
impairment was considered appropriate in 2000.

   As of December 31, 2000, the Company had a deferred tax asset of
approximately $124 million. A valuation allowance of $102 million has been
applied to result in a net realizable value of $22 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, generation of
taxable income and sales of assets with fair market values in excess of book
basis.

   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.

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, 2001 constituted approximately 72% of total reserves, and gas
production accounted for approximately 77% of total production for 2000.
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 2000 production volumes of
approximately 23 Bcf of natural gas (42% of natural gas production) at an
average price of $2.78 per MMBtu, excluding Encogen hedges. In total, oil and
gas price hedging activities decreased 2000 revenues by $20.3 million, 1999
revenues by $1.9 million, and increased 1998 revenues by $7.5 million.

Liquidity and Capital Resources

Cash Flows

   Net cash flows provided by operating activities in 2000 were $85 million, a
decrease of $9 million over the same period of 1999. Higher revenues were
largely offset by increased receivables and decreased advances from partners.
Net cash flows used in investing activities in 2000 were $116 million, a $227
million decrease from cash flows used in investing activities for the same
period of 1999. The decrease in investing activities is primarily due to the
acquisition of the Tesoro onshore properties in 1999 of $212 million. Capital
spending increased during the year, offset by higher proceeds from disposition
of properties. The increased capital

                                      23
<PAGE>

spending related primarily to the onshore operations. Net cash flows provided
by financing activities in 2000 were $35 million, compared to $247 million for
the same period of 1999. As of December 31, 2000, EEX had $75 million
outstanding under the revolving credit agreement. During the first quarter of
1999, EEX received $150 million from the issuance of preferred stock and
warrants. In December 1999, EEX received $105 million for the Gas Sales
Obligation. See Note 10 to Consolidated Financial Statements in Item 8.

Capital Budget

   Planned 2001 capital expenditures are estimated to be approximately $130
million, compared with actual expenditures of $181 million in 2000 and $388
million in 1999 (including $215 million for the acquisition of Tesoro oil and
gas properties and pipelines). This program is in excess of the Company's
expected operating cash flows for 2001. The Company expects to fund this
capital progam from operating cash flows, proceeds from asset sales, increased
borrowings under the revolving credit agreement and/or additional funds from
public and private equity 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" in Item 1 for additional
discussion.

   As of December 31, 2000, the original exploration and appraisal obligation
of $75 million due to EEX under the Enterprise joint venture agreement was
fully paid. Two remaining payments totaling $25 million remain due from
Enterprise contingent upon mutual approval of development plans associated
with discoveries made pursuant to the joint venture agreement. These two
remaining payments are not planned to be received by EEX in 2001.

Liquidity

   EEX has a $350 million revolving credit line with a group of banks that
matures on June 27, 2002, of which $75 million was outstanding at December 31,
2000. 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 December 31, 2000, the debt to capital ratio under the
revolving credit agreement was 50% and unused available credit was
approximately $150 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
March 1, 2001, the Company had $135 million outstanding under the revolving
credit agreement. See Note 9 to 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 10 to 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 described below.

   In June 2001, EEX's debt incurred under its revolving credit agreement will
become due and payable within one year and will be reclassified on EEX's
balance sheet from a long term to a current liability, adversely affecting
working capital. EEX plans to replace the revolving credit agreement with a
borrowing facility based

                                      24
<PAGE>

upon the value of its proved reserves prior to its expiration. The plan to
replace this facility may require substantial additional asset sales and/or
securing additional funds from public or private equity markets. (See the
discussion above under Capital Budget).

   Also in June 2001, EEX's letters of credit for $70 million expire under the
terms of the agreement under which they were issued. These letters of credit
are credit support required for the equity portion (approximately $68 million)
in the capital lease obligation for the FPS and Pipelines. EEX is currently
conducting negotiations to extend or replace the current letters of credit. If
the FPS and/or Pipelines are not sold, or the letter of credit facility
renewed or replaced by a similar arrangement, EEX will be required by the
capital lease agreements to terminate the lease and pay approximately $68
million to the lessor. EEX would assume the direct responsibility for the
secured notes (approximately $138 million) representing the financed portion
of the lease. This would result in total debt increasing by approximately $14
million and total capitalization decreasing by approximately $14 million
resulting in a decrease of available credit under the revolving credit
agreement.

   Preserving liquidity under EEX's current revolving credit agreement,
renewing or extending the letters of credit and converting to the borrowing
base facility referred to above, involves 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" in Item 1, above. 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.

Capital Structure

   In January 1999, EEX recorded $150 million of equity from the issuance of
1.5 million 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.

                                      25
<PAGE>

   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

   FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is effective for fiscal years beginning after June 15,
2000, 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
adopted this accounting standard as required on January 1, 2001. See Note 20
to Consolidated Financial Statements in Item 8.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

   Hedging activity for the year 2000 resulted in a loss of $11.0 million for
natural gas and a loss of $0.1 million for crude oil that totals to a combined
loss of $11.1 million. The total net hedging loss for natural gas includes a
gain of $9.2 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, 2000.
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
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>
                                      Notional     Average       Fair Value at
                                       Amount    Strike Price  December 31, 2000
                                      (BBtu)(1) (Per MMBtu)(2)  (In thousands)
                                      --------- -------------- -----------------
<S>                                   <C>       <C>            <C>
Natural Gas Swaps:
  January 2001--March 2001...........    383        $2.754          $(2,362)
</TABLE>

<TABLE>
<CAPTION>
                                      Notional     Average       Fair Value at
                                       Amount    Strike Price  December 31, 2000
                                      (BBtu)(1) (Per MMBtu)(2)  (In thousands)
                                      --------- -------------- -----------------
                                                Floor  Ceiling
                                                ------ -------
<S>                                   <C>       <C>    <C>     <C>
Natural Gas Collars:
  January 2001--March 2001...........   1,800   $2.558 $3.574      $ (9,095)
  April 2001--June 2001..............   1,365    2.517  3.277        (3,172)
  July 2001--September 2001..........   2,760    3.210  4.723        (2,832)
  October 2001--December 2001........   2,760    3.242  4.962        (2,306)
  January 2002--March 2002...........   1,350    3.854  6.137           --
  April 2002--June 2002..............   1,365    3.374  5.658           --
                                       ------                      --------
    Total............................  11,400                      $(17,405)
                                       ======                      ========
</TABLE>
--------
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.

                                      26
<PAGE>

   FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is effective for fiscal years beginning June 15, 2000,
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 adopted this
accounting standard as required on January 1, 2001. The effect of adoption on
January 1, 2001 will result in a decrease to reported shareholders' equity of
approximately $20 million.

   Interest Rate Risk--The Company has no open interest rate swap or interest
rate lock agreements. At December 31, 2000, 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, 2000:

<TABLE>
<CAPTION>
                                                                      Average
                                                         Principal Interest Rate
                                                         --------- -------------
                                                             (In thousands)
   <S>                                                   <C>       <C>
   2001................................................. $ 13,351      6.43%
   2002.................................................   15,419      6.43%
   2003.................................................   15,573      6.43%
   2004.................................................   16,601      6.43%
   2005.................................................   15,077      6.43%
   Thereafter...........................................  129,613      6.43%
                                                         --------
     Total.............................................. $205,634
                                                         ========
   Fair Value........................................... $205,634
                                                         ========
</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.

                                      27
<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 sheets of EEX
Corporation and subsidiaries (the "Company"), as of December 31, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2000. 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.

                                          Ernst & Young LLP

Houston, Texas
February 19, 2001

                                      28
<PAGE>

                                EEX CORPORATION

                      CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                    Year Ended December 31
                                                  ----------------------------
                                                    2000      1999      1998
                                                  --------  --------  --------
                                                  (In thousands, except per
                                                        share amounts)
<S>                                               <C>       <C>       <C>
Revenues:
  Natural gas.................................... $173,195  $ 93,512  $128,061
  Oil, condensate and natural gas liquids........   78,829    75,189    76,328
  Cogeneration operations........................    8,389     8,878    13,794
  Other..........................................    1,999      (205)      869
                                                  --------  --------  --------
    Total........................................  262,412   177,374   219,052
                                                  --------  --------  --------
Costs and Expenses:
  Production and operating.......................   39,212    39,338    46,861
  Exploration....................................   33,780    86,369    45,144
  Depletion, depreciation and amortization.......   93,965    68,978   101,051
  Impairment of producing oil and gas
   properties....................................   12,200    26,424    10,439
  Loss (Gain) on sales of property, plant and
   equipment.....................................    7,230   (15,483)   (9,085)
  Cogeneration operations........................    6,960     8,043    10,564
  General, administrative and other..............   19,538    28,355    24,058
  Taxes, other than income.......................   10,906     4,744    11,017
                                                  --------  --------  --------
    Total........................................  223,791   246,768   240,049
                                                  --------  --------  --------
Operating Income (Loss)..........................   38,621   (69,394)  (20,997)
Other Income--Net................................      365        95        81
Interest Income..................................    1,082     6,129       512
Interest and Other Financing Costs...............  (33,586)  (17,686)  (18,987)
                                                  --------  --------  --------
Income (Loss) Before Income Taxes................    6,482   (80,856)  (39,391)
Income Taxes (Benefit)...........................    1,586     6,891    (4,997)
Minority Interest Third Party....................    1,950        50     6,532
                                                  --------  --------  --------
Net Income (Loss)................................    2,946   (87,797)  (40,926)
Preferred Stock Dividends........................   13,364    12,117       --
                                                  --------  --------  --------
Net (Loss) Applicable to Common Shareholders..... $(10,418) $(99,914) $(40,926)
                                                  ========  ========  ========
Net (Loss) Per Share Available to Common
 Shareholders:
  Basic.......................................... $  (0.25) $  (2.37) $  (0.97)
                                                  ========  ========  ========
  Diluted........................................ $  (0.25) $  (2.37) $  (0.97)
                                                  ========  ========  ========
Weighted Average Shares Outstanding:
  Basic..........................................   41,949    42,200    42,208
                                                  ========  ========  ========
  Diluted........................................   41,949    42,200    42,208
                                                  ========  ========  ========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       29
<PAGE>

                                EEX CORPORATION

                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                               December 31
                                                           -------------------
                                                             2000      1999
                                                           -------- ----------
                                                             (In thousands)
<S>                                                        <C>      <C>
                          ASSETS
                          ------

Current Assets:
  Cash and cash equivalents............................... $ 19,791 $   15,053
  Restricted cash.........................................      --       5,000
  Accounts receivable--trade (net of allowance of $2,270
   and $1,791)............................................   57,539     28,248
  Other...................................................   22,478     12,737
                                                           -------- ----------
    Total current assets..................................   99,808     61,038
                                                           -------- ----------
Property, Plant and Equipment (at cost):
  Oil and gas properties (successful efforts method)......  955,263  1,259,364
  Other...................................................    8,160      8,047
                                                           -------- ----------
    Total.................................................  963,423  1,267,411
                                                           -------- ----------
Less accumulated depletion, depreciation and
 amortization.............................................  323,875    576,914
                                                           -------- ----------
    Net property, plant and equipment.....................  639,548    690,497
                                                           -------- ----------
Deferred Income Tax Assets................................   19,846     22,809
Other Assets..............................................    4,866      6,440
                                                           -------- ----------
    Total................................................. $764,068 $  780,784
                                                           ======== ==========
           LIABILITIES AND SHAREHOLDERS' EQUITY
           ------------------------------------

Current Liabilities:
  Accounts payable--trade................................. $ 76,999 $   72,518
  Current portion of capital lease obligations............   13,351     16,810
  Other...................................................    5,993      2,580
                                                           -------- ----------
    Total current liabilities.............................   96,343     91,908
                                                           -------- ----------
Bank Revolving Credit Agreement...........................   75,000        --
Capital Lease Obligations.................................  192,283    205,634
Gas Sales Obligation......................................   83,490    105,000
Other Liabilities.........................................   22,351     80,329
Minority Interest Third Party.............................    5,000      3,050
Shareholders' Equity (Consolidated Statement of
 Shareholders' Equity)....................................  289,601    294,863
                                                           -------- ----------
    Total................................................. $764,068 $  780,784
                                                           ======== ==========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       30
<PAGE>

                                EEX CORPORATION

                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                  Year Ended December 31
                                               -------------------------------
                                                 2000       1999       1998
                                               ---------  ---------  ---------
                                                      (In thousands)
<S>                                            <C>        <C>        <C>
OPERATING ACTIVITIES:
  Net Income (Loss)........................... $   2,946  $ (87,797) $ (40,926)
  Impairment of producing oil and gas
   properties.................................    12,200     26,424     10,439
  Impairment of undeveloped leasehold.........     7,606      2,907      1,936
  Dry hole cost...............................     3,872     50,770     18,326
  Depletion, depreciation and amortization....    93,965     68,978    101,051
  Deferred income taxes (benefit).............     1,586      6,988     (9,397)
  Loss (Gain) on sales of property, plant and
   equipment..................................     7,230    (15,483)    (9,085)
  Other.......................................   (13,001)    16,513        547
  Changes in current operating assets and
   liabilities:
    Accounts receivable.......................   (29,291)    21,031     15,395
    Other current assets......................    (8,364)       785     (2,695)
    Restricted cash...........................       --      (5,000)       --
    Accounts payable..........................     3,229     11,235    (57,187)
    Other current liabilities.................     3,413     (2,610)    (4,841)
                                               ---------  ---------  ---------
      Net cash flows provided by operating
       activities.............................    85,391     94,741     23,563
                                               ---------  ---------  ---------
INVESTING ACTIVITIES:
  Additions of property, plant and equipment..  (181,220)  (169,061)  (165,820)
  Tesoro acquisition, net.....................       --    (212,086)       --
  Proceeds from dispositions of property,
   plant and equipment........................    64,420     19,081    298,373
  Other (changes in accruals).................     1,252     19,614     (5,901)
                                               ---------  ---------  ---------
      Net cash flows (used in) provided by
       investing activities...................  (115,548)  (342,452)   126,652
                                               ---------  ---------  ---------
FINANCING ACTIVITIES:
  Issuance of preferred stock and common stock
   warrants...................................       --     150,000        --
  Borrowings under bank revolving credit
   agreement..................................   214,000    235,000    175,000
  Repayment of borrowings under bank revolving
   credit agreement...........................  (139,000)  (235,000)  (200,000)
  Borrowings under short-term financing
   agreement..................................    45,000      2,000    171,264
  Repayment of borrowings under short-term
   financing agreement........................   (45,000)    (2,000)  (176,264)
  Deliveries under the gas sales obligation...   (21,510)   105,000        --
  Minority interest third party...............     1,950      3,050        --
  Redemption of minority interests in
   preferred securities of subsidiary                --         --    (100,000)
  Payments of capital lease obligations.......   (16,810)   (10,874)    (8,417)
  Purchase of treasury stock..................    (3,735)       --         --
                                               ---------  ---------  ---------
      Net cash flows provided by (used in)
       financing activities...................    34,895    247,176   (138,417)
                                               ---------  ---------  ---------
Net Increase (Decrease) in Cash and Cash
 Equivalents..................................     4,738       (535)    11,798
Cash and Cash Equivalents at Beginning of
 Year.........................................    15,053     15,588      3,790
                                               ---------  ---------  ---------
Cash and Cash Equivalents at End of Year...... $  19,791  $  15,053  $  15,588
                                               =========  =========  =========
Non-Cash Items:
  Conversion of forward purchase facilities to
   treasury stock............................. $   5,000  $     --   $     --
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       31
<PAGE>

                                EEX CORPORATION

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                   Year Ended December 31
                                                -------------------------------
                                                  2000       1999       1998
                                                ---------  ---------  ---------
                                                       (In thousands)
<S>                                             <C>        <C>        <C>
Common Stock, authorized 150 million shares:
  Balance at beginning of year................  $     424  $     424  $   1,271
  Issued for stock plans (558 and 103
   shares)....................................          5        --           1
  One-for-three reverse split at par value
   (84,775 share reduction)...................        --         --        (848)
                                                ---------  ---------  ---------
  Balance at end of year (Outstanding shares:
   42,256, 42,483, and 42,387)................        429        424        424
                                                ---------  ---------  ---------
Preferred Stock, authorized 10 million shares:
  Balance at beginning of year................         16        --         --
  Issued 1.5 million shares, $0.01 par value..        --          15        --
  Dividend payment............................          2          1        --
                                                ---------  ---------  ---------
  Balance at end of year (1.8 and 1.6 million
   shares)....................................         18         16        --
                                                ---------  ---------  ---------
Paid in Capital:
  Balance at beginning of year................    729,925    569,268    570,493
  Excess of proceeds over par value of common
   stock issued for stock plans...............        --         --         871
  Market valuation adjustments of restricted
   stock......................................      1,531        302     (2,944)
  One-for-three reverse common stock split....        --         --         848
  Issuance of preferred stock.................        --     149,985        --
  Dividends on preferred stock................     13,362     12,117        --
  Stock issue costs...........................        (36)    (1,747)       --
                                                ---------  ---------  ---------
  Balance at end of year......................    744,782    729,925    569,268
                                                ---------  ---------  ---------
Retained Earnings (Deficit):
  Balance at beginning of year................   (434,748)  (334,698)  (293,772)
  Termination of phantom stock plan...........        --        (129)       --
  Issue common stock from treasury stock......        --          (7)       --
  Net (Loss) Applicable to common
   shareholders...............................    (10,418)   (99,914)   (40,926)
                                                ---------  ---------  ---------
  Balance at end of year......................   (445,166)  (434,748)  (334,698)
                                                ---------  ---------  ---------
Unamortized Restricted Stock Compensation:
  Balance at beginning of year................       (443)      (206)    (2,877)
  Grants (670, 98, and 50 shares).............     (1,963)      (597)    (1,195)
  Cancellations (112, 18, and 10 shares)......        169         21          4
  Amortization................................      1,170        143      1,032
  Market value adjustments....................        --         196      2,830
                                                ---------  ---------  ---------
  Balance at end of year......................     (1,067)      (443)      (206)
                                                ---------  ---------  ---------
Unearned Compensation:
  Balance at beginning of year................        --         --         --
  Replacement awards from options settled and
   restricted stock issued....................       (349)       --         --
                                                ---------  ---------  ---------
  Balance at end of year......................       (349)       --         --
                                                ---------  ---------  ---------
Treasury Stock:
  Balance at beginning of year................       (311)      (488)      (452)
  Issuance of shares for restricted stock
   awards (47 shares).........................        --         --         452
  Cancellations of restricted stock grants (10
   shares)....................................        --         --         (90)
  Termination of phantom stock plan; issued
   common stock (8 shares)....................        --         170        --
  Issue common stock from treasury stock......        --           7        --
  Purchase of shares--forward purchase
   facilities (797 shares)....................     (8,723)       --         --
  Purchase of restricted stock shares for
   payroll taxes (3 shares)...................        (12)       --         --
  Repurchase of outstanding shares (55
   shares)....................................        --         --        (398)
                                                ---------  ---------  ---------
  Balance at end of year (808, 14, and 22
   shares)....................................     (9,046)      (311)      (488)
                                                ---------  ---------  ---------
Shareholders' Equity..........................  $ 289,601  $ 294,863  $ 234,300
                                                =========  =========  =========
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       32
<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 changed the name of
the Company to EEX Corporation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   The consolidated financial statements are presented in accordance with
United States accounting principles. 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. Geologic 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.

                                      33
<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 13).
Certain stock options were repriced effective July 1, 2000 in connection with
the Company's implementation of "Interpretation 44."

   Cash and Cash Equivalents--Cash and cash equivalents include highly liquid
investments with maturities of three months or less when purchased. In
addition, during 1999 and early 2000, 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, 2000, to Shell Oil
Company (15%) and PG&E Texas Industrial Energy L.P. (11%); for the year ended
December 31, 1999, to Shell Oil Company (30%); and for the year ended December
31, 1998, to Shell Oil Company (13%). 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. 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.

                                      34
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



   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 paying
cash in exchange for physical delivery of the shares to EEX, or on a net basis
in either shares of EEX common stock or in cash. As of the end of August 2000,
EEX settled these two transactions by paying $8.7 million, of which $7.6
million ($5 million in 1999 and $2.6 million in 2000) was previously deposited
and classified as restricted cash, for physical delivery of 796,532 shares to
EEX. These shares are recorded as treasury shares in the Consolidated Balance
Sheet.

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 C Warrants to be exercised for cash or by utilizing
shares of Preferred Stock at the stated value on a gross or net basis.

                                      35
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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 on the Preferred Stock as follows:

<TABLE>
<CAPTION>
                                         Amount of Dividends Number of Preferred
   Year                                     (In millions)       Shares Issued
   ----                                  ------------------- -------------------
   <S>                                   <C>                 <C>
   2000.................................        $13.4              133,636
   1999.................................        $12.1              121,173
</TABLE>

6. TESORO ACQUISITION

   In December 1999, the Company acquired certain oil and gas properties and
pipeline assets by purchasing stock and membership interests in corporations
and limited liability companies. The Company acquired (i) all of the member
interests in four limited liability companies which, together, owned all of
the partnership interests of 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 two corporations which, together, owned all of the
partnership interests in EEX Pipeline Company, L.P., which owns partnership
interests in pipeline and gathering systems ("Pipeline Interests"). EEX closed
the acquisition at a net cost of $219 million.

   EEX Operating LLC ("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.

   The Company 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 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. The call option becomes exercisable when the
forward sale described below terminates, and expires five years after it
becomes exercisable.

   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 10).

   At December 31, 2000, the Company has loaned $113 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 note does not require or permit any cash
principal payment or any cash interest payment until all of E&P L.P.'s
obligations under the Gas Sales Obligation have been satisfied in full. 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.

                                      36
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The transaction described above has been accounted for using the purchase
method of accounting and has been included in the EEX Consolidated Financial
Statements since December 17, 1999.

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 oil and gas properties 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. The reserves are audited by its independent
petroleum consultant, Netherland, Sewell & Associates, Inc. This analysis uses
a multi-year market based commodity price forecast in effect at year-end 2000.
The initial prices used in this analysis for 2001 annual cash flows were
$26.80 per barrel of oil and $9.52 per Million British Thermal Units of gas,
except for contractually committed volumes. 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.

   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.

   Based upon the resulting fair value at June 30, 2000, the carrying value of
the Mudi Field was reduced and a pre-tax charge of $12 million for impairment
was recorded for oil and gas properties located in the International business
segment, primarily due to a decrease in planned production rates and the
impact of higher commodity prices under the production sharing agreement.

8. SUPPLEMENTAL CASH FLOW INFORMATION

   Cash paid for interest, net of amounts capitalized, was $33 million in
2000, $12 million in 1999 and $19 million in 1998. Net cash income taxes were
$2.4 million in 1998 and refunds of $0.1 million in 1999.

   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 2000, the Company
made final settlement of the purchase price with Tesoro.

   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

                                      37
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 cash 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."

9. 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 $75 million was outstanding at December 31,
2000. 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
                                                       ------------------------
                                                          2000         1999
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Bank revolving credit agreement.................... $    75,000  $       --
   Short-term borrowings..............................         --           --
   Capital lease obligations..........................     205,634      222,444
   Operating lease obligations........................       4,413        5,388
                                                       -----------  -----------
     Total Consolidated Debt.......................... $   285,047  $   227,832
   Consolidated Net Worth.............................     289,601      294,863
                                                       -----------  -----------
     Total Consolidated Debt and Net Worth............ $   574,648  $   522,695
                                                       ===========  ===========
     Maximum permitted Debt to Capital Ratio..........          60%          60%
     Debt to Capital Ratio............................          50%          44%
</TABLE>

   The following is a summary of interest and other financing costs (in
thousands):

<TABLE>
<CAPTION>
                                                         2000    1999    1998
                                                        ------- ------- -------
   <S>                                                  <C>     <C>     <C>
   Interest costs incurred............................. $33,586 $17,686 $18,987
   Interest capitalized................................     --      --      --
                                                        ------- ------- -------
   Interest charged to expense......................... $33,586 $17,686 $18,987
                                                        ======= ======= =======
</TABLE>

                                      38
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10. GAS SALES OBLIGATION

   In December 1999, 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 plus make-whole of the hedges assumed by the
purchaser in the agreement. 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. Payments made
during the year 2000 related to this obligation were $21.5 million. This
obligation is not debt for purposes of determining the debt to capital ratio
under the bank revolving credit agreement described in Note 9 above. During
2000, the Company delivered approximately 13 Bcf of gas at an average realized
price of approximately $2.51 per Mcf.

11. 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
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, 2000, EEX was required to maintain a $70 million letter of
credit in support of the equity owners of the leased facilities. The
commitment fee incurred associated with the letters of credit totaled $1.0
million, $0.8 million and $0.2 million in 2000, 1999 and 1998, respectively.

   The equipment and facilities that were used in developing and producing
reserves in the Mississippi Canyon Block 441 were leased under a lease
classified as a capital lease. EEX exercised an option, and purchased the
facilities in July 2000.

   Amortization of assets recorded under capital leases is included in
depletion, depreciation and amortization expense.

   EEX also leases buildings and office space under noncancellable operating
leases that expire at various dates through December 2005.

                                      39
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Estimated future minimum payments under noncancellable operating and
capital leases with initial or remaining terms of one year or more at December
31, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                             Operating Capital
                                                              Leases    Leases
                                                             --------- --------
   <S>                                                       <C>       <C>
   2001.....................................................  $1,910   $ 25,998
   2002.....................................................   1,992     26,000
   2003.....................................................     663     25,999
   2004.....................................................     408     25,999
   2005.....................................................     408     23,478
   Thereafter...............................................     --     135,229
                                                              ------   --------
     Total..................................................  $5,381   $262,703
                                                              ======
     Less interest factor...................................             57,069
                                                                       --------
     Capital lease obligations..............................           $205,634
                                                                       ========
</TABLE>

   Assets recorded under capital leases, excluding any investment since lease
inception, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                             2000      1999
                                                           --------  ---------
   <S>                                                     <C>       <C>
   Property and equipment................................. $228,844  $ 249,699
   Accumulated depreciation...............................  (98,553)  (112,802)
                                                           --------  ---------
     Total................................................ $130,291  $ 136,897
                                                           ========  =========
</TABLE>

   Rental expenses incurred under all operating leases totaled $2.7 million,
$1.8 million, and $2.4 million in 2000, 1999, and 1998, respectively.

12. 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 December 1999, the Company entered into a call option to purchase the
third party's equity interest in ERF for the lesser of $5 million or the fair
market value of the third party's interest, provided that the fair market
value shall not exceed the equity percentage represented by the third party's
interest in the oil and gas reserves of E&P L.P. Because of this call option,
the third party's equity interest will not exceed $5 million, an amount
reached during the third quarter of 2000. The 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 and is exercisable 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.

   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.

                                      40
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13. 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, 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
     Granted.......................................   718,600   $ 3.69   $ 2.70
     Canceled......................................  (682,468)  $27.91
                                                    ---------   ------
   Options outstanding
     December 31, 2000.............................   767,794   $ 5.88
                                                    =========   ======
</TABLE>

   The following is a summary of 1996 SIP stock options outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
                                                 Range of Exercise Prices
                                            ----------------------------------
                                            $3.53-$6.56 $29.25-$43.50  Total
                                            ----------- ------------- --------
   <S>                                      <C>         <C>           <C>
   Options outstanding.....................   718,710       49,084     767,794
   Weighted average remaining contractual
    life, in years.........................         9            5           9
   Weighted average exercise price.........  $   4.05      $ 32.65    $   5.88
   Number exercisable......................    85,910       49,084     134,994
   Weighted average exercise price.........  $   6.56      $ 32.65    $  16.05
</TABLE>

                                      41
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A summary of restricted stock award activity follows:

<TABLE>
<CAPTION>
                                                         Number of Shares
                                                     --------------------------
                                                       2000     1999     1998
                                                     --------  -------  -------
   <S>                                               <C>       <C>      <C>
   Outstanding--Beginning of year...................  551,419  168,667  123,477
     Awarded........................................   10,900  399,343   53,000
     Restrictions lifted............................ (146,911)  (5,022)  (4,477)
     Canceled.......................................  (86,734) (11,569)  (3,333)
                                                     --------  -------  -------
   Outstanding--End of year.........................  328,674  551,419  168,667
                                                     ========  =======  =======
</TABLE>

   The weighted average grant date fair value per share of restricted stock
awarded during 2000, 1999 and 1998 was $5.15, $3.60 and $23.76, 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
                                                               Average  Average
                                                    Number of  Exercise   Fair
                                                     Shares     Price    Value
                                                    ---------  -------- --------
   <S>                                              <C>        <C>      <C>
   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
     Granted.......................................   142,244   $ 2.87   $2.10
     Canceled......................................  (282,987)  $ 7.27
                                                    ---------   ------
   Options outstanding
     December 31, 2000............................. 1,356,034   $ 6.67
                                                    =========   ======
</TABLE>

                                      42
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following is a summary of 1998 SIP stock options outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
                                                 Range of Exercise Prices
                                           ------------------------------------
                                           $2.81-$6.00 $11.16-$15.47   Total
                                           ----------- ------------- ----------
   <S>                                     <C>         <C>           <C>
   Options outstanding...................   1,142,442     213,592     1,356,034
   Weighted average remaining contractual
    life, in years.......................           8           8             8
   Weighted average exercise price.......  $     5.57    $  12.57    $     6.67
   Number exercisable....................     496,553     146,259       642,812
   Weighted average exercise price.......  $     5.07    $  12.53    $     6.77
</TABLE>

   A summary of restricted stock award activity follows:

<TABLE>
<CAPTION>
                                                             Number of Shares
                                                            --------------------
                                                             2000     1999  1998
                                                            -------  ------ ----
   <S>                                                      <C>      <C>    <C>
   Outstanding--Beginning of year..........................  68,400     --  --
     Awarded............................................... 238,568  68,400 --
     Restrictions lifted................................... (26,099)    --  --
     Canceled.............................................. (30,700)    --  --
                                                            -------  ------ ---
   Outstanding--End of year................................ 250,169  68,400 --
                                                            =======  ====== ===
</TABLE>

   The weighted average grant date fair value per share of restricted stock
awarded during 2000 and 1999 was $2.75 and $2.81, respectively. 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. In 1999, the 1997
SOP was amended to include restricted stock awards. 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>
                                                               Weighted Weighted
                                                      Number   Average  Average
                                                        of     Exercise   Fair
                                                      Shares    Price    Value
                                                     --------  -------- --------
   <S>                                               <C>       <C>      <C>
   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
     Granted........................................    8,500   $ 3.35   $2.45
     Canceled.......................................  (10,967)  $10.75
                                                     --------   ------
   Options outstanding
     December 31, 2000..............................  261,867   $ 4.11
                                                     ========   ======
</TABLE>

                                      43
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following is a summary of 1997 SOP stock options outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
                                                    Range of Exercise Prices
                                                  ----------------------------
                                                  $2.72-$6.44 $32.25   Total
                                                  ----------- ------- --------
   <S>                                            <C>         <C>     <C>
   Options outstanding...........................   250,200    11,667  261,867
   Weighted average remaining contractual life,
    in years.....................................         9         6        9
   Weighted average exercise price...............  $   2.80   $ 32.25 $   4.11
   Number exercisable............................    78,408    11,667   90,075
   Weighted average exercise price...............  $   2.76   $ 32.25 $   6.58
</TABLE>

   A summary of restricted stock award activity follows:

<TABLE>
<CAPTION>
                                                              Number of Shares
                                                              ------------------
                                                               2000    1999 1998
                                                              -------  ---- ----
   <S>                                                        <C>      <C>  <C>
   Outstanding--Beginning of year............................     --   --   --
     Awarded.................................................  50,000  --   --
     Restrictions lifted..................................... (25,000) --   --
     Canceled................................................     --   --   --
                                                              -------  ---  ---
   Outstanding--End of year..................................  25,000  --   --
                                                              =======  ===  ===
</TABLE>

   The weighted average grant date fair value per share of restricted stock
awarded during 2000 was $2.81. Fair value is equal to the common stock fair
market value on the grant date.

   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>
                                                                Weighted Weighted
                                                                Average  Average
                                                     Number of  Exercise   Fair
                                                      Shares     Price    Value
                                                     ---------  -------- --------
   <S>                                               <C>        <C>      <C>
   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
     Granted........................................      --        --       --
     Canceled.......................................  (28,575)   $26.64
                                                     --------    ------
   Options outstanding
     December 31, 2000..............................   23,463    $30.48
                                                     ========    ======
</TABLE>

                                      44
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following is a summary of stock options outstanding under the 1996 SOP
at December 31, 2000:

<TABLE>
<CAPTION>
                                                 Range of Exercise Prices
                                            ----------------------------------
                                            $9.19-$14.16 $27.00-$33.00  Total
                                            ------------ ------------- -------
   <S>                                      <C>          <C>           <C>
   Options outstanding.....................     1,217        22,246     23,463
   Weighted average remaining contractual
    life, in years.........................         8             6          6
   Weighted average exercise price.........    $11.16       $ 31.54    $ 30.48
   Number exercisable......................       --         21,913     21,913
   Weighted average exercise price.........    $  --        $ 31.60    $ 31.60
</TABLE>

   Total compensation cost recognized in income for 2000, 1999 and 1998 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>
                                                 2000      1999       1998
                                               --------  ---------  --------
   <S>                                         <C>       <C>        <C>
   Net (Loss) Applicable to Common
    Shareholders
     As reported.............................. $(10,418) $ (99,914) $(40,926)
     Pro forma................................ $(12,676) $(104,555) $(44,252)
   Basic and Diluted Net (Loss) Per Share
     As reported.............................. $  (0.25) $   (2.37) $  (0.97)
     Pro forma................................ $  (0.30) $   (2.48) $  (1.05)
</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>
                                                               2000  1999  1998
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Risk free interest rate.................................... 6.25% 6.10% 5.36%
   Expected volatility........................................   56%   49%   42%
   Expected dividend yield.................................... None  None  None
</TABLE>

14. 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 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.

                                      45
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

   Oil and gas hedging activities decreased 2000 revenues by $20.3 million and
1999 revenues by $1.9 million and increased 1998 revenues by $7.5 million.

   At December 31, 2000, EEX had outstanding natural gas swaps that were
entered into as hedges extending through March 31, 2001 to exchange payments
on 383 BBtu of natural gas. At December 31, 2000, the weighted average strike
price and market price per MMBtu of natural gas was $2.754 and $8.977,
respectively. At December 31, 2000 there were $2.4 million of net unrealized
and unrecognized hedging losses 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, 2000, EEX had outstanding natural gas collars that were
entered into as hedges extending through June 30, 2002 to exchange payments on
11 Bcf of natural gas. At December 31, 2000, the weighted average floor and
ceiling strike price and market price per MMBtu of natural gas was $3.045,
$4.558 and $6.308, respectively. At December 31, 2000, there were $17.4
million of net unrealized and unrecognized hedging losses 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, 2000, the estimated
payment the Company would have made to terminate or otherwise settle all open
gas hedging activities was approximately $20 million, which represented their
estimated fair value.

15. INCOME TAXES

   Provision (Benefit) for Income Taxes (in thousands):

<TABLE>
<CAPTION>
                                                         2000   1999    1998
                                                        ------ ------  -------
   <S>                                                  <C>    <C>     <C>
   Current:
     Federal........................................... $  --  $  --   $   741
     Foreign...........................................    --    (317)   2,432
     State.............................................    --     220    1,227
                                                        ------ ------  -------
       Total...........................................    --     (97)   4,400
   Deferred--Federal...................................  1,586  6,988   (9,397)
                                                        ------ ------  -------
       Total provision (benefit)....................... $1,586 $6,891  $(4,997)
                                                        ====== ======  =======
</TABLE>

                                      46
<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>
Income (Loss) before income taxes:
  Domestic...................................... $ 8,570  $(100,998) $(35,135)
  Foreign.......................................  (4,039)    20,092    (4,256)
                                                 -------  ---------  --------
    Total....................................... $ 4,531  $ (80,906) $(39,391)
                                                 =======  =========  ========
Income taxes (benefit) computed at the federal
 statutory rate of 35%.......................... $ 1,586  $ (28,317) $(13,787)
  Percentage depletion..........................     --         --        --
  Foreign taxes.................................     --        (317)    2,432
  State taxes...................................     --         220     1,227
  Valuation allowance on deferred tax asset.....     (88)    35,294     5,410
  Other--net....................................      88         11      (279)
                                                 -------  ---------  --------
    Provision for income taxes (benefit)........ $ 1,586  $   6,891  $ (4,997)
                                                 =======  =========  ========
</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, 2000 and 1999
is as follows (in thousands):

<TABLE>
<CAPTION>
                                     2000                           1999
                         -----------------------------  -----------------------------
                           Total    Current Noncurrent    Total    Current Noncurrent
                         ---------  ------- ----------  ---------  ------- ----------
<S>                      <C>        <C>     <C>         <C>        <C>     <C>
Deferred Tax Assets
 (Liabilities):
  Property, plant and
   equipment............ $  14,667  $  --   $  14,667   $  61,306   $ --   $  61,306
  Employee benefit
   obligations..........     1,399     --       1,399       1,388     --       1,388
  Accruals and
   allowances...........     3,071   2,206        865       2,276     829      1,447
  Foreign corporations..       409     --         409      (1,005)    --      (1,005)
  Net operating loss....   104,592     --     104,592      61,847     --      61,847
  Valuation allowance...  (102,086)    --    (102,086)   (102,174)    --    (102,174)
                         ---------  ------  ---------   ---------   -----  ---------
    Net deferred tax
     asset.............. $  22,052  $2,206  $  19,846   $  23,638   $ 829  $  22,809
                         =========  ======  =========   =========   =====  =========
</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 2000, EEX decreased the
deferred tax asset by $2 million in recognition of the tax effect of book
income before taxes. 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. Although the Company has incurred net taxable losses for book
purposes in prior 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 selected assets. Due to the uncertainty of
future income estimates, the additional anticipated earnings 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, 2000 for the Company's deferred tax asset.

   As of December 31, 2000, the Company had approximately $299 million of U.S.
net operating loss carryforwards ("NOLs"). The NOLs have expiration dates
ranging from 2003 through 2020.

                                      47
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


16. 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 funded in advance.

   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. An agreement providing for the
spin-off of the pension assets was subject to a dispute over the definition of
those employees and retirees who should be included in the EEX plan. This
dispute was resolved in January 2001. While the dispute was pending, the
assets remained in trust with ENSERCH's successor. Therefore, in 1999 and
2000, EEX's costs for these benefit plans were based on EEX's allocated
pension plan assets, employees and retirees based upon information provided by
ENSERCH's successor. 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's successor. It is expected that the allocated
pension plan assets will be transferred to EEX's plan that provides
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.

   Employee Benefit Plan Disclosures (in thousands):

<TABLE>
<CAPTION>
                                                              Post-Retirement
                                          Pension Benefits       Benefits
                                          ------------------  ----------------
                                            2000      1999     2000     1999
                                          --------  --------  -------  -------
<S>                                       <C>       <C>       <C>      <C>
Assumptions as of December 31:
 Discount rate used in determining
  benefit obligation.....................     7.75%     7.75%    7.75%    7.75%
 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................................. $(19,487) $(19,173) $(7,003) $(8,949)
 Service cost............................     (486)     (634)      (3)      (7)
 Interest cost...........................   (1,521)   (1,426)    (500)    (496)
 Actuarial liability gain (loss).........     (668)      832      277    2,220
 Participants contribution...............       --       --      (166)    (165)
 Benefits paid...........................      828       914      964      394
                                          --------  --------  -------  -------
   Benefit obligation as of December 31.. $(21,334) $(19,487) $(6,431) $(7,003)
                                          ========  ========  =======  =======
Change in Plan Assets:
 Fair value of Plan assets as of
  beginning of period.................... $ 17,698  $ 11,820
 Actual return on assets.................      368       894
 Employer contributions..................      --      5,770
 Benefits paid...........................     (706)     (786)
                                          --------  --------
   Fair value of Plan assets as of
    December 31.......................... $ 17,360  $ 17,698
                                          ========  ========
Reconciliation of Funded Status:
 Funded status........................... $ (3,973) $ (1,788) $(6,431) $(7,003)
 Unrecognized net obligation.............      --        --     3,209    3,482
 Unrecognized actuarial (gain)...........     (195)   (2,071)    (379)    (102)
                                          --------  --------  -------  -------
   Accrued benefit cost as of December
    31................................... $ (4,168) $ (3,859) $(3,601) $(3,623)
                                          ========  ========  =======  =======
Components of Net Periodic Benefit Cost:
 Service cost--benefits earned during
  the period............................. $    486  $    634  $     3  $     7
 Interest cost on projected benefit
  obligation.............................    1,521     1,426      500      496
 Expected return on assets...............   (1,581)   (1,181)     --       --
 Amortization--net obligation............      --        --       273      273
 Amortization--unrecognized loss.........        4        11      --       --
                                          --------  --------  -------  -------
   Net periodic benefit cost............. $    430  $    890  $   776  $   776
                                          ========  ========  =======  =======
</TABLE>

                                      48
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   For measurement purposes, a 5.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2000. The rate is assumed
to remain at that level thereafter.

   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 Increase Point Decrease
                                                 -------------- --------------
   <S>                                           <C>            <C>
   Effect on total of service and interest cost
    for 2000....................................      $ 37          $ (32)
   Effect on year-end 2000 post-retirement
    benefit obligation..........................      $511          $(445)
</TABLE>

   Investment Plan--At December 31, 2000, 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, $0.2 million, and $0.3 million in 2000, 1999 and
1998, respectively. The Company matches up to 60% of the first 6% of employee
contributions.

17. 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.

   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 the Company 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 and in other areas
when 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
average operating day rate of approximately $130,000 and commenced in July
1999. As of December 31, 2000, approximately 546 days remained under the
contract at a total cost of approximately $73 million ($48 million in 2001 and
$25 million in 2002).

   As of December 31, 2000, the Company has a future volumetric delivery
obligation of approximately 5 billion cubic feet of natural gas to Encogen One
Partners, Ltd.

18. FIXED-PRICE PHYSICAL DELIVERIES

   In January 2001, EEX adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." 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. To mitigate the result
of implementation, EEX converted a portion of its existing swaps and collars
into fixed-price physical delivery contracts. The contract volumes and prices
are set out in the tables below.

                                      49
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   As of December 31, 2000, EEX had the following fixed-price physical
deliveries from one onshore field:

<TABLE>
<CAPTION>
                                                  Notional Amount Contract Price
                                                     (BBtu)(1)    (Per MMBtu)(2)
                                                  --------------- --------------
   <S>                                            <C>             <C>
   April 2001--June 2001.........................        398          $2.319
   July 2001--September 2001.....................        414           2.329
   October 2001--December 2001...................        391           2.526
   January 2002--March 2002......................        439           2.575
   April 2002--June 2002.........................        445           2.351
   July 2002--September 2002.....................        455           2.349
   October 2002--December 2002...................        426           2.533
   January 2003--March 2003......................        290           2.604
   April 2003--June 2003.........................        315           2.380
   July 2003--September 2003.....................        311           2.376
   October 2003--December 2003...................        303           2.560
   January 2004--March 2004......................        315           2.640
   April 2004--June 2004.........................        310           2.416
   July 2004--September 2004.....................        335           2.412
   October 2004--December 2004...................        319           2.596
                                                       -----
     Total.......................................      5,466
                                                       =====
</TABLE>
--------
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.

   As of December 31, 2000, EEX agreed to sell to third parties specified
volumes from several onshore fields at a specified minimum and maximum
contract price set out in the table below. EEX agreed to buy back the
specified volume at market price. The volumes and contract prices are set out
in the table below.

<TABLE>
<CAPTION>
                                                  Notional Amount Contract Price
                                                     (BBtu)(1)    (Per MMBtu)(2)
                                                  --------------- --------------
                                                                  Floor  Ceiling
                                                                  ------ -------
   <S>                                            <C>             <C>    <C>
   January 2001--March 2001......................      1,350      $2.553 $3.309
   April 2001--June 2001.........................      1,820       2.346  2.877
   July 2001--September 2001.....................      1,840       2.341  2.875
   October 2001--December 2001...................      1,840       2.494  3.038
                                                       -----
     Total.......................................      6,850
                                                       =====
</TABLE>
--------
(1) Billions of British Thermal Units.
(2) Millions of British Thermal Units.

                                      50
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


19. OTHER INFORMATION

   Major accounts in certain line items of the Consolidated Balance Sheets are
(in thousands):

<TABLE>
<CAPTION>
                                                                 2000   1999
                                                                ------ -------
   <S>                                                          <C>    <C>
   Other current assets:
     Prepaid costs related to Mudi Field....................... $9,030 $ 5,941
     Deferred hedging loss.....................................  6,394     428
     Current portion of deferred income taxes..................  2,206     829
   Other non-current liabilities:
     Accrued liabilities for restoration, dismantlement and
      abandonment costs........................................ $  340 $42,756
     Advances from partners....................................  7,449  20,604
     Post-retirement benefits (FAS 106)........................  3,688   3,978
     Litigation reserve........................................  4,397   7,076
     Accrued pension plan......................................  4,202   4,003
</TABLE>

20. NEW ACCOUNTING STANDARDS

   FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is effective for fiscal years beginning after June 15,
2000, 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
adopted this accounting standard as required on January 1, 2001. The effect of
adoption on January 1, 2001 will result in a decrease to reported
shareholders' equity of approximately $20 million.

   In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), "Accounting for Certain
Transactions Involving Stock Compensation." Interpretation 44 provides
criteria for the recognition of compensation expense in certain stock-based
compensation arrangements that are accounted for under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Interpretation 44 is effective July 1, 2000, with certain provisions effective
retroactively to December 15, 1998 and January 12, 2000. The effect of the
retroactive provisions of Interpretation 44 on the Company's financial
statements was immaterial.

                                      51
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


21. 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
managed separately because of their geographic locations. 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>
2000:
-----
Total Revenues..........    $    --         $    --        $220,621        $53,958    $(12,167) $262,412
Production and operating
 costs..................         --            1,245         24,312         13,655         --     39,212
Exploration costs.......       7,788             --          23,667          2,325         --     33,780
Depletion, depreciation
 and amortization.......         --            4,510         60,639         39,304       1,712   106,165
Other costs.............         --                1         11,696(d)         --       32,937    44,634
                            --------        --------       --------        -------    --------  --------
Operating Income
 (Loss).................      (7,788)         (5,756)       100,307         (1,326)    (46,816)   38,621
Interest Income.........         --              --             --             --        1,447     1,447
Interest and other
 financing costs........         --          (14,129)       (10,103)           --       (9,354)  (33,586)
                            --------        --------       --------        -------    --------  --------
Income (Loss) before
 income taxes...........    $ (7,788)       $(19,885)      $ 90,204        $(1,326)   $(54,723) $  6,482
                            ========        ========       ========        =======    ========  ========
Long-Lived Assets.......    $ 89,504        $146,092       $363,804        $35,691    $  4,457  $639,548
                            ========        ========       ========        =======    ========  ========
Additions to Long-Lived
 Assets.................    $ 41,208        $  6,450       $118,048        $14,432    $  1,082  $181,220
                            ========        ========       ========        =======    ========  ========
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
                            ========        ========       ========        =======    ========  ========
</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, gains/loss on hedging and sale of assets.
(d) Includes taxes other than income.

                                      52
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


22. SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)

   Oil and Gas Producing Activities--The following tables 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>
                                                             2000       1999
                                                           ---------  ---------
<S>                                                        <C>        <C>
Capitalized Costs:
  Proved oil and gas properties........................... $ 646,934  $ 935,360
  Floating Production System and Pipelines................   242,817    232,908
  Unproved oil and gas properties.........................    65,512     91,097
  Accumulated depletion, depreciation and amortization....  (320,173)  (574,778)
                                                           ---------  ---------
    Total net capitalized cost............................ $ 635,090  $ 684,587
                                                           =========  =========
</TABLE>

<TABLE>
<CAPTION>
                                    2000             1999             1998
                              ---------------- ---------------- ----------------
                                        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..................... $ 28,688 $   --  $238,749 $ 4,523 $  7,990 $35,555
  Unproved...................    6,421      53    4,767     --    14,168     473
Exploration costs............   60,901   2,325   79,618   4,143   59,729   6,501
Development costs............   83,125  14,380   79,091  10,069   44,845   8,142
                              -------- ------- -------- ------- -------- -------
    Total.................... $179,135 $16,758 $402,225 $18,735 $126,732 $50,671
                              ======== ======= ======== ======= ======== =======
</TABLE>

                                      53
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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>
                               2000              1999              1998
                         ----------------  ----------------- -----------------
                                   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................ $218,486 $53,958  $116,118  $54,601 $167,668  $29,270
Less:
  Production costs(a)...   36,742  13,655    28,607   16,097   46,117   10,859
  Exploration costs.....   31,455   2,325    82,420    3,949   33,129   12,021
  Depletion,
   depreciation and
   amortization(b)......   64,389  39,304    83,931   10,148  101,925    8,421
  Income tax
   effects(c)...........   30,065     --        --     1,807      477      --
                         -------- -------  --------  ------- --------  -------
   Net producing
    activities.......... $ 55,835 $(1,326) $(78,840) $22,600 $(13,980) $(2,031)
                         ======== =======  ========  ======= ========  =======
</TABLE>
--------
(a) Includes severance, ad valorem and production taxes.
(b) Includes pre-tax property impairment of $12 million, $26 million and $10
    million in 2000, 1999 and 1998, respectively.
(c) Amount includes $35.3 million and $5.4 million for valuation allowance on
    deferred tax asset for 1999 and 1998, 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, 2000,
1999 and 1998. 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)
                          --------------------------  -----------------------
                           2000     1999      1998     2000    1999    1998
                          -------  -------  --------  ------  ------  -------
<S>                       <C>      <C>      <C>       <C>     <C>     <C>
U.S. Reserves:
  At January 1........... 362,813  203,551   460,158   5,702   6,431   18,100
  Revisions of previous
   estimates.............  31,699  (10,658)  (13,129)   (212) (1,116)     847
  Extensions, discoveries
   and additions......... 115,931   11,804    38,458  11,760      40    1,145
  Purchases of minerals
   in place(b)...........     --   206,002    33,143     --    2,305    1,118
  Sales of minerals in
   place(c).............. (72,689)  (6,883) (257,169) (1,936)   (619) (11,340)
  Production............. (55,145) (41,003)  (57,910)   (877) (1,339)  (3,439)
                          -------  -------  --------  ------  ------  -------
  At December 31......... 382,609  362,813   203,551  14,437   5,702    6,431
                          =======  =======  ========  ======  ======  =======
Proved Developed
 Reserves:
  At January 1........... 309,424  191,985   425,773   4,592   6,299   16,882
  At December 31......... 306,760  309,424   191,985   2,795   4,592    6,299
Minority interest at
 12/31 total proved(d)... 102,301   86,319       --      599   1,043      --
Minority interest at
 12/31 proved
 developed(d)............  89,222   65,073       --      535     584      --
</TABLE>
--------
(a) Includes natural gas liquids of 416 MBbls for 2000, 427 MBbls for 1999 and
    561 MBbls for 1998.
(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.

                                      54
<PAGE>

                                EEX CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                                             Oil (MBbls)
                                                         ----------------------
                                                          2000    1999    1998
                                                         ------  ------  ------
<S>                                                      <C>     <C>     <C>
Non-U.S. Reserves:
  At January 1.......................................... 11,840  19,728   5,741
  Revisions of previous estimates.......................    752  (4,657)  5,877
  Extensions, discoveries and additions.................    --      --    4,733
  Purchases of minerals in place........................    --      --    5,741
  Sales of minerals in place............................    --      --      --
  Production............................................ (1,912) (3,231) (2,364)
                                                         ------  ------  ------
At December 31.......................................... 10,680  11,840  19,728
                                                         ======  ======  ======
Proved Developed Reserves:
  At January 1..........................................  9,896  15,831   4,767
  At December 31........................................  8,423   9,896  15,831
</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) $9.52 in 2000, $2.08 in 1999 and $2.19 in 1998; Oil (per barrel)
$26.80 in 2000, $23.41 in 1999 and $9.50 in 1998, except for contractually
committed volumes.

                                      55
<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):
  2000
    Future cash inflows.................... $ 4,231.6  $ 3,967.8     $ 263.8
    Future production and development
     costs.................................  (1,130.0)    (935.2)     (194.8)
    Future income tax expense..............    (729.4)    (716.0)      (13.4)
                                            ---------  ---------     -------
    Future net cash flows..................   2,372.2    2,316.6        55.6
    10% annual discount....................  (1,088.9)  (1,079.8)       (9.1)
                                            ---------  ---------     -------
    Standardized measure of discounted
     future net cash flows................. $ 1,283.3  $ 1,236.8     $  46.5
                                            =========  =========     =======
    Minority interest (a).................. $   304.0  $   304.0     $   --
                                            =========  =========     =======
  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
                                            =========  =========     =======
</TABLE>
--------
(a) Minority Interest amounts are included in the table above.

<TABLE>
<CAPTION>
                                                      2000     1999     1998
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Changes in Standardized Measure (in millions):
  Sales and transfers of oil and gas produced, net
   of production costs............................. $ (222.7) $(126.0) $(139.9)
  Changes in prices, net of production and future
   development costs...............................  1,358.5     68.0   (149.3)
  Extensions, discoveries and improved recovery,
   less related costs..............................    447.7     16.4     58.3
  Purchases of minerals in place...................      --     181.6     70.2
  Revisions of previous quantity estimates.........     99.0     (1.0)    (4.9)
  Sales of minerals in place.......................   (498.4)    (6.9)  (258.7)
  Accretion of discount............................     43.6     27.6     61.9
  Net change in income taxes.......................   (380.7)     --      26.9
  Other............................................      --       0.7     (7.7)
                                                    --------  -------  -------
    Total.......................................... $  847.0  $ 160.4  $(343.2)
                                                    ========  =======  =======
</TABLE>

                                       56
<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.

<TABLE>
<CAPTION>
                                                 Quarter Ended
                                   --------------------------------------------
                                   March 31  June 30   September 30 December 31
                                   --------  --------  ------------ -----------
<S>                                <C>       <C>       <C>          <C>
2000:
  Revenues........................ $ 60,868  $ 62,279    $65,983     $ 73,282
  (Losses) on Property Sales......     (560)   (1,729)    (1,389)      (3,552)
  Impairment of Assets............      --     12,200        --           --
  Operating Income (Loss)(a)......   14,743    (4,209)    12,575       15,512
  Net Income (Loss) Applicable to
   Common Shareholders............      987   (16,187)    (1,702)       6,484
  Basic and Diluted Net Income
   (Loss) Per Share............... $   0.02  $  (0.38)   $ (0.04)    $   0.16
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 (Loss) Income (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)
</TABLE>
--------
(a) Operating Income (Loss) excluding interest and taxes.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

   None

                                      57
<PAGE>

                                    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.

                                       58
<PAGE>

                                    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)

    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 4.8 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)
</TABLE>

                                       59
<PAGE>

<TABLE>
   <C>   <S>
   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, incorporated by reference to Exhibit 10.5
         to Registrant's Form 10-K for the year ended December 31, 1999.(2)

   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  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)


   10.9  1998 Amended and Restated Stock Incentive Plan, incorporated by
         reference to Exhibit A to Registrant's Proxy Statement dated April 19,
         1999.(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)
</TABLE>

                                       60
<PAGE>

<TABLE>
   <C>   <S>
   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 Settlement Agreement, dated June 26, 2000, between EEX Corporation and
         Janice Hartrick, incorporated by reference to Exhibit 10.3 to
         Registrant's Quarterly Report on Form 10-Q for the quarter ended June
         30, 2000.(2)

   10.22 Employment Agreement, dated July 3, 2000, between EEX Corporation and
         Richard L. Edmonson, incorporated by reference to Exhibit 10.4 to
         Registrant's Quarterly Report on Form 10-Q for the quarter ended June
         30, 2000.(2)

   10.23 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)

   10.24 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)


   10.25 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)

   10.26 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)

   10.27 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)
</TABLE>

                                       61
<PAGE>


<TABLE>
   <C>   <S>
   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 Reserves, LLC),
         incorporated by reference to Exhibit 99.3 to Registrant's Form 8-K
         dated December 17, 1999.(2)

   10.29 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)

   10.30 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)

   10.31 First Amendment to Natural Gas Prepaid Forward Sale Contract,
         effective May 16, 2000, between EEX E&P Company, L.P. and Bob West
         Treasure L.L.C., incorporated by reference to Exhibit 10.1 to
         Registrant's Quarterly Report on Form 10-Q for the quarter ended June
         30, 2000.(2)

   10.32 Amended and Restated Call Agreement, dated May 16, 2000, between EEX
         Capital, Inc. and Bob West Treasure, L.L.C., incorporated by reference
         to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the
         quarter ended June 30, 2000.(2)

   10.33 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)

   10.34 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)

   10.35 Purchase and Sale Agreement, dated November 20, 2000, between EEX
         Corporation, a Texas corporation and EEX E&P Company, L.P., by and
         through EEX Exploration and Production Company, L.L.C., a Delaware
         limited liability company, as General Partner, and W & T Offshore,
         Inc., a Nevada corporation, incorporated by reference to Exhibit 99.1
         to Registrant's Form 8-K dated December 19, 2000.(2)

   21    Subsidiaries of the Registrant.(1)

   23.1  Consent of Ernst & Young LLP.(1)

   23.2  Consent of Netherland, Sewell & Associates, Inc.(1)
</TABLE>
--------
(1) Filed herewith.
(2) Incorporated by reference.

   (b) Reports on Form 8-K

   None

                                       62
<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 9, 2001

   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 9, 2001
______________________________________  Chief Executive Officer
            T. M Hamilton

        /s/ R. S. Langdon              Executive Vice President,     March 9, 2001
______________________________________  Finance and
            R. S. Langdon               Administration, Chief
                                        Financial Officer

         /s/ J. T. Leary               Vice President, Finance       March 9, 2001
______________________________________  and Treasurer
             J. T. Leary

         /s/ T. E. Coats               Vice President, Planning      March 9, 2001
______________________________________  and Controller (Principal
             T. E. Coats                Accounting Officer)

          /s/ F. S. Addy               Director                      March 9, 2001
______________________________________
              F. S. Addy

    /s/ B. A. Bridgewater, Jr.         Director                      March 9, 2001
______________________________________
        B. A. Bridgewater, Jr.

        /s/ F. M. Lowther              Director                      March 9, 2001
______________________________________
            F. M. Lowther

        /s/ M. P. Mallardi             Director                      March 9, 2001
______________________________________
            M. P. Mallardi

       /s/ Howard H. Newman            Director                      March 9, 2001
______________________________________
           Howard H. Newman
</TABLE>

                                       63