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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 March 31, 1997
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
REQURIED 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 May 12, 1997: 147, 246,135
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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.
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MAXUS ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions)
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31, Ended March 31,
1997 1996
---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES
Sales and operating revenues $ 179.6 $ 174.0
Other revenues, net 4.2 6.2
--------- ---------
183.8 180.2
COSTS AND EXPENSES
Operating expenses 52.0 50.8
Gas purchase costs 21.8 18.0
Exploration, including exploratory
dry holes 10.8 7.9
Depreciation, depletion and amortization 38.4 40.7
General and administrative expenses 2.4 2.8
Taxes other than income taxes 4.5 3.4
Interest and debt expenses 33.2 34.1
--------- ---------
163.1 157.7
--------- ---------
INCOME BEFORE INCOME TAXES 20.7 22.5
INCOME TAXES 17.3 23.0
--------- ---------
NET INCOME (LOSS) $ 3.4 $ (0.5)
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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MAXUS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
(in millions, except shares)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 19.2 $ 28.9
Receivables, less allowance for doubtful accounts 140.9 199.0
Funding guarantee from parent 27.4 27.4
Inventories 26.4 26.3
Restricted cash 7.3 7.3
Deferred income taxes 15.3 15.3
Prepaid expenses 10.2 10.5
--------- ---------
TOTAL CURRENT ASSETS 246.7 314.7
Properties and Equipment, less accumulated
depreciation, depletion and amortization 2,020.3 2,022.2
Investments and Long-Term Receivables 0.6 0.4
Restricted Cash 27.0 26.5
Funding Guarantee from Parent 77.7 75.2
Deferred Charges 19.1 17.5
--------- ---------
$ 2,391.4 $ 2,456.5
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 54.1 $ 54.1
Accounts payable 46.6 98.1
Taxes payable 25.4 44.6
Accrued liabilities 154.1 158.0
--------- ---------
TOTAL CURRENT LIABILITIES 280.2 354.8
Long-Term Debt 1,026.8 1,034.4
Advances from Parent 261.8 182.2
Deferred Income Taxes 501.9 502.7
Other Liabilities and Deferred Credits 171.3 171.0
$9.75 Redeemable Preferred Stock, $1.00 par value
Authorized and issued shares 0 and 625,000 - 62.5
Stockholders' Equity
$2.50 Preferred Stock, $1.00 par value
Authorized shares--5,000,000
Issued shares--3,500,000 55.6 57.8
Common Stock, $1.00 par value
Authorized shares--300,000,000
Issued Shares--147,246,135 and 147,246,364 147.2 147.2
Paid-in capital 215.6 216.4
Accumulated deficit (268.8) (272.3)
Minimum pension liability (0.2) (0.2)
TOTAL STOCKHOLDERS' EQUITY --------- ---------
149.4 148.9
--------- ---------
$ 2,391.4 $ 2,456.5
========= =========
</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.
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MAXUS ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
--------------- ---------------
Three Months Three Months
Ended March 31, Ended March 31,
1997 1996
--------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3.4 $ (0.5)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation, depletion and amortization 38.4 40.7
Dry hole costs 6.1 0.5
Income taxes (4.5) (5.1)
Net gain on sale of assets and sale/maturity of investments (0.2) -
Postretirement benefits 0.7 0.8
Accretion of discount 2.4 2.1
Other (0.4) (1.3)
Changes in components of working capital:
Receivables 58.2 (6.3)
Inventories, prepaids and other current assets (1.6) 4.4
Accounts payable (51.5) (2.1)
Accrued liabilities 0.1 (4.0)
Taxes payable/receivable (15.5) (3.4)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 35.6 25.8
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for properties and equipment--including
dry hole costs (39.8) (40.9)
Proceeds from sale of assets 0.4 0.2
Restricted cash (0.5) 15.3
Other (6.0) (4.6)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (45.9) (30.0)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt (10.0) (0.1)
Advances from parent 76.4 (1.5)
Capital contribution from parent - 64.0
Redemption of Preferred Stock (62.5) (62.5)
Dividends paid (3.0) (9.1)
Other (0.3) (2.2)
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 0.6 (11.4)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9.7) (15.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28.9 38.3
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19.2 $ 22.7
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
5
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MAXUS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE
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.
In June 1996, YPF Sociedad Anonima ("YPF"), the parent company of Maxus, and
Maxus 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. ("Holdings"), and the sale of common stock of
certain subsidiaries of Maxus to a wholly owned subsidiary of YPF (See Note
Two).
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
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amount of the asset, an impairment loss shall be recognized to value the asset
at its fair value.
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; and, 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, which include
gas gathering and processing equipment and plants, 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
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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 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
eligible retired employees and certain insurance and other postemployment
benefits for eligible 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 Two).
LITIGATION CONTINGENCIES
The Company records liabilities for litigation when such amounts are probable,
material and can be reasonably estimated.
INCOME TAXES
Effective August 13, 1996, YPF transferred ownership of its shares of the
Company's Common Stock to Holdings, a Delaware corporation. The Company
subsequently transferred its ownership of the common stock of CLH to a
subsidiary of Holdings (See Note Two). As a result of these transactions both
the Company and CLH are now included as members of an affiliated group of
companies qualifying, within the meaning of the Unites States Internal Revenue
Code, to file a consolidated federal income tax return having Holdings as
their common U.S. parent.
The Company's financial statements reflect an allocation of income tax expense
or benefit from the Holdings consolidated income tax group. This method of
allocation is consistent with the principles established by Statement of
Financial Accounting Standards, No. 109 ("SFAS 109"), "Accounting for Income
Taxes." It is based on a calculation of income tax for the Company as a
separate entity, adjusted to reflect certain attributes of Holding's
consolidated income tax return.
8
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The attributes include, but are not limited, to the consolidated loss
apportionment, tax credits, and the alternative minimum tax.
Effective August 1, 1996, CLH assumed certain liabilities of the Company
relating to environmental matters (See Note Two); thus, current taxes and
deferred taxes associated with the assumption of these liabilities have been
transferred to the accounts of CLH.
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 ("NGL") through price swap
agreements and futures contacts. 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.
NOTE TWO
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 Cumulative
Convertible Preferred Stock (the "$4.00 Preferred Stock") and the transfer to
a YPF subsidiary of a Maxus subsidiary that had 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, pursuant to a Stock Purchase and Sale Agreement by
and between YPF and Seller. 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 consisted 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. consisted
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 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.
Maxus used the proceeds from this transaction for general corporate purposes,
including the redemption of its $4.00 Preferred Stock, which is discussed
below.
While not a part of the above-described sale transactions, 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 held a 25% interest in the Guarapiche Block, an exploration
block in Venezuela.
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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 Holdings of approximately $55.6
million to redeem the $4.00 Preferred Stock.
As further part of the reorganization, the Company 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 Company's environmental contingencies and a
declaratory judgment action filed by Occidental Chemical Corporation and
Henkel Corporation.
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.
In the first quarter 1997, it was determined that an additional $3.1 million
in environmental reserves were necessary due to an increased level of work at
certain sites. YPF agreed to assume this additional liability. Therefore,
the Company's environmental reserves and funding guarantee were increased by
$3.1 million to reflect the transaction. At March 31, 1997, the outstanding
funding guarantee totaled $105.1 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. Capital
contributions of $9.5 million have been made to CLH since the effective date
of the Assumption.
NOTE THREE
ASSET ACQUISITION AND DIVESTITURE
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. Effective September 1, 1996, Maxus
sold all of the capital stock of Maxus Guarapiche, which owns a 25% interest
in the Guarapiche Block, to International (See Note Two).
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NOTE FOUR
PREFERRED STOCK
On January 31, 1997, Maxus redeemed the remaining 625,000 shares of its $9.75
Cumulative Convertible Preferred Stock, which was subject to mandatory
redemption provisions, for $62.5 million plus accrued dividends. YPF provided
the funding for the redemption which was recorded as an Advance from Parent on
the Consolidated Balance Sheet.
NOTE FIVE
LONG TERM DEBT AND CREDIT ARRANGEMENTS
During the first quarter of 1997, the Company paid its first quarterly
principal installment of $10 million to Chase Manhattan Bank as required under
the terms of the Midgard credit facility.
NOTE SIX
COMMITMENTS AND CONTINGENCIES
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.
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, Maxus 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.
Also, certain laws allow for recovery of natural resource damages from
potentially responsible parties and ordering the implementation of interim
remedies to abate an imminent and substantial endangerment to the environment.
Potential expenditures for any such actions cannot be reasonably estimated.
In connection with the sale of Maxus' former chemical subsidiary, Diamond
Shamrock Chemicals Company ("Chemicals"), to Occidental Petroleum Corporation
("Occidental") in 1986, Maxus agreed to indemnify Chemicals and Occidental
from and against certain liabilities relating to the business or activities of
Chemicals prior to the September 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.
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In addition, Maxus agreed to indemnify Chemicals and Occidental for 50% of
certain environmental costs incurred by Chemicals for which notice is given to
Maxus 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 Maxus' aggregate exposure for this
cost sharing being limited to $75 million. 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 OxyChem and Henkel
and the Company has appealed the judgment.
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 March 31, 1997, the
Company and CLH on its behalf had paid OxyChem and Henkel a total of
approximately $42 million against the $75 million cap and, based on OxyChem's
and Henkel's historical annual expenditures, the Company had previously
reserved $4 million for costs it anticipated through August 1996. The Company
cannot predict with any certainty what portion of the approximately $29
million unreserved portion of the $33 million amount remaining at March 31,
1997, 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.
At March 31, 1997, reserves for the environmental contingencies discussed
herein totaled $104 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.
Maxus is conducting litigation against the insurance companies that wrote
Chemicals' and Maxus' primary and excess insurance during the relevant periods
who have refused to provide coverage for Chemicals' or Maxus' cost of the
personal injury and property damage claims related to certain environmental
claims, including remedial activities at chemical plant sites and disposal
sites. Maxus has entered into settlement agreements with certain of the
insurers, the terms of which are required to be held confidential. Maxus 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. In the following discussion concerning specific
plant sites, other plant sites generally and third party sites, references to
the Company include, as appropriate, references to CLH acting under the
Assumption.
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 1998, cost approximately
$23 million and take three to four years to complete. The work is being
supervised and paid for by the Company pursuant to the above described
indemnification obligation to Occidental. The Company has fully 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
12
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generally are buried under more recent sediment deposits. The Company, on
behalf of Occidental, negotiated an agreement with the EPA under which the
Company is conducting further testing and studies to characterize contaminated
sediment and biota 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 the Company's
studies. The Company currently expects the testing and studies to be completed
in 1999 and cost from $4 million to $6 million after March 31, 1997. The
Company has reserved for the amount of its estimate of the remaining costs to
be incurred in performing these studies. The Company has been conducting
similar studies under its 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 the Company and Occidental, and the Company is funding
Occidental's share of the cost of investigation and remediation of these
sites. The 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 has
participated in the cost of studies and is implementing interim remedial
actions and conducting remedial investigations and feasibility studies, the
ultimate cost of remediation is uncertain. The Company anticipates it 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 approximately $47 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 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
13
<PAGE>
by the Director's Order. It is estimated that the total cost of performing the
RIFS will be $5 million to $8 million during the years 1997 through 1999. 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 the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("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.
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 of
these sites. At several of these, Chemicals has no known exposure. Although
PRPs are typically 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. At a number of these sites, the
ultimate cost of these sites and Chemicals' share of the costs thereof cannot
be estimated at this time. The Company has reserved for its estimated costs
related to these sites, where such costs are both probable and reasonably
estimatable.
14
<PAGE>
MAXUS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FIRST QUARTER 1997
RESULTS OF OPERATIONS - FIRST QUARTER 1997 VS. FIRST QUARTER 1996
Maxus Energy Corporation (the "Company" or "Maxus") reported net income of $3
million for the first quarter of 1997 compared to a net loss of $1 million for
the first quarter of 1996. Performance improved as a result of higher sales and
operating revenues coupled with lower income taxes being partially offset by
higher costs and expenses. Performance also improved despite the sale of three
of the Company's subsidiaries holding certain Bolivian and Venezuelan assets to
YPF Sociedad Anonima ("YPF") effective July 1, 1996.
Sales and Operating Revenues. Sales and operating revenues for the first
quarter of 1997 increased $6 million to $180 million, compared to $174 million
for the same 1996 period. The increase in sales and operating revenues was due
primarily to higher average prices for crude oil, natural gas and natural gas
liquids ("NGL") and higher crude oil sales volumes in Ecuador partially offset
by lower crude oil sales volumes in Northwest Java and the absence of sales and
operating revenues from Maxus' former operations in Bolivia and Venezuela.
Net worldwide crude oil sales volumes averaged 53 thousand barrels per day
("mbpd") in the first quarter of 1997, a decline of 12 mbpd compared to 65 mbpd
in the same quarter in 1996. The decline was due primarily to the absence of 13
mbpd in average crude oil sales volumes from the Company's former Bolivian and
Venezuelan operations during the first quarter of 1996. Ecuador's first quarter
1997 average net crude oil sales volumes of 13 mbpd were five mbpd higher than
the same period last year; however, this increase was offset by a decrease in
average crude oil sales volumes of four mbpd in Northwest Java as a result of
lower crude oil entitlements driven by higher crude oil prices, lower cost
recovery and new contract terms. Effective January 19, 1997, Maxus' share of
crude oil and natural gas production in Northwest Java decreased due to the
renegotiation in 1990 of the production sharing contract with Indonesia's state
oil company, Pertamina. Maxus' average net worldwide crude oil sales price rose
significantly, from $17.75 per barrel ("bbl") in the first quarter of 1996 to
$20.50 per bbl in the first quarter of 1997.
Average net U.S. natural gas sales volumes for the first quarter of 1997 were
175 million cubic feet per day ("mmcfpd"), a decrease of four mmcfpd as compared
to the first quarter of 1996. The average gas price received in the U.S. rose
significantly, from $1.82 per thousand cubic feet ("mcf") in the first quarter
of 1996 to $2.44 per mcf in the first quarter of 1997.
Average net Northwest Java natural gas sales volumes of 63 mmcfpd in the first
quarter of 1997 were flat compared to the same period in 1996. Natural gas sales
prices averaged $2.67 per mcf during the first quarter of 1997 compared to $2.64
per mcf during the first quarter of 1996.
Average net NGL sales in the U.S. for the first quarter of 1997 of 19 mbpd
were flat compared to the first quarter of 1996. The average sales price for
U.S. NGL in the first quarter of 1997 was $13.66 per bbl, an increase of $1.19
per bbl from the same period in 1996.
Costs and Expenses. Costs and expenses of $163 million for the first quarter
of 1997 were $5 million higher than such period in 1996 due primarily to higher
gas purchase costs and higher exploration expenses partially offset by lower
depreciation, depletion and amortization ("DD&A").
Gas purchase costs of $22 million were $4 million higher in the first quarter
of 1997 as compared to the first quarter of 1996 due to higher gas purchase
prices; however, these costs were recovered through higher gas sales prices.
15
<PAGE>
Exploration expenses during the first quarter of 1997 were $11 million, an
increase of $3 million compared to the first quarter of 1996. During the first
quarter of 1997, the Company recognized $4 million of dry hole expense in
Tunisia.
DD&A of $38 million in the first quarter of 1997 was $3 million lower than the
same period in 1996. The absence of DD&A in Bolivia during the first quarter of
1997 resulted in a favorable impact of $2 million.
Income tax expense was $17 million and $23 million in the first quarters of
1997 and 1996, respectively. The $6 million decrease in income tax expense was
primarily due to the absence of income taxes in Bolivia and Venezuela in the
first quarter of 1997 and the new contract terms in Northwest Java.
FINANCIAL CONDITION
The Company's net cash provided by operating activities was $36 million in the
first quarter of 1997 compared to $26 million in the first quarter of 1996. Net
cash from operating activities before working capital changes increased $9
million during 1997 due primarily to higher sales and operating revenues, lower
cash interest expense and lower cash income taxes. Overall, first quarter 1997
net working capital requirements remained relatively flat compared to the first
quarter of 1996.
The Company began the year with $29 million of cash and cash equivalents.
During the first three months of 1997, Maxus received $76 million in advances
from parent and generated $36 million from operating activities. The Company
used $40 million of cash to fund capital expenditures, $63 million to fund the
redemption of the remaining 625,000 shares of $9.75 Cumulative Convertible
Preferred Stock (the "9.75 Preferred Stock") as required in January 1997, $3
million to pay preferred dividends and $10 million to repay the first quarterly
principal installment due under the Midgard credit facility. At March 31, 1997,
the Company's cash and cash equivalents balance was $19 million. In the first
three months of 1996, 1995 year-end cash balances of $38 million, $26 million of
cash provided by operations, a capital contribution from parent of $64 million
and the release of $15 million in restricted cash were used to redeem a portion
of the Company's $9.75 Preferred Stock, fund expenditures for properties and
equipment and pay preferred dividends.
In management's opinion, cash on hand and cash from operations will be
inadequate to fund the 1997 program spending budget, service debt and pay
preferred stock dividends and trade obligations. It is anticipated that YPF
could be required to make cash advances to Maxus in 1997 totaling approximately
$150 million to $200 million to help fund the Company's obligations. Actual
cash advances made by YPF could vary significantly depending on, among other
circumstances, oil and gas prices and program spending commitments.
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, NGL and
crude oil price swap agreements and crude oil and natural gas futures contracts,
which are not used for trading purposes.
FUTURE OUTLOOK
Maxus currently projects total program spending (capital expenditures plus
exploration expenses) for 1997 to be approximately $212 million, compared to
$233 million in 1996. The planned allocation is Indonesia $108 million, Midgard
(U.S.) $66 million, Ecuador $23 million and domestic and overseas new ventures
$15 million. Funding for the 1997 spending program is expected to be provided
by cash from operations and cash advances from YPF as necessary. In addition
to the 1997 program, Maxus has financial and/or performance commitments for
exploration and development activities in 1998 and beyond, none of which are
material.
16
<PAGE>
Midgard has signed a letter of intent with Amoco Production Company ("Amoco")
concerning the establishment of a partnership with regard to Midgard's business
and assets. It is anticipated that Midgard and Amoco will each contribute to
the partnership oil and gas properties in the Texas Panhandle and western
Oklahoma and that Amoco will contribute certain other assets. Midgard and Amoco
have commenced negotiations of definitive agreements covering the partnership.
However, no definitive agreements have been entered into, and consequently no
assurances can be given that the attempts to establish the partnership will be
successful. 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 to changes in governments, 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 the Block 16 project ("Block 16") agreed to convert such contract
into a production sharing contract. Effective January 1, 1997, the Company and
the government entered into a new contract governing Block 16. The principal
difference between the two contracts is the manner in which the consortium's
costs in Block 16 are recovered. Under the former contract, the Company had the
right to recover its investment before the government began to share in
significant proceeds from the sale of production; under the new contract, the
government receives a royalty, and the Company's recovery of its investment is
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 reduced its 1996 program
spending on Block 16 to $17 million from $32 million in 1995.
The new contract also resolves certain outstanding disputes and amends the
prior agreement in various other ways, some of which are expected to
significantly improve the Company's current and future operating costs. The
Company believes that the new contract permits the Company to go forward with
the development of Block 16 and permits it to do so on a more cost-effective
basis, subject to the planned enhancement of pipeline capacity discussed
below. Based on the terms of the newly approved contract and events which have
transpired since such approval, no write down of carrying value of Block 16 is
required. During 1996, pipeline capacity available to the Company was
sufficient to transport only about 60 to 80% of the oil which the Company was
capable of producing daily in Ecuador. Due to the decreased usage by
PetroEcuador, however, pipeline capacity has presently been available to
transport close to 100% of the oil which the Company is capable of producing
daily. It is not known whether this availability is temporary and, if
permanent, whether it will be adequate to accommodate expected increased
production in mid-1997. Additionally, the Ecuadorian Government has announced
it intends to enhance the capacity of the existing pipeline rather than solicit
bids for the construction of a new pipeline system as previously announced. It
is uncertain if this planned pipeline enhancement will occur or what impact it
might have on the Company's transportation needs.
17
<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 informatin is incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 -- 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: W. Mark Miller
-----------------------------
W. Mark Miller, Executive Vice
President, on behalf of the
registrant and as its principal
financial officer
May 13, 1997
18
<PAGE>
Exhibit Index
Exhibit Title Exhbit No.
- ------------- ----------
Financial Data Schedule 27
19
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<PERIOD-END> MAR-31-1997
<CASH> 19
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<RECEIVABLES> 141
<ALLOWANCES> 1
<INVENTORY> 26
<CURRENT-ASSETS> 247
<PP&E> 2,020
<DEPRECIATION> 337
<TOTAL-ASSETS> 2,391
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<BONDS> 1,289
0
56
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<TOTAL-LIABILITY-AND-EQUITY> 2,391
<SALES> 180
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