<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8567-2
MAXUS ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1891531
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
717 NORTH HARWOOD STREET, DALLAS, TEXAS 75201-6594
(Address of principal executive offices) (Zip Code)
(214) 953-2000
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO THE FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO[_]
Shares of Common Stock outstanding at November 12, 1996: 147,246,869
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PART 1. FINANCIAL INFORMATION
In the opinion of the management of Maxus Energy Corporation (together with
its subsidiaries, "Maxus" or the "Company"), all adjustments (consisting only of
normal accruals) necessary for a fair presentation of the consolidated results
of operations, consolidated balance sheet and consolidated cash flows at the
date and for the periods indicated have been included in the accompanying
consolidated financial statements. Effective April 1, 1995, the Company used
the purchase method of accounting to record the acquisition of the Company by
YPF Sociedad Anonima, an Argentine sociedad anonima ("YPF"), as discussed in
Note Two to the financial statements. Periods prior to April 1, 1995 are
presented; however, financial statements for these periods are on a pre-Merger
basis and, therefore, not comparative.
2
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MAXUS ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share)
<TABLE>
<CAPTION>
1996 1995
---------------------------- ------------------------------------------------
Three Months Nine Months Three Months Six Months | Three Months
Ended Ended Ended Ended | Ended
September 30, September 30, September 30, September 30, | March 31,
--------- -------- --------- --------- | ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) |
<S> <C> <C> <C> <C> | <C>
REVENUES |
Sales and operating revenues $ 174.4 $ 520.5 $ 141.8 $ 292.5 | $ 142.5
Other revenues, net 9.1 20.7 4.9 11.1 | 9.6
----------- ----------- ------------ ----------- | ------------
183.5 541.2 146.7 303.6 | 152.1
|
COSTS AND EXPENSES |
Operating expenses 56.5 158.9 58.2 116.2 | 64.6
Gas purchase costs 17.0 53.5 13.6 26.8 | 12.7
Exploration, including exploratory dry holes 5.3 19.3 10.3 27.1 | 8.9
Depreciation, depletion and amortization 41.8 125.9 45.5 90.7 | 29.9
General and administrative expenses 3.1 8.4 4.7 9.1 | 4.2
Taxes other than income taxes 3.3 9.9 3.5 6.3 | 3.1
Interest and debt expenses 33.8 101.9 35.5 70.2 | 24.1
Pre-merger costs - - - - | 42.4
----------- ----------- ------------ ----------- | ------------
160.8 477.8 171.3 346.4 | 189.9
----------- ----------- ------------ ------------ | ------------
|
Income (Loss) Before Income Taxes 22.7 63.4 (24.6) (42.8) | (37.8)
Income Taxes 11.4 55.3 3.5 8.3 | 19.1
----------- ----------- ------------ ------------ | ------------
Net Income (Loss) $ 11.3 $ 8.1 $ (28.1) $ (51.1) | (56.9)
=========== =========== ============ ============ |
Dividend requirement on Preferred Stock | (9.6)
| ------------
Net Loss Applicable to Common Shares | $ (66.5)
| ============
Net Loss Per Common Share | $ (0.49)
| ============
Average Common Shares Outstanding | 135.5
</TABLE>
See Notes to Consolidated Financial Statements.
3
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MAXUS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
(in millions, except shares)
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31,
1996 1995
--------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 42.5 $ 38.3
Receivables, less doubtful receivables 116.6 141.8
Funding guarantee from parent 27.0 -
Inventories 30.5 40.8
Restricted cash 9.6 19.0
Prepaids and other current assets 23.8 26.5
--------- ----------
TOTAL CURRENT ASSETS 250.0 266.4
Properties and Equipment, less accumulated
depreciation, depletion and amortization 2,026.9 2,363.6
Investments and Long-Term Receivables 7.5 7.1
Restricted Cash 44.6 61.4
Funding Guarantee from Parent 78.6 -
Deferred Charges 19.0 18.3
--------- ----------
$ 2,426.6 $ 2,716.8
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Long-term debt $ 70.4 $ 34.3
Accounts payable 45.8 59.0
Taxes payable 39.2 39.7
Accrued liabilities 144.6 173.4
--------- ----------
TOTAL CURRENT LIABILITIES 300.0 306.4
Long-Term Debt 1,219.1 1,261.2
Deferred Income Taxes 500.3 551.2
Other Liabilities and Deferred Credits 202.8 233.0
$9.75 Redeemable Preferred Stock, $1.00 par value
Authorized and issued shares--625,000 and 1,250,000 62.5 125.0
Stockholders' Equity
$2.50 Preferred Stock, $1.00 par value
Authorized shares--5,000,000
Issued shares--3,500,000 60.0 66.5
$4.00 Preferred Stock, $1.00 par value
Authorized shares--0 and 5,915,017
Issued shares--0 and 4,356,658 - 11.7
Common Stock, $1.00 par value
Authorized shares--300,000,000
Issued Shares--147,246,869 and 135,609,772 147.2 135.6
Paid-in capital 217.8 105.8
Accumulated deficit (279.2) (73.7)
Minimum pension liability (3.9) (5.9)
--------- ----------
TOTAL STOCKHOLDERS' EQUITY 141.9 240.0
--------- ----------
$ 2,426.6 $ 2,716.8
========= ==========
</TABLE>
See Commitments and Contingencies.
See Notes to Consolidated Financial Statements.
The Company uses the successful efforts method to account for its oil and gas
producing activities.
4
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MAXUS ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
----------------- --------------- ----------------
Nine Months Six Months Three Months
Ending Ending Ending
September 30, September 30, March 31,
1996 1995 1995
----------------- --------------- | ----------------
(Unaudited) |
<S> <C> <C> | <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net Income/(loss) $8.1 ($51.1) | ($56.9)
Adjustments to reconcile net income/(loss) to net cash provided |
by operating activities: |
Depreciation, depletion and amortization 125.9 90.7 | 29.9
Dry hole costs 1.9 9.5 | 1.0
Deferred income taxes (20.4) (25.5) | 0.4
Net gain on sale of assets and sale/maturity of investments 0.1 (4.4) | (1.7)
Postretirement benefits 2.5 2.0 | 1.4
Pre-merger costs - - | 42.4
Accretion of discount 6.6 4.0 | -
Other (1.4) (0.2) | 1.3
Changes in components of working capital: |
Receivables 3.3 5.2 | 23.8
Inventories, prepaids and other current assets 8.7 (9.4) | (1.4)
Accounts payable (9.6) (2.9) | (15.1)
Accrued liabilities (15.5) (24.4) | 26.3
Taxes payable/receivable 4.4 22.6 | 10.1
----------------- --------------- | ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 114.6 16.1 | 61.1
----------------- --------------- | ----------------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Expenditures for properties and equipment--including |
dry hole costs (146.3) (79.2) | (53.6)
Proceeds on asset sales to parent 292.7 - | -
Proceeds from sale of assets 0.2 0.5 | 2.1
Proceeds from sale/maturity of short-term investments - 96.3 | 63.4
Purchase of short-term investments - - | (24.6)
Restricted cash 26.2 25.4 | 12.2
Other (26.8) (21.7) | 9.8
----------------- --------------- | ----------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 146.0 21.3 | 9.3
----------------- --------------- | ----------------
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
Interest rate swap - 6.9 | 3.4
Proceeds from issuance of short-term debt - 17.2 | -
Repayment of short-term debt (34.4) (17.7) | -
Net proceeds from issuance of long-term debt - 833.9 | -
Repayment of long-term debt - (425.1) | -
Cash advance from parent 21.7 1.8 | -
Acquisition of common stock (3.5) (745.2) | -
Issuance of common stock to parent 64.0 - | -
Capital contribution from parent - 250.5 | -
Stock rights redemption - - | (13.6)
Redemption of preferred stock (280.5) - | -
Dividends paid (23.7) (19.2) | (9.6)
----------------- --------------- | ----------------
NET CASH USED IN FINANCING ACTIVITIES (256.4) (96.9) | (19.8)
----------------- --------------- | ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4.2 (59.5) | 51.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 38.3 92.1 | 40.6
----------------- --------------- | ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $42.5 $32.6 | $91.6
================= =============== | ================
</TABLE>
See Notes to Consolidated Financial Statements.
5
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1. SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements have been prepared in conformity
with generally accepted accounting principles, the most significant of which
are described below. Effective April 1, 1995, the Company used the purchase
method of accounting to record the acquisition of the Company by YPF as
discussed in Note Two. Financial statements presented for periods after April
1, 1995 reflect the effects of the Merger-related transactions. Periods prior
to April 1, 1995 are presented; however, financial statements for these
periods are on a pre-Merger basis and, therefore, not comparative. In June
1996, YPF announced an internal reorganization of Maxus which included the
transfer of the common stock of Maxus to a YPF indirect wholly-owned
subsidiary, YPF Holdings, Inc. and the sale of common stock of certain
subsidiaries of Maxus to a wholly-owned subsidiary of YPF (See Note Five).
Consolidation Accounting
The Consolidated Financial Statements include the accounts of the Company
and all domestic and foreign subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Management's Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from these estimates.
Statement of Cash Flows
Investments with original maturities of three months or less at the time
of original purchase are considered cash equivalents for purposes of the
accompanying Consolidated Statement of Cash Flows. Short-term investments
include investments with maturities over three months but less than one year.
Inventory Valuation
Inventories are valued at the lower of historical cost or market value
and are primarily comprised of well equipment and supplies. Historical cost is
determined primarily by using the weighted average cost method.
Properties and Equipment
Properties and equipment are carried at cost. Major additions are
capitalized; expenditures for repairs and maintenance are charged against
earnings.
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," which requires a review
of long-lived assets for impairment whenever events or changes in circumstance
indicate that the carrying amount of the asset may not be recoverable. Under
SFAS 121, if the expected future cash flow of a long-lived asset is less than
the carrying amount of the asset, an impairment loss shall be recognized to
value the asset at its fair value.
6
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The Company uses the successful efforts method to account for costs
incurred in the acquisition, exploration, development and production of oil
and gas reserves. Under this method, all geological and geophysical costs are
expensed; all development costs, whether or not successful, are capitalized as
costs of proved properties; exploratory drilling costs are initially
capitalized, but if the effort is determined to be unsuccessful, the costs are
then charged against earnings; depletion is computed based on an aggregation
of properties with common geologic structural features or stratigraphic
conditions, such as reservoirs or fields.
For investment in unproved properties in the United States, a valuation
allowance (included as an element of depletion) is provided by a charge
against earnings to reflect the impairment of unproven acreage. Investment in
international non-producing leasehold costs are reviewed periodically by
management to insure the carrying value is recoverable based upon the
geological and engineering estimates prepared by independent petroleum
engineers of total possible and probable reserves expected to be added over
the remaining life of each concession. Based upon increases to proved reserves
determined by reserve reports, a portion of the investment in international
non-producing leasehold costs will be periodically transferred to investment
in proved properties.
Depreciation and depletion related to the costs of all development
drilling, successful exploratory drilling and related production equipment is
calculated using the unit of production ("UOP") method based upon estimated
proved developed reserves. Leasehold costs are amortized using the UOP method
based on estimated proved reserves. Other properties and equipment are
depreciated generally on the straight-line method over their estimated useful
lives. Estimated future dismantlement, restoration and abandonment costs for
major facilities, net of salvage value, are taken into account in determining
depreciation, depletion and amortization.
The Company capitalizes the interest cost associated with major property
additions and mineral development projects while in progress. Such amounts are
amortized applying the same depreciation method over the same useful lives as
that used for the related assets.
When complete units of depreciable property are retired or sold, the
asset cost and related accumulated depreciation are eliminated with any gain
or loss reflected in other revenues, net. When less than complete units of
depreciable property are disposed of or retired, the difference between asset
cost and salvage or sales value is charged or credited to accumulated
depreciation and depletion.
Deferred Charges
Deferred charges are primarily comprised of debt issuance costs and are
amortized over the terms of the related debt agreements.
Revenue Recognition
Oil and gas sales are recorded on the entitlements method. Differences
between the Company's actual production and entitlements result in a
receivable when underproduction occurs and a payable when overproduction
occurs. These underproduced or overproduced volumes are valued based on the
weighted average sales price for each respective property.
Pensions
The Company has a number of trusteed noncontributory pension plans
covering substantially all full-time employees. The Company's funding policy
is to contribute amounts to the plans sufficient to meet the minimum funding
requirements under governmental regulations, plus such additional amounts as
management may determine to be appropriate. The benefits related to the
7
<PAGE>
plans are based on years of service and compensation earned during years of
employment. The Company also has a noncontributory supplemental retirement
plan for executive officers and selected key employees.
Other Postretirement and Postemployment Benefits
The Company provides certain health care and life insurance benefits for
retired employees and certain insurance and other postemployment benefits for
individuals whose employment is terminated by the Company prior to their
normal retirement. The Company accrues the estimated cost of retiree benefit
payments, other than pensions, during employees' active service periods.
Employees become eligible for these benefits if they meet minimum age and
service requirements. The Company accounts for benefits provided after
employment but before retirement by accruing the estimated cost of
postemployment benefits when the minimum service period is met, payment of the
benefit is probable and the amount of the benefit can be reasonably estimated.
The Company's policy is to fund other postretirement and postemployment
benefits as claims are incurred.
Environmental Expenditures
Environmental liabilities are recorded when environmental assessments
and/or remediation are probable and material and such costs to the Company can
be reasonably estimated. The Company's estimate of environmental assessment
and/or remediation costs to be incurred are based on either 1) detailed
feasibility studies of remediation approach and cost for individual sites or
2) the Company's estimate of costs to be incurred based on historical
experience and publicly available information based on the stage of assessment
and/or remediation of each site. As additional information becomes available
regarding each site or as environmental remediation standards change, the
Company revises its estimate of costs to be incurred in environmental
assessment and/or remediation. During the third quarter 1996, the Company, as
part of its general reorganization, transferred certain liabilities related to
environmental matters to Chemical Land Holdings, Inc. ("CLH"), an indirect
subsidiary of YPF, effective as of August 1, 1996 (See Note Five).
Litigation Contingencies
The Company records liabilities for litigation when such amounts are
probable, material and can be reasonably estimated.
Income Taxes
The Company reports income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 requires the use of an asset and liability approach to
measure deferred tax assets and liabilities resulting from all expected future
tax consequences of events that have been recognized in the Company's
financial statements or tax returns.
Earnings per Share
Earnings per share are presented for pre-Merger periods only as
subsequent to the Merger such amounts are not meaningful. Primary earnings per
share were based on the weighted average number of shares of common stock and
common stock equivalents outstanding, unless the inclusion of common stock
equivalents had an antidilutive effect on earnings per share. Fully diluted
earnings per share were not presented due to the antidilutive effect of
including all potentially dilutive common stock equivalents.
8
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Financial Instruments with Off-Balance-Sheet Risk and Concentrations of
Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents, short-term investments,
restricted cash and trade receivables.
The Company's cash equivalents and short-term investments and restricted
cash represent high-quality securities placed with various high investment
grade institutions. This investment practice limits the Company's exposure to
concentrations of credit risk.
The Company's trade receivables are dispersed among a broad domestic and
international customer base; therefore, concentrations of credit risk are
limited. The Company carefully assesses the financial strength of its
customers. Letters of credit are the primary security obtained to support
lines of credit.
The Company has minimal exposure to credit losses in the event of
nonperformance by the counterparties to natural gas price swap agreements and
nonderivative financial assets. The Company does not obtain collateral or
other security to support financial instruments subject to credit risk but
restricts such arrangements to investment-grade counterparties.
Investments in Marketable Securities
Investments in debt and equity securities are reported at fair value
except for those investments in debt securities which management has the
intent and the ability to hold to maturity. Investments in debt securities
which are held-for-sale are classified based on the stated maturity and
management's intent to sell the securities. Unrealized gains and losses on
investments in marketable securities, except for debt securities classified as
"held-to-maturity", are reported as a separate component of stockholders'
equity.
Derivatives
The Company periodically hedges the effects of fluctuations in the price
of crude oil, natural gas and natural gas liquids through price swap
agreements and futures contracts. Gains and losses on these hedges are
deferred until the related sales are recognized and are recorded as a
component of sales and operating revenues. The Company periodically enters
into interest rate swap agreements to hedge interest on long-term debt. The
gain or loss on interest rate swaps is recognized monthly as an increase or
decrease to interest expense.
Take-or-Pay Obligations
The Company records payments received for take-or-pay obligations for
unpurchased contract volumes as deferred revenue, which is included in Other
Liabilities in the consolidated balance sheet. The deferred revenue is
recognized in the income statement as quantities are delivered which fulfill
the take-or-pay obligation. At September 30, 1996, the Company had $12.5
million in deferred revenue as a result of a take-or-pay payment received in
1995 related to its Indonesian operations.
2. MERGER
On June 8, 1995, a special meeting of the stockholders of the Company was
held to approve the Agreement of Merger ("Merger Agreement") dated February
28, 1995, between the Company, YPF Acquisition Corp. (the "Purchaser") and
YPF. The holders of the Company's common stock, $1.00 par value per share (the
"Shares" or "Common Stock"), and $4.00 Cumulative Convertible Preferred
9
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Stock (the "$4.00 Preferred Stock" and, together with the Shares, the "Voting
Shares"), approved the Merger Agreement, and the Purchaser was merged into the
Company (the "Merger") on June 8, 1995 (the "Merger Date").
The Merger was the consummation of transactions contemplated by a tender
offer (the "Offer") which was commenced on March 6, 1995 by the Purchaser for
all the outstanding Shares at $5.50 per Share. Pursuant to the Offer, in April
1995 the Purchaser acquired 120,000,613 Shares representing approximately
88.5% of the then-outstanding Shares of the Company. As a result of the
Merger, each outstanding Share (other than Shares held by the Purchaser, YPF
or any of their subsidiaries or in the treasury of the Company, all of which
were canceled in the second quarter of 1995, and Shares of holders who
perfected their appraisal rights under Section 262 of the Delaware General
Corporation Law) was converted into the right to receive $5.50 in cash, and
YPF became the sole holder of all outstanding Shares. The Company's preferred
stock, currently consisting of the $2.50 Cumulative Convertible Preferred
Stock (the "$2.50 Preferred Stock") and $9.75 Cumulative Convertible Preferred
Stock (the "$9.75 Preferred Stock"), remains outstanding. On August 13, 1996,
the Company redeemed all of its outstanding shares of $4.00 Preferred Stock.
As part of a general reorganization of the Company (see Note Five), YPF
transferred ownership of its Shares in the Company to its indirect wholly-
owned subsidiary, YPF Holdings, Inc., effective August 13, 1996.
The total amount of funds required by the Purchaser to acquire the entire
common equity interest in the Company, including the purchase of Shares
pursuant to the Offer and the payment for Shares converted into the right to
receive cash pursuant to the Merger, was approximately $762 million. In
addition, the Purchaser assumed all outstanding obligations of the Company. On
April 5, 1995, the Purchaser entered into a credit agreement (the "Credit
Agreement") with lenders for which The Chase Manhattan Bank (National
Association) ("Chase") acted as agent, pursuant to which the lenders extended
to the Purchaser a credit facility for up to $550 million (the "Purchaser
Facility"). On April 5, 1995, the Purchaser borrowed $442 million under the
Purchaser Facility and received a capital contribution of $250 million from
YPF. The Purchaser used borrowings under the Purchaser Facility and the funds
contributed to it by YPF to purchase 120,000,613 Shares pursuant to the Offer.
Subsequent to the Merger, these Shares and all other outstanding Shares vested
in YPF.
Effective April 1, 1995, the Company used the purchase method to record
the acquisition of the Company by YPF. In a purchase method combination, the
purchase price is allocated to the acquired assets and assumed liabilities
based on their fair values at the date of acquisition. As a result, the assets
and liabilities of the Company were revalued to reflect the approximate $762
million cash purchase price paid by YPF to acquire the Company. The Company's
oil and gas properties were assigned carrying amounts based on their relative
fair market values.
Following the Merger, Chase provided two additional credit facilities
aggregating $425 million: (i) a credit facility of $250 million (the "Midgard
Facility") extended to Midgard Energy Company, a wholly owned subsidiary of
the Company, and (ii) a credit facility of $175 million (the "Holdings
Facility") extended to Maxus Indonesia, Inc., a wholly owned subsidiary of the
Company. The proceeds of the loans made pursuant to these facilities were used
to repay, in part, the Purchaser Facility, which was assumed by the Company
pursuant to the Merger. In addition, the Company applied $8 million of its
available cash to repay the Purchaser Facility and used approximately $86
million of its available cash to pay holders of Shares converted into the
right to receive cash in the Merger.
3. KEEPWELL COVENANT
Pursuant to the Merger Agreement, in the event the Company is unable to
meet its obligations as they come due, whether at maturity or otherwise,
including, solely for the purposes of this undertaking, dividend and
redemption payments with respect to the $9.75 Preferred Stock, the
10
<PAGE>
$2.50 Preferred Stock and the $4.00 Preferred Stock, YPF has agreed to
capitalize the Company in an amount necessary to permit the Company to meet
such obligations; provided that YPF's aggregate obligation will be (i) limited
to the amount of debt service obligations under the Purchaser Facility, the
Midgard Facility and the Holdings Facility and (ii) reduced by the amount, if
any, of capital contributions by YPF to the Company after the Merger Date and
by the amount of the net proceeds of any sale by the Company of Common Stock
or nonredeemable preferred stock after the Merger Date. The foregoing
obligations of YPF (the "Keepwell Covenant") will survive until June 8, 2004.
During the first nine months of 1996, YPF made capital contributions to the
Company and Chemical Land Holdings, Inc. ("CLH") (See Note Five) in the
aggregate amount of $64 million and $2.5 million, respectively. These amounts
represent the cumulative contribution received by Maxus and CLH from YPF
pursuant to the terms of the Keepwell Covenant.
4. ASSET ACQUISITION
In January 1996, the Company and its partners were successful in
acquiring the highly prospective Guarapiche block in Venezuela's first auction
awards for equity production in over 20 years. Guarapiche is located on the
same trend as the five billion barrel El Furrial field in northeastern
Venezuela. In July 1996, the Company, together with its partners, paid $109
million ($27 million net to Maxus) to the Venezuelan Government for rights to
explore the Guarapiche block. BP Exploration Orinoco Limited is the operator
with a 37.5% working interest, while Amoco Production Company and the Company
hold the remaining 37.5% and 25%, respectively. On September 1, 1996, Maxus
sold its interest in the Guarapiche block to YPF International Ltd.
("International"), a Cayman Islands corporation (See Note Five).
5. GENERAL REORGANIZATION
On June 18, 1996, the Company announced a reorganization which included
the sale of three of its subsidiaries holding certain Bolivian and Venezuelan
assets to YPF, the redemption of the outstanding shares of $4.00 Preferred
Stock and the transfer to a YPF subsidiary of a Maxus subsidiary that assumed
certain liabilities related to environmental matters.
On July 1, 1996, Maxus International Energy Company ("Seller"), a wholly
owned subsidiary of Maxus, sold all of the issued and outstanding shares of
capital stock of its wholly owned subsidiary, International, to YPF
("Purchaser"), pursuant to a Stock Purchase and Sale Agreement by and between
Purchaser and Seller dated as of July 1, 1996. The sole assets of
International at the time of the transaction were all of the issued and
outstanding shares of capital stock of Maxus Bolivia, Inc. ("Maxus Bolivia"),
Maxus Venezuela (C.I.) Ltd. ("Venezuela C.I.") and Maxus Venezuela S.A.
("Venezuela S.A."). The assets of Maxus Bolivia consist of all of the former
assets and operations of Maxus in Bolivia, including the interests of Maxus in
the Surubi Field and Secure and Caipipendi Blocks. The assets of Venezuela
C.I. and Venezuela S.A. consist of all of the former assets and operations of
Maxus in Venezuela, except those held through Maxus Guarapiche Ltd. ("Maxus
Guarapiche"), including the interests of Maxus in the Quiriquire Unit.
The purchase price for the outstanding shares of capital stock of
International was $266.2 million which represented the carrying amount of
International on the financial reporting books of Seller as of June 30, 1996.
In the second quarter of 1996, Maxus had received a $101 million advance (the
"Advance") against the purchase price from Purchaser. At closing, the
remainder of the estimated purchase price, in the form of a promissory note
payable by Purchaser to Seller in the principal amount of $165.2 million,
which together with the Advance equaled Seller's estimate of such carrying
amount, was delivered to Seller. Full payment of this promissory note was
received prior to
11
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September 30, 1996. Maxus used the proceeds from this transaction for general
corporate purposes, including the redemption of its $4.00 Preferred Stock.
While not a part of the above-described sale transaction, effective
September 1, 1996, Seller sold all of the capital stock of Maxus Guarapiche to
International for $26.4 million which represented the carrying amount of Maxus
Guarapiche on the financial reporting books of Seller as of August 31, 1996.
Maxus Guarapiche has a 25% interest in the Guarapiche Block, an exploration
block, in Venezuela.
Also as part of the general reorganization, on August 13, 1996 Maxus
redeemed all of its outstanding shares of $4.00 Preferred Stock at a price of
$50 per share plus accrued and unpaid dividends (approximately $220.8 million
in the aggregate). The excess of the redemption price over the carrying value
of the $4.00 Preferred Stock resulted in an increase in the Company's
accumulated deficit of $213.6 million. The Company used a portion of the
proceeds from the sale of all of the issued and outstanding shares of capital
stock of International as well as an advance from YPF of approximately $55.6
million to redeem the $4.00 Preferred Stock.
As a further part of the reorganization, the Company has transferred
certain liabilities related to environmental matters to CLH, an indirect
subsidiary of YPF, effective as of August 1, 1996. In connection with this
transfer, CLH assumed (the "Assumption") the liabilities so transferred and
YPF committed to contribute capital (the "Contribution Agreement") to CLH up
to an amount of $106.9 million that will enable CLH to satisfy its obligations
under the Assumption based on the Company's reserves established in respect of
the assumed liabilities as of July 31, 1996 plus certain operating expenses
budgeted by CLH from time to time. YPF will not be obligated to contribute
capital to CLH beyond the amount of its initial undertaking. The Company will
remain responsible for any obligations assumed by CLH in the event CLH does
not perform or fulfill such obligations. CLH has assumed responsibility for,
among other things, the environmental contingencies discussed in Note Eleven
and a declaratory judgment action filed by Occidental Chemical Corporation
("OxyChem") and Henkel Corporation ("Henkel"), and the Company transferred to
CLH its remaining rights to recover costs under a cost-sharing arrangement
with Diamond Shamrock, Inc.
The contribution obligation of YPF related to the Assumption was
reflected on the Company's financial statements as a long-term and short-term
funding guarantee from parent totaling $106.9 million, an increase to deferred
income taxes of $37.4 million and an increase to paid-in capital of $69.5
million. At September 30, 1996, the outstanding funding guarantee totaled
$105.6 million. Insofar as CLH has assumed the Company's environmental
liabilities and YPF has committed to pay for the liabilities, such liabilities
are not expected to have an adverse impact on the financial reporting books of
the Company.
Under the terms of the Contribution Agreement, Maxus agreed that any
contributions to the equity capital of CLH by YPF shall reduce the obligation
of YPF to capitalize Maxus pursuant to the Merger Agreement. During the third
quarter 1996, YPF made capital contributions of $2.5 million to CLH.
Effective August 13, 1996, YPF transferred ownership of its shares of the
Company's Common Stock to one of its wholly-owned subsidiaries, YPF Holdings,
Inc.
6. ANALYSIS OF THE MAIN ACCOUNTS OF THE CONSOLIDATED FINANCIAL
STATEMENTS
Details regarding the significant accounts included in the accompanying
financial statements are as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet Accounts September 30,
(in millions) 1996
---------------
<S> <C>
ASSETS
a) RECEIVABLES:
Trade accounts receivables $92.1
Funding guarantee from parent 27.0
Notes and other receivables 25.0
Allowance for doubtful trade receivables (0.5)
---------------
$143.6
===============
b) PROPERTIES AND EQUIPMENT:
Proved properties $1,654.2
Unproved properties 441.0
Other 176.5
---------------
Total Oil and Gas 2,271.7
Corporate 11.5
---------------
2,283.2
Less--Accumulated depreciation, depletion and amortization (256.3)
---------------
$2,026.9
===============
c) INVENTORIES:
Crude oil $0.1
Warehouse/field year inventory 29.5
Other 0.9
---------------
$30.5
===============
d) DEFDERRED CHARGES:
Unamoritized debt issuance costs $14.0
Other 5.0
---------------
$19.0
===============
LIABILITIES
e) ACCRUED LIABILITIES:
Environmental remediation $22.7
Accrued interest 34.2
Overlift liability 10.1
Merger accrual 14.6
Joint interest billings for international operations 29.7
Other 33.3
---------------
$144.6
===============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
f) LONG-TERM DEBT: Interest
Rates (%) Maturity Current Noncurrent
--------- -------- ------- ----------
<S> <C> <C> <C> <C>
8.5% Debentures 8.50 1998-2008 $ 77.3
9.375% Notes 9.37 2003 227.7
9.5% Notes 9.50 2003 88.2
9.875% Notes 9.87 2002 223.1
11.25% Debentures 11.25 2013 14.4
11.5% Debentures 11.50 2001-2015 95.0
Medium-term notes 7.57-11.08 1996-2004 $14.1 96.4
Holdings Facility 8.3125 1997-2002 26.3 148.7
Midgard Facility 7.8125 1997-2003 30.0 220.0
Advances from parent 28.3
------- ------------
$70.4 $1,219.1
======= ============
<CAPTION>
g) OTHER LIABILITIES AND DEFERRED CREDITS:
<S> <C>
Environmental remediation $ 81.9
Long-term employee benefit costs 52.0
Litigation contingencies 11.3
Reserve for insurance losses 19.1
Take-or-pay payment 12.5
Other 26.0
--------------
$202.8
==============
</TABLE>
7. TAXES
The Company reports income taxes in accordance with SFAS 109. The Company's
provision for income taxes was comprised of the following:
Nine Months Ended
September 30, 1996 (in
millions)
------------------------------
Current
Federal.............................. $ 5.9
Foreign.............................. 69.8
State and local...................... (5.0)
----
70.7
Deferred
Federal.............................. (19.5)
Foreign.............................. 4.1
-----
(15.4)
-----
Provision for income taxes............. $ 55.3
======
8. RESTRICTED CASH
At September 30, 1996, the Company had $54.2 million in restricted
cash of which $10.3 million represented collateral for outstanding letters
of credit. Assets held in trust as required by certain insurance policies
totaled $43.9 million. Approximately $9.6 million of collateral for
outstanding letters of credit at September 30, 1996, were classified as a
current asset as these amounts are excepted to be released during 1996.
14
<PAGE>
9. COMMON STOCK
During the first nine months of 1996, YPF contributed $64 million of
capital to the Company, which YPF used to purchase an additional 11,636,363
shares of the Company's Common Stock at $5.50 per share. The difference
between the par value of the Common Stock and the amount of capital
contributed was credited to Paid-in capital.
10. PREFERRED STOCK
The Company has the authority to issue 100,000,000 shares of preferred
stock, $1.00 par value. The rights and preferences of shares of authorized but
unissued preferred stock are established by the Company's Board of Directors
at the time of issuance.
a) $9.75 CUMULATIVE CONVERTIBLE PREFERRED STOCK
In 1987, the Company sold 3,000,000 shares of the $9.75 Preferred Stock.
Since such time, the Company has entered into various agreements, most
recently on June 8, 1995, with the sole holder of the $9.75 Preferred Stock
pursuant to which, among other things, the Company has repurchased 500,000
shares and the parties have waived or amended various covenants, agreements
and restrictions relating to such stock. At September 30, 1996, 625,000 shares
of $9.75 Preferred Stock are outstanding, each receiving an annual cash
dividend of $9.75. In addition, 187,500 of such shares (the "Conversion Waiver
Shares") each receive an additional quarterly cash payment of $.25 ($.50 in
certain circumstances). For the 12-month period commencing February 1, 1996,
each share of the $9.75 Preferred Stock has a liquidation value of $100 ($62.5
million in the aggregate at September 30, 1996) plus accrued dividends. Since
February 1, 1994, the stock has been subject to mandatory redemption at the
rate of 625,000 shares per year. Effective February 1, 1996, the Company
redeemed 625,000 shares as required for $62.5 million. The $9.75 Preferred
Stock currently is neither convertible by the holder nor redeemable at the
Company's option and has no associated registration rights. The $9.75
Preferred Stock entitles the holder to vote only on certain matters separately
affecting such holder. In addition, pursuant to the June 8, 1995 agreement,
the holder of the $9.75 Preferred Stock waived previously granted rights to
approve certain "self-dealing" transactions and certain financial covenants
pertaining to the Company, and the Company waived its right of first offer
with respect to the transfer of the $9.75 Preferred Stock and certain transfer
restrictions on such stock.
b) $4.00 CUMULATIVE CONVERTIBLE PREFERRED STOCK
As part of the Company's reorganization (see Note Five), the Company
redeemed on August 13, 1996, all of its outstanding shares of $4.00 Preferred
Stock at a price of $50 per share plus accrued and unpaid dividends
(approximately $220.8 million in the aggregate). At any time prior to the
redemption date, each outstanding share of $4.00 Preferred Stock was
convertible into shares of the Company's Common Stock (2.29751 shares).
c) $2.50 CUMULATIVE PREFERRED STOCK
Each outstanding share of the $2.50 Preferred Stock is entitled to
receive annual cash dividends of $2.50 per share, is redeemable after December
1, 1998 at and has a liquidation
15
<PAGE>
value of $25.00 per share ($87.5 million in the aggregate at September 30,
1996), plus accrued but unpaid dividends, if any.
The holders of the $2.50 Preferred Stock are entitled to limited voting
rights under certain conditions. In the event the Company is in arrears in the
payment of six quarterly dividends, the holders of the $2.50 Preferred Stock
have the right to elect two members to the Board of Directors until such time
as the dividends in arrears are current and a provision is made for the
current dividends due.
11. COMMITMENTS AND CONTINGENCIES
Federal, state and local laws and regulations relating to health and
environmental quality in the United States, as well as environmental laws and
regulations of other countries in which the Company operates, affect nearly
all of the operations of the Company. These laws and regulations set various
standards regulating certain aspects of health and environmental quality,
provide for penalties and other liabilities for the violation of such
standards and establish in certain circumstances remedial obligations. In
addition, especially stringent measures and special provisions may be
appropriate or required in environmentally sensitive foreign areas of
operation, such as those in Ecuador.
Many of the Company's United States operations are subject to
requirements of the Safe Drinking Water Act, the Clean Water Act, the Clean
Air Act (as amended in 1990), the Occupational Safety and Health Act, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA"), and other federal, as well as state, laws. Such laws
address, among other things, limits on the discharge of wastes associated with
oil and gas operations, investigation and clean-up of hazardous substances,
and workplace safety and health. In addition, these laws typically require
compliance with associated regulations and permits and provide for the
imposition of penalties for noncompliance. The Clean Air Act Amendments of
1990 may benefit the Company's business by increasing the demand for natural
gas as a clean fuel. CERCLA imposes retroactive liability upon certain parties
for the response costs associated with cleaning up old hazardous substance
sites. CERCLA liability to the government is joint and several. CERCLA allows
authorized trustees to seek recovery of natural resource damages from
potentially responsible parties. CERCLA also grants the government the
authority to require potentially responsible parties to implement interim
remedies to abate an imminent and substantial endangerment to the environment.
The Company believes that its policies and procedures in the area of
pollution control, product safety and occupational health are adequate to
prevent unreasonable risk of environmental and other damage, and of resulting
financial liability, in connection with its business. Some risk of
environmental and other damage is, however, inherent in particular operations
of the Company and, as discussed below, the Company has certain potential
liabilities associated with former operations. The Company cannot predict what
environmental legislation or regulations will be enacted in the future or how
existing or future laws or regulations will be administered or enforced.
Compliance with more stringent laws or regulations, as well as more vigorous
enforcement policies of the regulatory agencies, could in the future require
material expenditures by the Company for the installation and operation of
systems and equipment for remedial measures and in certain other respects.
Such potential expenditures cannot be reasonably estimated.
In connection with the sale of the Company's former chemical subsidiary,
Diamond Shamrock Chemicals Company ("Chemicals"), to Occidental Petroleum
Corporation ("Occidental") in 1986, the Company agreed to indemnify Chemicals
and Occidental from and against certain liabilities relating to the business
or activities of Chemicals prior to the September
16
<PAGE>
4, 1986 closing date (the "Closing Date"), including certain environmental
liabilities relating to certain chemical plants and waste disposal sites used
by Chemicals prior to the Closing Date.
In addition, the Company agreed to indemnify Chemicals and Occidental for
50% of certain environmental costs incurred by Chemicals for which notice is
given to the Company within 10 years after the Closing Date on projects
involving remedial activities relating to chemical plant sites or other
property used in the conduct of the business of Chemicals as of the Closing
Date and for any period of time following the Closing Date, with the Company's
aggregate exposure for this cost sharing being limited to $75 million. The
total expended by the Company under this cost sharing arrangement was about
$41 million as of September 30, 1996. Occidental Chemical Corporation
("OxyChem"), a subsidiary of Occidental, and Henkel Corporation ("Henkel"), an
assignee of certain of Occidental's rights and obligations, filed a
declaratory judgment action in Texas state court with respect to the Company's
agreement in this regard. The lower court found in favor of Occidental and the
Company has appealed the judgment (see "Legal Proceedings" below).
In connection with the spin-off of Diamond Shamrock R&M, Inc., now known
as Diamond Shamrock, Inc. ("DSI"), in 1987, the Company and DSI agreed to
share the costs of losses (other than product liability) relating to
businesses disposed of prior to the spin-off, including Chemicals. Pursuant to
this cost-sharing agreement, the Company bore the first $75 million of such
costs and DSI bore the next $37.5 million. Under the arrangement, such ongoing
costs are now borne one-third by DSI and two-thirds by the Company. This
arrangement will continue until DSI has borne an additional $47.5 million, at
which time DSI will have no further obligation under the cost-sharing
arrangement.
For the seven months ended July 31, 1996, the Company's total
expenditures for environmental compliance for disposed of businesses,
including Chemicals, were approximately $13 million, $5 million of which was
recovered from DSI under the above described cost-sharing agreement.
At September 30, 1996, reserves for the environmental contingencies
discussed herein totaled $104.6 million. Management believes it has adequately
reserved for all environmental contingencies which are probable and can be
reasonably estimated; however, changes in circumstances could result in
changes, including additions, to such reserves in the future.
The Company has transferred certain liabilities related to environmental
matters to Chemical Land Holdings, Inc. ("CLH"), an indirect subsidiary of YPF
(see Note Five), effective as of August 1, 1996. In connection with this
transfer, CLH assumed (the "Assumption") the liabilities so transferred and
YPF committed to contribute capital to CLH up to an amount of $106.9 million
that will enable CLH to satisfy its obligations under the Assumption based on
the Company's reserves established in respect of the assumed liabilities as of
July 31, 1996 plus certain operating expenses budgeted by CLH from time to
time. YPF will not be obligated to contribute capital to CLH beyond the amount
of its initial undertaking. The Company will remain responsible for any
obligations assumed by CLH in the event CLH does not perform or fulfill such
obligations. The environmental contingencies discussed herein and the
declaratory judgment action filed by OxyChem and Henkel are among the matters
for which CLH has assumed responsibility, and the Company has transferred to
CLH its remaining rights to recover costs under the arrangement with DSI. The
contribution obligation of YPF related to the Assumption was reflected on the
Company's financial statements as a long-term and short-term funding guarantee
from parent totaling $106.9 million, an increase to deferred income taxes of
$37.4 million and an increase to paid-in capital of $69.5 million. At
September 30, 1996, the outstanding funding guarantee totaled $105.6 million.
Insofar as CLH has assumed the Company's environmental liabilities and YPF has
committed to pay for the liabilities, such liabilities are not expected to
have an adverse impact on the financial reporting books of the Company.
17
<PAGE>
The insurance companies that wrote Chemicals' and the Company's primary
and excess insurance during the relevant periods have to date refused to
provide coverage for most of Chemicals' or the Company's cost of the personal
injury and property damage claims related to environmental claims, including
remedial activities at chemical plant sites and disposal sites. In two actions
filed in New Jersey state court, the Company has been conducting litigation
against all of these insurers for declaratory judgments that it is entitled to
coverage for certain of these claims. In 1989, the trial judge in one of the
New Jersey actions ruled that there is no insurance coverage with respect to
the claims related to the Newark plant (discussed below). The trial court's
decision was upheld on appeal and that action is now ended. The other suit,
which is pending, covers disputes with respect to insurance coverage related
to certain other environmental matters. The Company has entered into
settlement agreements with certain of the insurers in this second suit, the
terms of which are required to be held confidential. The Company also is
engaged in settlement discussions with other defendant insurers; however,
there can be no assurance that such discussions will result in settlements
with such other insurers.
Newark, New Jersey. A consent decree, previously agreed upon by the U.S.
Environmental Protection Agency (the "EPA"), the New Jersey Department of
Environmental Protection and Energy (the "DEP") and Occidental, as successor
to Chemicals, was entered in 1990 by the United States District Court of New
Jersey and requires implementation of a remedial action plan at Chemicals'
former Newark, New Jersey agricultural chemicals plant. Engineering for such
plan, which will include an engineering estimate of the cost of construction,
is progressing. Construction is expected to begin in 1997, cost approximately
$22 million and take three to four years to complete. The work is being
supervised and paid for by CLH, on behalf of the Company pursuant to the
Assumption and under the Company's above described indemnification obligation
to Occidental. The Company has reserved the estimated costs of performing the
remedial action plan and required ongoing maintenance costs.
Studies have indicated that sediments of the Newark Bay watershed,
including the Passaic River adjacent to the plant, are contaminated with
hazardous chemicals from many sources. These studies suggest that the older
and more contaminated sediments located adjacent to the Newark plant generally
are buried under more recent sediment deposits. The Company, on behalf of
Occidental, negotiated an agreement with the EPA under which CLH, on the
Company's behalf, is conducting further testing and studies to characterize
contaminated sediment in a six-mile portion of the Passaic River near the
plant site. The stability of the sediments in the entire six-mile portion of
the Passaic River study area is also being examined as a part of CLH's
studies. The Company currently expects the testing and studies to be completed
in 1999 and cost from $4 million to $6 million after December 31, 1995. The
Company has reserved for the amount of its estimate of the remaining costs to
be incurred in performing these studies. The Company and later CLH have been
conducting similar studies under their own auspices for several years. Until
these studies are completed and evaluated, the Company cannot reasonably
forecast what regulatory program, if any, will be proposed for the Passaic
River or the Newark Bay watershed and therefore cannot estimate what
additional costs, if any, will be required to be incurred. However, it is
possible that additional work, including interim remedial measures, may be
ordered with respect to the Passaic River.
Hudson County, New Jersey. Until 1972, Chemicals operated a chromium ore
processing plant at Kearny, New Jersey. According to the DEP, wastes from
these ore processing operations were used as fill material at a number of
sites in and near Hudson County.
As a result of negotiations between the Company (on behalf of Occidental)
and the DEP, Occidental signed an administrative consent order with the DEP in
1990 for investigation and remediation work at certain chromite ore residue
sites in Kearny and Secaucus, New Jersey. The work is presently being
performed by CLH on behalf of the Company and Occidental, and CLH is funding
Occidental's share of the cost of investigation and remediation of these
sites. The
18
<PAGE>
Company is currently providing financial assurance for performance
of the work in the form of a self-guarantee in the amount of $20 million
subject to the Company's continuing ability to satisfy certain financial tests
specified by the State. This financial assurance may be reduced with the
approval of the DEP following any annual cost review. While the Company and
CLH have participated in the cost of studies and CLH is implementing interim
remedial actions and conducting remedial investigations and feasibility
studies, the ultimate cost of remediation is uncertain. The Company
anticipates CLH will submit its remedial investigation and feasibility study
report to the DEP in 1997. The results of the DEP's review of this report
could increase the cost of any further remediation that may be required. The
Company has reserved its best estimate of the remaining cost to perform the
investigations and remedial work as being $48 million. In addition, the DEP
has indicated that it expects Occidental and the Company to participate with
the other chromium manufacturers in the funding of certain remedial activities
with respect to a number of so-called "orphan" chrome sites located in Hudson
County, New Jersey. Occidental and the Company have declined participation as
to those sites for which there is no evidence of the presence of residue
generated by Chemicals. The Governor of New Jersey issued an Executive Order
requiring state agencies to provide specific justification for any state
requirements more stringent than federal requirements. The DEP has indicated
that it may be revising its soil action level upwards towards the higher soil
screening levels proposed by the EPA in 1994.
Painesville, Ohio. From about 1912 through 1976, Chemicals operated
manufacturing facilities in Painesville, Ohio. The operations over the years
involved several discrete but contiguous plant sites over an area of about
1,300 acres. The primary area of concern historically has been Chemicals'
former chromite ore processing plant (the "Chrome Plant"). For many years, the
site of the Chrome Plant has been under the administrative control of the EPA
pursuant to an administrative consent order under which Chemicals is required
to maintain a clay cap over the site and to conduct certain ground water and
surface water monitoring. Many other sites have previously been clay-capped
and one specific site, which was a waste disposal site from the mid-1960s
until the 1970s, has been encapsulated and is being controlled and monitored.
In September 1995, the Ohio Environmental Protection Agency (the "OEPA")
issued its Directors' Final Findings and Order (the "Director's Order") by
consent ordering that a remedial investigation and feasibility study (the
"RIFS") be conducted at the former Painesville plant area. The Company has
agreed to participate in the RIFS as required by the Director's Order. It is
estimated that the total cost of performing the RIFS will be $5 million to $8
million over the next three years. In spite of the many remedial, maintenance
and monitoring activities performed, the former Painesville plant site has
been proposed for listing on the National Priority List under CERCLA; however,
the EPA has stated that the site will not be listed so long as it is
satisfactorily addressed pursuant to the Director's Order and OEPA's programs.
The Company has reserved for the amount of its estimate of its share of the
cost to perform the RIFS. The scope and nature of any further investigation or
remediation that may be required cannot be determined at this time; however,
as the RIFS progresses, the Company will continuously assess the condition of
the Painesville plant site and make any changes, including additions, to its
reserve as may be required. The Company's obligations regarding the Chrome
Plant described above have been assumed by CLH pursuant to the Assumption.
Other Former Plant Sites. Environmental remediation programs are in place
at all other former plant sites where material remediation is required in the
opinion of the Company. Former plant sites where remediation has been
completed are being maintained and monitored to insure continued compliance
with applicable laws and regulatory programs. The Company has reserved for its
estimated costs related to these sites, none of which are individually
material.
Third Party Sites. Chemicals has also been designated as a potentially
responsible party ("PRP") by the EPA under CERCLA with respect to a number of
third party sites, primarily off of Chemicals' properties, where hazardous
substances from Chemicals' plant operations allegedly were disposed of or have
come to be located. Numerous PRPs have been named at substantially all
19
<PAGE>
of these sites. At several of these, Chemicals has no known exposure. Although
PRPs are almost always jointly and severally liable for the cost of
investigations, cleanups and other response costs, each has the right of
contribution from other PRPs and, as a practical matter, cost sharing by PRPs
is usually effected by agreement among them. Accordingly, the ultimate cost of
these sites and Chemicals' share of the costs thereof cannot be estimated at
this time, but are not expected to be material except possibly as a result of
the matters described below. The matters described below are among those for
which CLH has assumed responsibility under the Assumption.
1. Fields Brook; Ashtabula, Ohio. At the time that Chemicals was sold to
Occidental, Chemicals operated a chemical plant at Ashtabula, Ohio which is
adjacent to Fields Brook. Occidental has continued to operate the Ashtabula
plant. In 1986, Chemicals was formally notified by the EPA that it was a PRP
for the Fields Brook site. The site is defined as Fields Brook, its
tributaries and surrounding areas within the Fields Brook watershed. At least
15 other parties are presently considered to be financially responsible PRPs.
In 1986, the EPA estimated the cost of sediment remediation at the site would
be $48 million. The PRPs, including Occidental, have developed an allocation
agreement for sharing the costs of the work in Fields Brook ordered by the
EPA. Under the allocation, the Occidental share for Chemicals' ownership of
the Ashtabula plant would be about five percent of the total, assuming all
viable PRPs were to participate.
In 1990, the OEPA, as state trustee for natural resources under CERCLA,
advised previously identified PRPs, including Chemicals, that the OEPA
intended to conduct a Natural Resource Damage Assessment of the Fields Brook
site to calculate a monetary value for injury to surface water, groundwater,
air, and biological and geological resources at the site. Also, although
Fields Brook empties into the Ashtabula River which flows into Lake Erie, it
is not known to what extent, if any, the EPA will propose remedial action
beyond Fields Brook for which the Fields Brook PRPs might be asked to bear
some share of the costs. Until all preliminary studies and necessary
governmental actions have been completed and negotiated or judicial
allocations have been made, it is not possible for the Company to estimate
what the response costs, response activities or natural resource damages, if
any, may be for Fields Brook or related areas, the parties responsible
therefore or their respective shares.
It is the Company's position that costs attributable to the Ashtabula
plant fall under the Company's above-described cost sharing arrangement with
Occidental under which the Company bears one-half of certain costs up to an
aggregate dollar cap. Occidental, however, has contended that it is entitled
to full indemnification from the Company for such costs, and the outcome of
this dispute cannot be predicted. The Company has reserved its estimate of its
share of potential cleanup costs based on the assumption that this site falls
under the Occidental cost sharing arrangement.
2. French Limited Disposal Site; Crosby, Texas. The PRPs, including
Chemicals (represented by CLH on behalf of the Company), entered into a
consent decree and a related trust agreement with the EPA with respect to this
disposal site. The consent decree was entered by the federal court as a
settlement of the EPA's claim for remedial action. Chemical's share of the
cost to complete remediation at this site is expected to be approximately
$100,000 and such amount is fully accrued.
3. SCP/Carlstadt Site; Carlstadt, New Jersey. Chemicals' share of
remediation costs at this CERCLA site would be approximately one percent,
based on relative volume of waste shipped to the site. An interim remedy has
now been implemented at the site by the PRPs but no estimate can be made at
this time of ultimate costs of remediation which may extend to certain off-
site locations.
4. Chemical Control Site; Elizabeth, New Jersey. The DEP has demanded of
PRPs (including Chemicals) reimbursement of the DEP's alleged $34 million
(including interest through December 31, 1995) in past costs for its partial
cleanup of this site. The PRPs and the EPA have settled the federal claims for
cost recovery and site remediation, and remediation is now complete. Based on
20
<PAGE>
the previous allocation formula, it is expected that Chemicals' share of any
money paid to the DEP for its claim would be approximately two percent. The
Company has fully reserved its estimated liability for this site.
Legal Proceedings. In November 1995, OxyChem filed suit in Texas state
court seeking a declaration of certain of the parties' rights and obligations
under the sales agreement pursuant to which the Company sold Chemicals to
Occidental. Henkel joined in said lawsuit as a plaintiff in January 1996.
Specifically, OxyChem and Henkel are seeking a declaration that the Company is
required to indemnify them for 50% of certain environmental costs incurred on
projects involving remedial activities relating to chemical plant sites or
other property used in connection with the business of Chemicals on the
Closing Date which relate to, result from or arise out of conditions, events
or circumstances discovered by OxyChem or Henkel and as to which the Company
is provided written notice by OxyChem or Henkel prior to the expiration of ten
years following the Closing Date, irrespective of when OxyChem or Henkel
incurs and gives notice of such costs, subject to an aggregate $75 million
cap. The court denied the Company's motion for summary judgment and granted
OxyChem's and Henkel's joint motion for summary judgment, thereby granting
OxyChem and Henkel the declaration they sought. The Company believes the
court's orders are erroneous and has appealed.
The Company has established reserves based on its 50% share of remaining
costs expected to be paid or incurred by OxyChem and Henkel prior to September
4, 1996, the tenth anniversary of the Closing Date. As of September 30, 1996,
the Company and CLH on its behalf had paid OxyChem and Henkel a total of
approximately $41 million against the $75 million cap and, based on OxyChem's
and Henkel's historical annual expenditures, the Company had approximately $5
million reserved. The Company cannot predict with any certainty what portion
of the approximately $29 million unreserved portion of the $34 million amount
remaining at September 30, 1996, OxyChem and Henkel may incur; however,
OxyChem and Henkel have asserted in court that the entire amount will be
spent. In the event that the Company does not prevail in its appeal, it could
be required to pay up to approximately $29 million in additional costs which
have not been reserved related to this indemnification. CLH has assumed,
pursuant to the Assumption, responsibility for this litigation.
The Company has established reserves for legal contingencies in
situations where a loss is probable and can be reasonably estimated.
On August 10, 1996, a new Government was inaugurated in Ecuador and on
August 20, 1996, the new Energy Minister announced his intention to cancel the
Company's risk service contract unless the Company and the other members of
its consortium for Block 16 and adjacent tracts ("Block 16") agreed to convert
such contract into a production sharing contract. In September 1996, the
Company and the Government agreed in principle to enter into a new contract
governing Block 16. The principal difference between the two contracts would
be the manner in which the consortium's costs in the Block will be recovered.
Under the former contract, the Company had the right to recover its investment
before the Government began to share in any proceeds from production; under
the new contract, the Government will receive a royalty, and the Company's
recovery of its investment will be out of the proceeds after deducting such
royalty. Previous Governments had signaled their dissatisfaction with the
former arrangement and in recent years a series of auditing, contract
administration and certification of new field disputes had arisen that made it
increasingly difficult to develop Block 16. Partly in response to these
difficulties, the Company had reduced its budget for 1996 program spending on
Block 16 to approximately $20 million from $32 million in 1995.
While the changes in the contract would result in a diminution in the
present value of future net cash flows, it is not expected to result in a
write down of the carrying value of the Block. The new contract would also
resolve certain outstanding disputes and amend the prior agreement in
21
<PAGE>
various other ways, some of which would significantly improve the Company's
current and future operating costs. The Company believes that the new contract
will permit the Company now to go forward with the development of Block 16 and
permit it to do so on a more cost-effective basis, subject to the eventual
resolution of pipeline capacity problems. Pipeline capacity available to the
Company is sufficient to transport only about 60% to 80% of the oil the
Company expects to be able to produce daily, and none of the various projects
to increase transportation capacity that have been considered has been
approved by the Government of Ecuador. When and whether this problem will be
resolved remains uncertain. No definitive production sharing contract has been
signed and no assurances can be given that a new contract will be entered
into.
The Company has entered into various operating agreements and capital
commitments associated with the exploration and development of its oil and gas
properties. Such contractual, financial and/or performance commitments are not
material.
The Company's foreign petroleum exploration, development and production
activities are subject to political and economic uncertainties, expropriation
of property and cancellation or modification of contract rights, foreign
exchange restrictions and other risks arising out of foreign governmental
sovereignty over the areas in which the Company's operations are conducted, as
well as risks of loss in some countries due to civil strife, acts of war,
guerrilla activities and insurrection. Areas in which the Company has
significant operations include the United States, Indonesia and Ecuador.
22
<PAGE>
MAXUS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 1996
MERGER
On June 8, 1995, YPF Sociedad Anonima ("YPF"), an Argentine sociedad anonima,
completed its acquisition of all of the shares of common stock ("Common Stock")
of Maxus Energy Corporation (the "Company" or "Maxus") through a merger (the
"Merger") of Maxus with a YPF subsidiary. The Merger was the consummation of
transactions contemplated by a tender offer which was commenced by YPF on March
6, 1995 for all outstanding shares of Common Stock of the Company at $5.50 per
share. As of the date hereof, the Company's preferred stock, currently
consisting of the $2.50 Cumulative Preferred Stock and $9.75 Cumulative
Convertible Preferred Stock, remains outstanding. On August 13, 1996, the
Company redeemed all of its outstanding shares of $4.00 Cumulative Convertible
Preferred Stock (the "$4.00 Preferred Stock").
Effective April 1, 1995, the Company used the purchase method of accounting to
record the acquisition of the Company by YPF. In a purchase method combination,
the purchase price is allocated to the assets acquired and liabilities assumed
based on their fair values at the date of acquisition. As a result, the assets
and liabilities of the Company were revalued to reflect the approximate $762
million cash purchase price paid by YPF to acquire the Company. The Company's
oil and gas properties were assigned carrying amounts based on their relative
fair market values. Because of these purchase adjustments, the financial
statements for periods subsequent to April 1, 1995 reflect the effects of
Merger-related transactions. Periods prior to April 1, 1995 are on a pre-Merger
basis and, therefore, not comparative.
GENERAL REORGANIZATION
On June 18, 1996, the Company announced a reorganization which included the sale
of three of its subsidiaries holding certain Bolivian and Venezuelan assets to
YPF, the redemption of the outstanding shares of $4.00 Preferred Stock and the
transfer to a YPF subsidiary of a Maxus subsidiary that assumed certain
liabilities related to environmental matters.
On July 1, 1996, Maxus International Energy Company ("Seller"), a wholly owned
subsidiary of Maxus, sold all of the issued and outstanding shares of capital
stock of its wholly owned subsidiary, YPF International Ltd. ("International"),
to YPF ("Purchaser"), pursuant to a Stock Purchase and Sale Agreement by and
between Purchaser and Seller dated as of July 1, 1996. The sole assets of
International at the time of the transaction were all of the issued and
outstanding shares of capital stock of Maxus Bolivia, Inc. ("Maxus Bolivia"),
Maxus Venezuela (C.I.) Ltd. ("Venezuela C.I.") and Maxus Venezuela S.A.
("Venezuela S.A."). The assets of Maxus Bolivia consist of all of the former
assets and operations of Maxus in Bolivia, including the interests of Maxus in
the Surubi Field and Secure and Caipipendi Blocks. The assets of Venezuela C.I.
and Venezuela S.A. consist of all of the former assets and operations of Maxus
in Venezuela, except those held through Maxus Guarapiche Ltd. ("Maxus
Guarapiche"), including the interests of Maxus in the Quiriquire Unit.
The purchase price for the outstanding shares of capital stock of International
was $266 million which represented the carrying amount of International on the
financial reporting books of Seller as of June 30, 1996. In the second quarter
of 1996, Maxus had received a $101 million advance (the "Advance") against the
purchase price from Purchaser. At closing, the remainder of the estimated
purchase price, in the form of a promissory note payable by Purchaser to Seller
in the principal amount of $165 million, which together with the Advance equaled
Seller's estimate of such carrying amount, was delivered to Seller. Full
payment of this promissory note was received prior to September 30, 1996. Maxus
used the proceeds from this transaction for general corporate purposes,
including the redemption of its $4.00 Preferred Stock.
In January 1996, the Company and its partners were successful in acquiring the
highly prospective Guarapiche block in Venezuela's first auction awards for
equity production in over 20 years. Guarapiche is located on the same trend as
the five billion barrel El Furrial field in northeastern Venezuela. In July
23
<PAGE>
1996, the Company, together with its partners, paid $109 million (approximately
$27 million net to the Company) to the Venezuelan Government for rights to
explore the Guarapiche block. BP Exploration Orinoco Limited is the operator
with a 37.5% working interest while Amoco Production Company and the Company
hold 37.5% and 25% working interests, respectively. While not a part of the
above-described sale transaction, effective September 1, 1996, Seller sold all
of the capital stock of Maxus Guarapiche to International for $26 million which
represented the carrying amount of Maxus Guarapiche on the financial reporting
books of Seller as of August 31, 1996. Maxus Guarapiche has a 25% interest in
the Guarapiche Block, an exploration block, in Venezuela.
Also as part of the general reorganization, on August 13, 1996 Maxus redeemed
all of its outstanding shares of $4.00 Preferred Stock at a price of $50 per
share plus accrued and unpaid dividends (approximately $221 million in the
aggregate). The excess of the redemption price over the carrying value of the
$4.00 Preferred Stock resulted in an increase in the Company's accumulated
deficit of $214 million. The Company used a portion of the proceeds from the
sale of all of the issued and outstanding shares of capital stock of
International as well as an advance from YPF of approximately $56 million to
redeem the $4.00 Preferred Stock.
As a further part of the reorganization, the Company has transferred certain
liabilities related to environmental matters to Chemical Land Holdings, Inc.
("CLH"), an indirect subsidiary of YPF, effective as of August 1, 1996. In
connection with this transfer, CLH assumed (the "Assumption") the liabilities so
transferred and YPF committed to contribute capital to CLH up to an amount of
$107 million that will enable CLH to satisfy its obligations under the
Assumption based on the Company's reserves established in respect of the assumed
liabilities as of July 31, 1996 plus certain operating expenses budgeted by CLH
from time to time. YPF will not be obligated to contribute capital to CLH
beyond the amount of its initial undertaking. The Company will remain
responsible for any obligations assumed by CLH in the event CLH does not perform
or fulfill such obligations. CLH has assumed responsibility for, among other
things, the environmental contingencies discussed in Note Eleven and a
declaratory judgment action filed by Occidental Chemical Corporation ("OxyChem")
and Henkel Corporation ("Henkel"), and the Company has transferred to CLH its
remaining rights to recover costs under a cost-sharing arrangement with Diamond
Shamrock, Inc.
The contribution obligation of YPF related to the Assumption was reflected on
the Company's financial statements as a long-term and short-term account
receivable due from YPF totaling $107 million, an increase to deferred income
taxes of $37 million and an increase to paid-in capital of $70 million. At
September 30, 1996 the outstanding funding guarantee totaled $106 million.
Insofar as CLH has assumed the Company's environmental liabilities and YPF has
committed to pay for the liabilities, such liabilities are not expected to have
an adverse impact on the financial reporting books of the Company.
Effective August 13, 1996, YPF transferred ownership of its shares of the
Company's Common Stock to one of its wholly-owned subsidiaries, YPF Holdings,
Inc.
RESULTS OF OPERATIONS - THIRD QUARTER 1996 VS. THIRD QUARTER 1995
The Company reported third quarter 1996 net income of $11 million. This
compares to a third quarter 1995 net loss of $28 million.
Sales and Operating Revenues. Sales and operating revenues of $174 million in
the third quarter of 1996 increased $33 million from such period in 1995. U.S.
(Midgard) sales and operating revenues were $16 million higher in the third
quarter of 1996 as compared to the third quarter of 1995 due primarily to higher
natural gas sales volumes and prices as well as higher natural gas liquids
prices. In Ecuador, third quarter 1996 sales and operating revenues were $8
million higher than the same period a year ago due to the sale of crude oil
production from the southern Amo field and higher crude oil sales prices. Crude
oil sales from the southern Amo field were initially recorded in the fourth
quarter of 1995. In Northwest Java, higher natural gas sales volumes in
connection with new natural gas sales contracts in addition to increased
24
<PAGE>
demand from existing natural gas sales contracts favorably impacted sales and
operating revenues $4 million in the third quarter of 1996 as compared to the
same period in 1995. In Southeast Sumatra, third quarter 1996 sales and
operating revenues increased $4 million from third quarter 1995 due to higher
crude oil sales prices partially offset by lower crude oil sales volumes.
Net worldwide crude oil sales volumes of 55 thousand barrels per day ("mbpd") in
the third quarter of 1996 were 5 mbpd lower than the same period last year.
Third quarter 1996 crude oil sales volumes in Southeast Sumatra were down 5 mbpd
from the third quarter of 1995 due to lower crude oil entitlements primarily as
a result of lower gross crude oil liftings and lower cost recovery. In
Northwest Java, lower crude oil entitlements due primarily to lower cost
recovery unfavorably impacted crude oil sales volumes by 3 mbpd in the third
quarter of 1996 as compared to such period last year. Offsetting these
declines, crude oil sales volumes in Ecuador were 4 mbpd higher in the third
quarter of 1996 as compared to the third quarter of 1995 due to the production
from the southern Amo field. Maxus' worldwide average crude oil sales price
rose from $15.69 per barrel in the third quarter of 1995 to $19.40 per barrel in
the third quarter of 1996.
U.S. (Midgard) natural gas sales volumes of 188 million cubic feet per day
("mmcfpd") in the third quarter of 1996 were 16 mmcfpd higher than the third
quarter of 1995 due to higher natural gas production. The average natural gas
sales price increased from $1.40 per thousand cubic feet ("mcf") in the third
quarter of 1995 to $1.89 per mcf in the third quarter of 1996.
Northwest Java natural gas sales volumes of 73 mmcfpd in third quarter 1996 were
15 mmcfpd higher than third quarter 1995, primarily due to higher natural gas
production in connection with new natural gas sales contracts as well as
increased demand from exiting natural gas sales contracts. Natural gas prices
rose slightly, from $2.62 per mcf in the third quarter of 1995 to $2.66 per mcf
in the third quarter of 1996.
Natural gas liquids sales volumes in the United States were relatively flat in
the third quarter of 1996 as compared to the third quarter of 1995. The average
sales price for U.S. (Midgard) natural gas liquids in the third quarter of 1996
was $12.99 per barrel, an increase of $2.85 per barrel from the third quarter of
1995.
Costs and Expenses. Operating expenses of $57 million were slightly lower in
the third quarter of 1996 as compared to such period in 1995 primarily as a
result of the sale of certain Bolivian and Venezuelan properties in the third
quarter 1996 (see "General Reorganization" above). Gas purchase costs rose from
$14 million in the third quarter of 1995 to $17 million in the third quarter of
1996 due primarily to higher natural gas prices; however, this cost increase was
recovered through higher sales volumes and prices.
Exploration expenses (including exploratory dry holes) of $5 million in the
third quarter of 1996 were $5 million lower than in the same quarter a year ago.
U.S. (Midgard) exploration costs were $2 million lower in the third quarter of
1996 as compared to the same quarter last year due to a decrease in geological
and geophysical expenses of $1 million and exploration administrative expenses
of $1 million. Additionally, third quarter 1996 dry hole costs were $2 million
lower in Southeast Sumatra as compared to the third quarter of 1995.
Depreciation, depletion and amortization ("DD&A") expenses were $4 million lower
in the third quarter of 1996 as compared to the third quarter of 1995 due
primarily to lower DD&A expenses in the U.S. (Midgard) as a result of proved
natural gas reserve additions during 1996 driven by increased development
drilling.
Income tax expense of $11 million in the third quarter of 1996 was $8 million
higher as compared to such period in 1995. Current taxes are higher due to
higher operating income in Indonesia in 1996. Deferred taxes are higher due to
higher cost reimbursement in Ecuador partially offset by a deferred tax benefit
from restructuring.
25
<PAGE>
FINANCIAL CONDITION
The Company's net cash provided by operating activities was $115 million for the
nine months ended September 1996. Net cash provided by operating activities of
$123 million before working capital changes was reduced by working capital
requirements of $9 million. Additional working capital was required due to
lower accrued liabilities in Southeast Sumatra and Ecuador.
The Company began the year with $38 million of cash and cash equivalents.
During the first nine months of 1996, Maxus received an aggregate $64 million
from the issuance of Common Stock to YPF pursuant to the terms of the Keepwell
Covenant (as that term is defined in Note Three to the financial statements),
released $26 million of restricted cash backing trade letters of credit as well
as six months of interest on outstanding borrowings as required by a certain
credit facility and generated $115 million from operating activities.
As discussed in "General Reorganization", Maxus received $266 million from YPF
for the sale of the outstanding shares of capital stock of International. Maxus
used the proceeds from this transaction, along with an additional $56 million
cash advance from parent, for general corporate purposes, including the
redemption of its $4.00 Preferred Stock on August 13, 1996 for $218 million.
On September 1, 1996, Maxus International Energy Company, a wholly owned
subsidiary of Maxus, sold all of the issued and outstanding capital stock of
Maxus Guarapiche Ltd. to International for $26 million. The Company used the
proceeds from this transaction to reduce cash advances due parent.
The Company used $146 million of cash to fund capital expenditures, $8 million
to pay environmental compliance for disposed of businesses, $8 million to fund
contributions to certain pension plans, $24 million to pay preferred dividends
and $4 million to make payments in respect of shares of Common Stock converted
into the right to receive $5.50 per share upon the Merger. In addition, Maxus
used $34 million to repay short-term debt and $63 million to fund the mandatory
redemption of 625,000 shares of $9.75 Preferred Stock in February 1996. At
September 30, 1996, Company's cash and cash equivalents balance was $43 million.
In management's opinion, cash on hand at September 30, 1996 and cash provided by
operations during the remainder of the year may be inadequate to fund the
remaining 1996 program spending budget, service debt and pay preferred stock
dividends and trade obligations. It is anticipated that YPF could be required
to make additional cash advances to Maxus in the fourth quarter 1996 totaling
approximately $20 million to $25 million to fund the Company's obligations.
The Company's exposure to foreign currency fluctuations is minimal as
substantially all of the Company's material foreign contracts are denominated in
U.S. dollars.
The Company's only derivative financial instruments are natural gas and natural
gas liquids price swap agreements and crude oil and natural gas futures
contracts, which are not used for trading purposes.
See Note Eleven to the Financial Statements for information regarding certain
environmental commitments and contingencies.
LEGAL PROCEEDINGS
In November 1995, Occidental Chemical Corporation ("OxyChem"), a subsidiary of
Occidental Petroleum Corporation ("Occidental"), filed suit in Texas state court
seeking a declaration of certain of the parties' rights and obligations under
the sales agreement pursuant to which the Company sold Diamond Shamrock
Chemicals Company ("Chemicals") to Occidental on September 4, 1986 (the "Closing
Date"). Henkel Corporation ("Henkel"), an assignee of certain of Occidental's
rights and obligations, joined in said lawsuit as a plaintiff in January 1996.
Specifically, OxyChem and Henkel are seeking a declaration that the
26
<PAGE>
Company is required to indemnify them for 50% of certain environmental costs
incurred on projects involving remedial activities relating to chemical plant
sites or other property used in connection with the business of Chemicals on the
Closing Date which relate to, result from or arise out of conditions, events or
circumstances discovered by OxyChem or Henkel and as to which the Company is
provided written notice by OxyChem or Henkel prior to the expiration of ten
years following the Closing Date, irrespective of when OxyChem or Henkel incurs
and gives notice of such costs, subject to an aggregate $75 million cap. The
court denied the Company's motion for summary judgment and granted OxyChem's and
Henkel's joint motion for summary judgment, thereby granting OxyChem and Henkel
the declaration they sought. The Company believes the court's orders are
erroneous and has appealed.
The Company has established reserves based on its 50% share of remaining costs
expected to be paid or incurred by OxyChem and Henkel prior to September 4,
1996, the tenth anniversary of the Closing Date. As of September 30, 1996, the
Company and CLH on its behalf had paid OxyChem and Henkel a total of
approximately $41 million against the $75 million cap and, based on OxyChem's
and Henkel's historical annual expenditures, the Company had approximately $5
million reserved. The Company cannot predict with any certainty what portion of
the approximately $29 million unreserved portion of the $34 million amount
remaining at September 30, 1996, OxyChem and Henkel may incur; however, OxyChem
and Henkel have asserted in court that the entire amount will be spent. In the
event that the Company does not prevail in an appeal, it could be required to
pay up to approximately $29 million in additional costs which have not been
reserved related to this indemnification. CLH has assumed, pursuant to the
Assumption, responsibility for this litigation.
The Company has established reserves for legal contingencies in situations where
a loss is probable and can be reasonably estimated.
FUTURE OUTLOOK
Maxus currently projects total program spending (capital expenditures plus
exploration expenses) for 1996 to be approximately $236 million, compared to
$231 million in 1995. This 1996 program spending projection includes actual
program spending for Maxus' former Bolivian and Venezuelan interests for the
first half of 1996 of $2 million and $9 million, respectively. In addition,
Indonesia will receive $82 million, Midgard (U.S.) $77 million, Ecuador $19
million and domestic and overseas new ventures $45 million, which includes $27
million paid to the Venezuelan Government in July 1996 for Maxus' net interest
in the Guarapiche Block. Funding for the 1996 spending program is expected to
be provided through cash and cash equivalents on hand at the beginning of the
year, cash from operations, cash proceeds received in connection with the sale
of all outstanding shares of capital stock of International to YPF and cash
advances from YPF as necessary. In addition to the 1996 program, Maxus has
financial and/or performance commitments for exploration and development
activities in 1997 and beyond, none of which are material.
The Company has reached an agreement in principle with Amoco Corporation
("Amoco") concerning the establishment of a joint venture with regard to
Midgard's business and assets. It is anticipated that Midgard and Amoco will
each contribute to the joint venture oil and gas properties in the Texas
Panhandle and Western Oklahoma and that Amoco will contribute certain other
assets. No definitive agreements have been entered into, and consequently no
assurances can be given that the attempts to establish the joint venture will be
successful. In addition to the general reorganization discussed above, Maxus is
continuing to consider a number of possible capital and business restructuring
alternatives; however, no decisions have been made to take any additional
specific action nor can there be any assurance that any specific action will be
taken.
The Company's foreign petroleum exploration, development and production
activities are subject to political and economic uncertainties, expropriation of
property and cancellation or modification of contract rights, foreign exchange
restrictions and other risks arising out of foreign governmental sovereignty
over the areas in which the Company's operations are conducted, as well as
risks of loss in some countries due
27
<PAGE>
to civil strife, guerrilla activities and insurrection. Areas in which the
Company has significant operations include the United States, Indonesia and
Ecuador.
On August 10, 1996, a new Government was inaugurated in Ecuador and on August
20, 1996, the new Energy Minister announced his intention to cancel the
Company's risk service contract unless the Company and the other members of its
consortium for Block 16 and adjacent tracts ("Block 16") agreed to convert such
contract into a production sharing contract. In September 1996, the Company and
the Government agreed in principle to enter into a new contract governing Block
16. The principal difference between the two contracts would be the manner in
which the consortium's costs in the Block will be recovered. Under the former
contract, the Company had the right to recover its investment before the
Government began to share in any proceeds from production; under the new
contract, the Government will receive a royalty, and the Company's recovery of
its investment will be out of the proceeds after deducting such royalty.
Previous Governments had signaled their dissatisfaction with the former
arrangement and in recent years a series of auditing, contract administration
and certification of new field disputes had arisen that made it increasingly
difficult to develop Block 16. Partly in response to these difficulties, the
Company had reduced its budget for 1996 program spending on Block 16 to
approximately $20 million from $32 million in 1995.
While the changes in the contract would result in a diminution in the present
value of future net cash flows, it is not expected to result in a write down of
the carrying value of the Block. The new contract would also resolve certain
outstanding disputes and amend the prior agreement in various other ways, some
of which would significantly improve the Company's current and future operating
costs. The Company believes that the new contract will permit the Company now
to go forward with the development of Block 16 and permit it to do so on a more
cost-effective basis, subject to the eventual resolution of pipeline capacity
problems. Pipeline capacity available to the Company is sufficient to transport
only about 60% to 80% of the oil the Company expects to be able to produce
daily, and none of the various projects to increase transportation capacity that
have been considered has been approved by the Government of Ecuador. When and
whether this problem will be resolved remains uncertain. No definitive
production sharing contract has been signed and no assurances can be given that
a new contract will be entered into.
28
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The information required by this Item is disclosed in Note 9. "Commitments
and Contingencies" contained in the financial information provided in Part I of
this report, and such information is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 -- Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAXUS ENERGY CORPORATION
By: /s/ W. Mark Miller
------------------------------------------
W. Mark Miller, Executive Vice
President, on behalf of the registrant and
as its principal financial officer
November 12, 1996
29
<PAGE>
Exhibit Index
Exhibit Title Exhibit No.
- -------------- -----------
Financial Data Schedule 27.1
30
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<PERIOD-END> SEP-30-1996
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