-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G6Tm1HMcH/5PaMz19ZdA1an14g2fADpnNzz5pkbMF3LVbr0QUsCZRfUwJkf8PK7M 8RecXBJ6EiWhWigr0XNHqQ== 0000930661-97-000651.txt : 19970321 0000930661-97-000651.hdr.sgml : 19970321 ACCESSION NUMBER: 0000930661-97-000651 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXUS ENERGY CORP /DE/ CENTRAL INDEX KEY: 0000724176 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 751891531 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-55857 FILM NUMBER: 97560174 BUSINESS ADDRESS: STREET 1: 717 N HARWOOD ST- RM 3147 CITY: DALLAS STATE: TX ZIP: 75201-6594 BUSINESS PHONE: 2149532000 FORMER COMPANY: FORMER CONFORMED NAME: DIAMOND SHAMROCK CORP /DE/ DATE OF NAME CHANGE: 19870518 FORMER COMPANY: FORMER CONFORMED NAME: NEW DIAMOND CORP DATE OF NAME CHANGE: 19830908 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 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 75201-6594 DALLAS, TEXAS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Registrant's telephone number, including area code: (214) 953-2000 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- $2.50 Cumulative Preferred Stock, $1.00 Par Value....... New York Stock Exchange 8 1/2% Sinking Fund Debentures Due April 1, 2008........ New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 1, 1997: Not applicable. Shares of Common Stock outstanding at March 1, 1997 -- 147,246,135. DOCUMENTS INCORPORATED BY REFERENCE None - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES. Maxus Energy Corporation ("Maxus" or the "Company") was incorporated in Delaware in 1983 to hold the stock of various corporations, the oldest of which was founded in 1910. The Company, together with its subsidiaries, is an oil and gas exploration and production company with ongoing international activity primarily in Indonesia and Ecuador and domestic activity primarily in the mid-continent region of the United States. Its principal executive offices are located at 717 North Harwood Street, Dallas, Texas 75201-6594, and its telephone number is (214) 953-2000. In this report, the terms "Company" and "Maxus" mean Maxus Energy Corporation, its subsidiaries and their predecessors unless the context otherwise indicates. On June 8, 1995, YPF Sociedad Anonima ("YPF"), an Argentine sociedad anonima, completed its acquisition of all the shares of common stock ("Common Stock") of 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 Common Stock, all of which is owned by a subsidiary of YPF, and the Company's $2.50 Cumulative Preferred Stock ("$2.50 Preferred Stock") remain outstanding. On August 13, 1996, the Company redeemed all of its outstanding $4.00 Cumulative Convertible Preferred Stock ("$4.00 Preferred Stock"), and on January 31, 1997, the Company redeemed its remaining outstanding $9.75 Cumulative Convertible Preferred Stock ("$9.75 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 acquired assets and assumed liabilities based on their fair values at the date of acquisition. As a result, the Company's assets and liabilities were revalued to reflect the approximate $762 million cash purchase price paid by YPF to acquire the Company. Due to the application of purchase accounting on April 1, 1995, financial information post-Merger is not comparable to prior periods. Therefore, financial information is presented separately for pre-Merger (year ended December 31, 1994 and the three-month period ended March 31, 1995) and post-Merger periods (nine months ended December 31, 1995 and year ended December 31, 1996). The Company's sales or transfers between geographic areas were not significant for the year ended December 31, 1994, the three months ended March 31, 1995, the nine months ended December 31, 1995 and year ended December 31, 1996. Operating revenues from export sales to unaffiliated customers located outside the United States were less than 10% of the Company's consolidated sales and operating revenues for the twelve months ended December 31, 1994, the three months ended March 31, 1995, the nine months ended December 31, 1995 and the year ended December 31, 1996. Information concerning outside sales and operating profit by geographic area for the twelve months ended December 31, 1996 and the nine months ended December 31, 1995 and identifiable assets by geographic area as of December 31, 1996 and 1995 is presented on pages F-41 and F-42. Information concerning outside sales and operating profit by geographic area for the twelve months ended December 31, 1994, and the three months ended March 31, 1995 and identifiable assets by geographic area as of December 31, 1994 is presented on pages F-8 and F-9 of this report. 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. Effective 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 2 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 the Quiriquire Unit. 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 (approximately $27 million net to the Company) to the Venezuelan Government for rights to explore the Guarapiche block. 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 had a 25% interest in the Guarapiche Block. 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 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 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 to the capital of CLH up to $108 million, which amount 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 provide funding for certain operating expenses budgeted by CLH from time to time. Exploration and Production--International 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, acts of war, guerrilla activities and insurrection. Indonesia The Company has interests in production sharing contracts with Pertamina, Indonesia's state oil company, for the exploration, development and production of oil and gas in two primary areas in the Java Sea--Southeast Sumatra and Northwest Java. These areas accounted for 77% of the Company's total net production of oil during 1996. The Company's working interest in the Southeast Sumatra production sharing contract is 55.7% and in the Northwest Java production sharing contract is 24.3%. The Company is the operator of the Southeast Sumatra block, and Atlantic Richfield Company ("ARCO") is the operator of the Northwest Java block. The Indonesian production sharing contracts allow the Company to recover, subject to available production, tangible and intangible costs of exploration, intangible costs of production and operating costs on a current basis and tangible costs of production generally over a seven-year period. After recovery of those costs and fulfillment of a domestic market obligation for oil, in 1996 the contractors received 34% of the oil produced and 79.5% of the gas produced before Indonesian taxes, the statutory rate for which is approximately 56%. The Southeast Sumatra and Northwest Java production sharing contracts extend to 2018 and 2017, respectively. 3 The Company has gas projects in both the Northwest Java and Southeast Sumatra contract areas. In 1992, ARCO began developing gas reserves in Northwest Java. Production from this project, which began delivery to Jakarta in 1993, averaged 322.2 million cubic feet per day ("mmcfpd") (gross) during 1996. In Southeast Sumatra, where the Company has certified (but not included in its proved reserves because of an absence of a contract of sale) 300 billion cubic feet ("bcf") of gross gas reserves, the Company is negotiating with Pertamina for domestic gas sales contracts to supply expanding West Java markets. Although the Company cannot give any assurance that a contract will ultimately be signed, management currently believes that these negotiations will lead to a satisfactory gas sales contract and a profitable market for the Company's Southeast Sumatra natural gas. During 1996, five exploration and 22 development wells were drilled in the Northwest Java contract area. During the year, 33.6 million barrels (gross) of oil and 96.3 bcf (gross) of gas were added to proved reserves. Also during 1996, the Company drilled six exploration and 25 development wells in the Southeast Sumatra contract area which added 45.3 million barrels (gross) of proved oil reserves. Southeast Sumatra 1996 gross production remained essentially unchanged from 1995 production. Natural declines were offset by new production resulting from the introduction of horizontal well technology and use of high volume electrical submersible pumps combined with an active drilling program. Two large 3D seismic surveys were also completed in the Southeast Sumatra block in 1996. Reserve additions replaced 90% of the gross production of oil for the Southeast Sumatra block and 90% of the gross oil and gas produced in the Northwest Java block in 1996. The Company plans to drill nine exploration wells in the Southeast Sumatra block and nine exploration wells in the Northwest Java block in 1997. At the same time, the Company has increased capital expenditures for development drilling to boost current production. Major efforts are underway to reduce development and lifting costs and secure operating conditions to commercialize small oil accumulations discovered in previous years that were formerly considered uneconomic. Ecuador The Company is the operator of and has a 35% working interest in the Block 16 project ("Block 16") in eastern Ecuador from which production began in 1994. A total of 14 wells were drilled on the Block in 1996: eight delineation wells in the Daimi Field, four delineation wells in the Ginta Field and two disposal wells in the WIPS1 pad. Additionally, 20 completions and 23 workovers were performed during 1996. During 1996, the construction of the Southern Production Facilities continued, with Phase I of the project being completed. These facilities are scheduled to begin operations in July 1997 and are expected to allow a production capacity increase from 45,000 barrels of oil per day to 65,000 barrels of oil per day. 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 decreased usage during the first quarter of 1997 by PetroEcuador, the state oil company, however, pipeline capacity has 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 the expected increased production in mid-1997. Additionally, the Ecuadorian Government has announced its intention to solicit bids in early 1997 for the construction of a new pipeline system and expects completion of the pipeline within 18 to 24 months from the date of execution of a contract. The impact, if any, which a recent change in the country's political leadership will have on these plans to solicit such bids is not known. On August 10, 1996, a new administration 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 agreed to convert such contract into a production sharing contract. On December 27, 1996, the Company and the Government entered into a new contract effective January 1, 1997 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 4 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 administrations 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. 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 eventual permanent increase of pipeline capacity discussed above. The Company's program spending in Ecuador was reduced from $32 million in 1995 to $17 million in 1996. For 1997, the program spending will be increased to approximately $23 million mainly due to the planned completion of Southern Production Facilities and use of horizontal drilling in the Tivacuno Field. Exploration and Production--Domestic Through its wholly owned subsidiary, Midgard Energy Company ("Midgard"), the Company currently focuses its domestic exploration and production efforts in the Texas Panhandle and western Oklahoma where it has substantial investments in natural gas gathering systems that are used to aggregate gas produced and purchased by the Company for processing and resale. The Company owns and operates one gas processing plant in the area: its Sunray plant in Moore County, Texas. The Sunray plant, which was completed in 1993, incorporates state-of-the-art technology, including a cold box for extraction of helium. It can process approximately 200 mmcfpd at peak operation and, as of February 1, 1997, was processing approximately 180 mmcfpd. In December 1996, the Company shut down its gas processing plant in Roger Mills County, Oklahoma, and gas previously processed by that plant is currently being processed at a third party facility. While it has made no decision to reactivate the Roger Mills plant, the Company is evaluating alternatives to relocate the Roger Mills plant to a more strategic location in the Texas Panhandle during 1997. In 1996, Midgard continued an aggressive drilling program on its Mid- continent properties, drilling and completing 109 wells compared to 81 wells in 1995. Production for 1996 rose 12% over 1995 rates to an average of 145 mmcfpd and year-end reserves increased 22% from December 31, 1995 to 724 bcf equivalent. Midgard replaced 330% of production during the year at a cost of $0.34 per thousand cubic feet ("mcf") equivalent and, as compared to 1995, reduced unit production costs by 12% and unit gathering costs by 6%. For 1997, Midgard's development plans include the continuation of its in- fill drilling program at a level comparable to 1996 and efforts to maximize processed volumes through gathering systems upgrades. Additionally, Midgard expects to pursue strategic acquisition opportunities in the gathering, processing and producing properties sectors, while drilling a portfolio of higher risk and higher potential exploration wells to complement its lower risk in-fill and extension drilling program. Midgard has signed a letter of intent with Amoco Production Company concerning the establishment of a partnership with regard to its business and assets. The objective of the partnership is lowering unit costs, creating economies of scale and improving marketing leverage. Establishment of the partnership is subject to execution of definitive agreements and efforts in that regard are currently proceeding. 5 Oil and Gas Operations Average sales prices and production costs of crude oil and natural gas produced by geographic area for the three months ended March 31, 1995, the nine months ended December 31, 1995 and the year ended December 31, 1996 were as follows:
NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ United States Average Sales Price Crude Oil (per barrel)... $19.23 $16.29 $16.07 $13.89 Natural Gas Liquids (per barrel)................. $11.94 $10.42 $10.27 $10.02 Natural Gas Sold (per mcf)(a)................. $ 1.83 $ 1.54 $ 1.42 $ 1.89 Natural Gas Produced (per mcf)(b)................. $ 2.31 $ 1.97 $ 1.89 $ 2.10 Average Production Cost (per barrel)(c)......... $ 3.46 $ 3.39 $ 3.74 $ 3.37 Indonesia Average Sales Price Crude Oil (per barrel)... $20.32 $17.01 $17.54 $15.61 Natural Gas Liquids (per barrel)................. $14.49 $14.33 $19.19 $ 9.42 Natural Gas Sold (per mcf)(a)................. $ 2.65 $ 2.62 $ 2.65 $ 2.24 Natural Gas Produced (per mcf)(b)................. $ 2.65 $ 2.64 $ 2.73 $ 2.53 Average Production Cost (per barrel)(c)......... $ 7.01 $ 6.44 $ 7.42 $ 6.18 South America Average Sales Price Crude Oil (per barrel)... $15.81 $12.79 $12.58 $12.58 Average Production Cost (per barrel)(c)......... $ 4.72 $ 6.30 $ 8.99 $ 9.36
- ---------- (a) The average natural gas price for sales volumes is calculated by dividing the total net sales value for all natural gas sold by the Company, including residue gas remaining after the removal of natural gas liquids, by the annual natural gas sales volume. (b) The average natural gas price for produced volumes is calculated by dividing the total net value received from the sale of natural gas and natural gas liquids produced by the Company by the annual natural gas production volume. (c) Production or lifting cost is exclusive of depreciation and depletion applicable to capitalized lease acquisition, exploration and development expenditures. Average production costs are calculated by dividing total operating costs by the sum of crude oil and equivalent barrels of oil for natural gas production. Gas volumes produced were converted to equivalent barrels of crude oil by dividing the mcf volume by six. Six mcf of gas have approximately the heating value of one barrel of crude oil. The Company periodically hedges against the effects of fluctuations in the prices of natural gas through price swap agreements and futures contracts. During 1996, a hedging program covered an average of 60% of the Company's United States natural gas production and 35% of its United States natural gas liquids sales. The Company anticipates hedging approximately 85% of its United States natural gas production and 40% of its United States natural gas liquids sales during 1997. Information regarding the Company's oil and gas producing activities for the periods indicated is set forth on pages F-27 through F-31 and F-66 through F- 69 of this report. The Company's estimates of its net interests in proved reserves at December 31, 1996 are based upon records regularly prepared and maintained by its engineers. In 1996, the Company filed estimates of certain of its proved reserves of crude oil and natural gas in the United States at December 31, 1995 with the United States Department of Energy. The total reserve estimates included therein do not differ by more than 5% from the total reserve estimates for the comparable period for the same reserves included in the Company's filings with the Securities and Exchange Commission. 6 The following table shows the Company's average daily sales and net production (after deducting royalty and operating interests of others) by geographic area for the periods presented.
NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ United States Average Daily Production Crude Oil (m barrels).... 1.2 1.1 1.0 2.4 Natural Gas (mmcf)(a).... 145 130 125 156 Average Daily Sales Natural Gas Liquids (m barrels)................ 9.9 8.7 8.8 8.2 Natural Gas (mmcf)(b).... 116 104 98 131 Indonesia Average Daily Production Crude Oil (m barrels).... 43.6 53.0 52.0 59.3 Average Daily Sales Natural Gas Liquids (m barrels)................ 2.3 1.7 0.9 2.1 Natural Gas (mmcf)(b).... 69 61 40 44 South America Average Daily Production Crude Oil (m barrels).... 11.9 12.4 8.5 4.6 Average Daily Sales Crude Oil (m barrels).... 14.1 10.4 6.9 5.2
- ---------- (a) Reflects the average amount of daily wellhead production. (b) Average daily sales volumes for natural gas production, reduced, in those cases where the gas is processed for extraction of natural gas liquids, by the shrinkage resulting therefrom. In addition to gathering and processing a substantial part of the Company's own natural gas, the Company purchases natural gas in the Texas Panhandle and western Oklahoma for resale. The majority of this natural gas is processed through the Company's processing facility. The table below reflects the average daily sales and average sales prices received for such purchased natural gas and the natural gas liquids extracted in processing for the periods presented.
NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1996 1995 1995 1994 ------------ ------------ ------------ ------------ Average Sales Price Natural Gas Liquids (per barrel)................. $14.70 $10.57 $10.48 $10.12 Natural Gas (per mcf).... $ 2.19 $ 1.42 $ 1.49 $ 1.90 Average Daily Sales Natural Gas Liquids (m barrels)................ 8.6 8.9 9.6 9.7 Natural Gas (mmcf)....... 66 68 69 144
7 The following tables set forth information regarding the Company's wells and leasehold acres. "Gross" wells or acres are the total number of wells or acres in which the Company owns any interest. "Net" wells or acres are the sum of the fractional working interests the Company owns in gross wells or acres. "Productive" wells are either producing wells or wells capable of commercial production although currently shut-in. One or more completions ("multiple completions") in the same bore hole are counted as one well. At December 31, 1996, total gross and net productive oil and gas wells, including multiple completions, by geographic area were as follows:
WELLS ------------------------- OIL GAS ----------- ------------- GROSS NET GROSS NET ----- ----- ----- ------- Oil and Gas Wells United States....................................... 329 229.1 1,547 1,187.6 Indonesia........................................... 770 300.2 10 2.4 South America....................................... 33 11.6 0 0.0 ----- ----- ----- ------- Total............................................. 1,132 540.9 1,557 1,190.0 Multiple Completions United States....................................... 0 0.0 31 14.7 Indonesia........................................... 93 22.6 0 0.0 ----- ----- ----- ------- Total............................................. 93 22.6 31 14.7
At December 31, 1996, total gross and net developed and undeveloped acreage by geographic area was as follows:
UNITED SOUTH OTHER STATES INDONESIA AMERICA FOREIGN ------- --------- ------- ------- Gross Acres Developed Acres............................. 557,717 143,738 5,160 0 Undeveloped Acres........................... 310,141 7,027,662 506,137 971,587 ------- --------- ------- ------- Total..................................... 867,858 7,171,400 511,297 971,587 Net Acres Developed Acres............................. 469,612 54,254 1,806 0 Undeveloped Acres........................... 176,242 2,543,306 177,148 582,952 ------- --------- ------- ------- Total..................................... 645,854 2,597,560 178,954 582,952
8 Exploration and Development Activities Drilling activities of the Company for each year in the three-year period ended December 31, 1996 are summarized by geographic area in the following table:
FOR THE YEAR ENDED DECEMBER 31, ---------------------- 1996 1995 1994 ------ ------ ------ Gross wells drilled(*) United States Exploratory Oil..................................................... 0 0 0 Gas..................................................... 0 0 1 Dry..................................................... 0 2 6 ------ ------ ------ Total.................................................. 0 2 7 Development Oil..................................................... 8 3 2 Gas..................................................... 96 73 44 Dry..................................................... 5 5 4 ------ ------ ------ Total.................................................. 109 81 50 Indonesia Exploratory Oil..................................................... 1 0 3 Gas..................................................... 0 0 0 Dry..................................................... 10 12 7 ------ ------ ------ Total.................................................. 11 12 10 Development Oil..................................................... 45 35 38 Gas..................................................... 4 0 1 Dry..................................................... 1 2 2 ------ ------ ------ Total.................................................. 50 37 41 South America Exploratory Oil..................................................... 4 1 1 Gas..................................................... 0 0 0 Dry..................................................... 0 1 0 ------ ------ ------ Total.................................................. 4 2 1 Development Oil..................................................... 16 17 13 Gas..................................................... 0 0 0 Dry..................................................... 0 0 0 ------ ------ ------ Total.................................................. 16 17 13 Other Foreign Exploratory Oil..................................................... 0 0 0 Gas..................................................... 0 0 0 Dry..................................................... 1 3 0 ------ ------ ------ Total.................................................. 1 3 0
9
FOR THE YEAR ENDED DECEMBER 31, ------------------- 1996 1995 1994 ------ ------------ Development Oil....................................................... 0 0 0 Gas....................................................... 0 0 0 Dry....................................................... 0 0 0 ------ ----- ----- Total.................................................... 0 0 0 Net Wells Drilled* United States Exploratory Oil....................................................... 0.0 0.0 0.0 Gas....................................................... 0.0 0.0 1.0 Dry....................................................... 0.0 1.5 3.5 ------ ----- ----- Total.................................................... 0.0 1.5 4.5 Development Oil....................................................... 7.9 3.0 0.2 Gas....................................................... 89.4 65.7 22.1 Dry....................................................... 5.0 5.0 1.6 ------ ----- ----- Total.................................................... 102.3 73.7 23.9 Indonesia Exploratory Oil....................................................... 0.6 0.0 0.7 Gas....................................................... 0.0 0.0 0.0 Dry....................................................... 4.3 6.4 3.3 ------ ----- ----- Total.................................................... 4.9 6.4 4.0 Development Oil....................................................... 20.0 14.5 17.1 Gas....................................................... 1.0 0.0 0.2 Dry....................................................... 0.6 1.1 0.5 ------ ----- ----- Total.................................................... 21.6 15.6 17.8 South America Exploratory Oil....................................................... 1.4 0.4 0.4 Gas....................................................... 0.0 0.0 0.0 Dry....................................................... 0.0 0.6 0.0 ------ ----- ----- Total.................................................... 1.4 1.0 0.4 Development Oil....................................................... 5.6 7.2 4.6 Gas....................................................... 0.0 0.0 0.0 Dry....................................................... 0.0 0.0 0.0 ------ ----- ----- Total.................................................... 5.6 7.2 4.6 Other Foreign Exploratory Oil....................................................... 0.0 0.0 0.0 Gas....................................................... 0.0 0.0 0.0 Dry....................................................... 1.0 2.6 0.0 ------ ----- ----- Total.................................................... 1.0 2.6 0.0
10
FOR THE YEAR ENDED DECEMBER 31, ---------------------- 1996 1995 1994 ------ ------ ------ Development Oil.................................................... 0.0 0.0 0.0 Gas.................................................... 0.0 0.0 0.0 Dry.................................................... 0.0 0.0 0.0 ------ ------ ------ Total................................................. 0.0 0.0 0.0
- ---------- * "Gross" wells means all wells in which the Company has an interest. "Net" wells means gross wells after deducting interests of others. At December 31, 1996, the Company was participating in the drilling of 7 gross and 6.3 net wells in the United States, 4 gross and 1.6 net wells in Indonesia and 3 gross and 1.5 net wells in areas outside the United States other than Indonesia. Competition and Markets The primary markets for the Company's Indonesian oil production are the Pacific Rim countries, including Japan, China and Indonesia. The continued increasing environmental consciousness of this region has resulted in premium prices for low sulfur oil such as that produced from the Southeast Sumatra and Northwest Java areas. The Company has ongoing business relationships with government oil companies, utilities, refiners and trading companies which are expected to continue to facilitate sales in this area. The Company believes the long-term potential for natural gas demand growth in North America remains positive for several reasons. Chief among these reasons are the environmental advantages of natural gas relative to other energy sources, opportunities for natural gas as a result of the deregulation of the electrical generating industry and natural gas' favorable position with regard to the anticipated decommission of a number of nuclear power plants. Natural gas prices, however, remained volatile during 1996, especially during the first and fourth quarters. Cold winter weather coupled with low storage levels contributed to regional price imbalances. The Company's domestic natural gas reserve base and production is concentrated in its Mid-continent division (Midgard), which encompasses Anadarko Basin production in the Texas Panhandle and western Oklahoma areas. The Company's Sunray gas plant is located in Moore County, Texas and is directly connected to three major interstate pipelines. This multiple pipeline access provides the Company with the ability to maximize the value of natural gas from this plant. During 1996, the Company elected to decrease emphasis on its national natural gas marketing efforts to local distribution companies, industrial customers and utility companies due to the decline in value associated with the services demanded by these markets and the increased cost and investment required in providing those services. The Company has instead elected to pursue an arrangement to sell a portion of its gas to a larger natural gas marketing concern at a price competitive with prices received in direct marketing without the cost and investment associated with direct marketing. The Company continues to emphasize its natural gas sales for agricultural purposes and for supply to local area markets. Approximately 15% of the Company's natural gas sales in 1996 were made directly to local gas distribution companies and industrial and agricultural users through term contracts, and the remaining 85% was sold on the spot market. The Company sells crude oil, natural gas and natural gas liquids to an assortment of customers including refinery, industrial and agricultural type customers. Oil and gas are commodities and the Company's production represents only a small fraction of the total market for these products. As a result, the prices the Company receives depend primarily on the relative balance between supply and demand for these products. The world oil market continues to be subject to uncertainty. World crude supplies during 1996 were tighter than most analysts had predicted and consequently prices were higher. The Iraqi "oil for food" sales were 11 repeatedly delayed and non-OECD demand was consistently underestimated. The prospect of Iraqi sales depressed the medium term futures prices relative to the short term, discouraging refiners from holding inventory. The lack of inventory, in turn, contributed to increased price volatility. Limited Iraqi sales returned in December 1996 and North Sea production is currently at record high levels. Prices declined during the first quarter of 1997 and are expected to continue to be volatile in the near future. Health, Safety and Environmental Controls 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 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 $42 million as of December 31, 1996. Occidental 12 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 Henkel, and the Company has appealed the judgment. (See "Item 3. Legal Proceedings".) In connection with the spin-off of Diamond Shamrock R&M, Inc., now known as Ultramar Diamond Shamrock Corporation ("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. Thereafter, such ongoing costs were borne one-third by DSI and two-thirds by the Company until DSI had borne an additional $47.5 million. As of December 31, 1996, DSI had fulfilled its remaining responsibility under the cost-sharing arrangement, and it has no further obligation thereunder. During 1996, the Company spent $8 million in environmental related expenditures in its oil and gas operations. Expenditures for 1997 are expected to be approximately $13 million. 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 arrangement. At December 31, 1996, reserves for the environmental contingencies discussed herein totaled $101.6 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 transferred certain liabilities related to environmental matters to CLH 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 transferred to CLH its then 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 December 31, 1996, the outstanding funding guarantee totaled $102.6 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. 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 13 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 late 1997 or in 1998, cost approximately $23 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 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 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, 1996. 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 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 approximately $47 million at December 31, 1996. 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 14 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 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 estimated 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 individually is 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 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. 15 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. 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. 3. Chemical Control Site; Elizabeth, New Jersey. The PRPs and the EPA have settled the federal claims for cost recovery and site remediation, and remediation is now complete. 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. Based on 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. Employees As of December 31, 1996, the Company had approximately 2,027 employees. ITEM 3. LEGAL PROCEEDINGS. In 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 December 31, 1996, 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, 16 the Company had approximately $4 million reserved. The Company cannot predict with any certainty what portion of the approximately $29 million unreserved portion of the $33 million amount remaining at December 31, 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. See also the heading "Health, Safety and Environmental Controls" under "Items 1 and 2. Business and Properties" of this report for a description of certain other legal proceedings, which description is incorporated herein by reference. The Company is involved in various other legal proceedings incidental to its business, the outcome of any of which should not have a material adverse effect on its financial position. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS. Inapplicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. There is no established public trading market for the Common Stock. At March 1, 1997, YPF was the sole holder of record of the Common Stock. Midgard, a subsidiary of the Company, is party to a credit agreement which places certain restrictions on its ability to make or declare certain payments, advances and loans specified therein, including dividends to the Company. (For a further description of such credit agreement, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Significant Events 1995".) While these restrictions could impact the ability of the Company to pay dividends on its Common Stock, the Company has paid no such dividends since 1987, and cash flows are currently being dedicated to exploration and development projects rather than to such payment. The Company intends to continue paying regular quarterly dividends on its only other equity issue currently outstanding, the $2.50 Preferred Stock. 17 ITEM 6. SELECTED FINANCIAL DATA. FIVE-YEAR FINANCIAL SUMMARY (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
NINE MONTHS THREE MONTHS ENDED ENDED DECEMBER 31, MARCH 31, 1996 1995 1995 1994 1993 1992 -------- ------------ ------------ -------- -------- -------- OPERATIONS Sales and operating revenues............... $ 718.0 $ 463.8 $ 142.5 $ 682.1 $ 786.7 $ 718.4 Net income (loss) before extraordinary item and cumulative effect of change in accounting principle.............. 20.6 (73.7) (56.9) (22.7) (37.9) 74.2 Extraordinary item...... (5.6) (7.1) Cumulative effect of change in accounting principle.............. (4.4) -------- -------- -------- -------- -------- -------- Net income (loss)....... $ 15.0 $ (73.7) $ (56.9) $ (22.7) $ (49.4) $ 74.2 FINANCIAL POSITION Current assets.......... $ 314.7 $ 266.4 $ 394.6 $ 441.9 $ 404.7 $ 391.2 Current liabilities..... 354.8 306.4 224.3 171.0 263.4 327.9 Properties and equipment, less accumulated depreciation, depletion and amortization....... 2,022.2 2,363.6 1,110.7 1,088.4 1,305.6 1,138.3 Total assets............ 2,456.5 2,716.8 1,692.1 1,706.7 1,987.4 1,811.6 Long-term debt, including current portion................ 1,270.7 1,295.5 975.6 975.6 1,055.1 829.4 Deferred income taxes... 502.7 551.2 199.7 199.3 198.3 152.9 Redeemable preferred stock.................. 62.5 125.0 125.0 125.0 250.0 250.0 Stockholders' equity.... 148.9 240.0 13.5 91.1 147.9 171.6 OTHER DATA Expenditures for properties and equipment--including dry hole costs......... $ 203.3 $ 137.4 $ 53.6 $ 166.2 $ 340.0 $ 261.1 Total exploration and development expenditures (whether capitalized or expensed).............. 219.0 165.5 60.6 197.1 376.8 256.7 Preferred dividends paid................... 27.4 28.8 9.6 43.6 41.7 41.7 Depreciation, depletion and amortization....... 168.9 142.1 29.9 140.2 153.6 174.4 PER COMMON SHARE Net income (loss) before extraordinary item and cumulative effect of change in accounting principle.............. $ $ $ (0.49) $ (0.49) $ (0.60) $ 0.27 Extraordinary item...... (0.05) Cumulative effect of change in accounting principle.............. (0.03) -------- -------- -------- -------- -------- -------- Net income (loss)....... $ $ $ (0.49) $ (0.49) $ (0.68) $ 0.27
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Significant Events 1996 On June 18, 1996, Maxus Energy Corporation (the "Company" or "Maxus") announced a reorganization which included the sale of three of its subsidiaries holding certain Bolivian and Venezuelan assets to YPF Sociedad Anonima ("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 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 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. 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 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 had 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 an indirect, wholly owned subsidiary of YPF, YPF Holdings, Inc. ("Holdings"), of approximately $56 million to redeem the $4.00 Preferred Stock. As a further part of the reorganization, the Company 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 (the "Contribution Agreement") 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 "Environmental Matters" below and a declaratory judgment action discussed in "Legal Proceedings" below, and the Company transferred to CLH its remaining rights to recover costs under a cost-sharing arrangement with Ultramar Diamond Shamrock 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 $107 million, an increase to 19 deferred income taxes of $37 million and an increase to paid-in capital of $70 million. At December 31, 1996, the outstanding funding guarantee totaled $103 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 Agreement of Merger ("Merger Agreement"). During 1996, YPF made capital contributions of $8 million to CLH. Effective August 13, 1996, YPF transferred ownership of its shares of the Company's Common Stock to Holdings. Significant Events 1995 On June 8, 1995, a special meeting of the stockholders of the Company was held to approve the Merger Agreement dated February 28, 1995, between the Company, YPF Acquisition Corp. ("YPFA Corp.") and YPF. The holders of the Company's common stock, $1.00 par value per share (the "Shares" or "Common Stock"), and $4.00 Preferred Stock (together with the Shares, the "Voting Shares") approved the Merger Agreement, and YPFA Corp. 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 YPFA Corp. for all the outstanding Shares at $5.50 per Share. Pursuant to the Offer, in April 1995 YPFA Corp. 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 YPFA Corp., 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 total amount of funds required by YPFA Corp. 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, YPFA Corp. assumed all outstanding obligations of the Company. On April 5, 1995, YPFA Corp. entered into a credit agreement with lenders for which The Chase Manhattan Bank (National Association) ("Chase") acted as agent, pursuant to which the lenders extended to YPFA Corp. a credit facility for up to $550 million (the "Purchaser Facility"). On April 5, 1995, YPFA Corp. borrowed $442 million under the Purchaser Facility and received a capital contribution of $250 million from YPF. YPFA Corp. 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 "Indonesian 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 20 receive cash in the Merger. In December 1996, International, the parent of Holdings, loaned the Company approximately $175 million to repay the Indonesian Facility. Significant Events 1994 Maxus responded to many financial and operational challenges in 1994 which culminated with the Company's agreement to merge with YPF in 1995. Financially, significant natural gas and crude oil price declines in 1994 contributed to Maxus' decision to streamline operations by decreasing overhead and operating expenses, lowering program spending and redeeming certain preferred stock. During the second quarter of 1994, the Company also sold its interest in Diamond Shamrock Offshore Partners Limited Partnership ("Offshore Partners") and certain producing oil and gas properties in Maxus' U.S. Southern Division for $325 million net (the "Divested Properties"). Additionally, the Company sold its geothermal subsidiary, Thermal Power Company, for approximately $58 million net in cash and a note for $6.5 million. A portion of the proceeds from these sales was used to reduce debt and redeem 625,000 shares of the $9.75 Preferred Stock for $63 million. Operationally, the Company initiated production from all three of Maxus' South American operations--Ecuador, Bolivia and Venezuela. The Sunray gas plant experienced its first full year of operation and achieved the operating efficiencies and cost savings (approximately $14 million annually) that had been anticipated. Additionally, net production from the Northwest Java gas project averaged approximately 44 million cubic feet per day ("mmcfpd") during 1994, resulting in $30 million of additional revenues. Results for the Twelve Months Ended December 31, 1996 For the twelve months ended December 31, 1996, Maxus reported net income of $15 million. During 1996, performance improved as higher crude oil, natural gas and natural gas liquids ("NGL") prices, higher natural gas sales volumes and lower costs more than offset higher income taxes resulting from higher operating income. Comparative information for the twelve months ended December 31, 1995 is not presented due to the Merger with YPF which was effective April 1, 1995. Sales and Operating Revenues. Sales and operating revenues for the twelve months ended December 31, 1996 were $718 million composed of $404 million from Maxus' Indonesian operations, $233 million from U.S. operations and $81 million from South American operations. Maxus' net worldwide crude oil sales volumes averaged 59 thousand barrels per day ("mbpd") during the twelve-month period ended December 31, 1996, which were comprised of 44 mbpd from Maxus' Indonesian operations, 14 mbpd from South American operations and one mbpd from U.S. operations. Maxus' net worldwide crude oil sales volumes declined four mbpd from an average of 63 mbpd during the twelve months ended December 31, 1995 due primarily to lower net crude oil sales in Indonesia. In Northwest Java, 1996 average net crude oil sales declined four mbpd compared to the same period last year due to natural declines in gross crude oil production and lower cost recovery. In Southeast Sumatra, 1996 average net crude oil sales declined six mbpd compared to the same period in 1995 due primarily to lower cost recovery. During 1996, natural declines in gross crude oil production in Southeast Sumatra were offset by new crude oil production resulting from the introduction of horizontal well technology and use of high volume electrical submersible pumps combined with an active drilling program. Partially offsetting the overall decline in Indonesia, average net crude oil sales in South America increased five mbpd from nine mbpd in 1995. In Ecuador, 1996 average net crude oil sales of 10 mbpd were two mbpd higher than 1996 primarily as a result of crude oil production from the Amo, Iro, Ginta and Diami fields. Although Maxus owned an interest in its Bolivian operations for only six months in 1996, average net crude oil sales increased three mbpd from one mbpd for the year ended December 31, 1995 due primarily to the sale of approximately nine months of crude oil inventory to the Bolivian Government during the first quarter of 1996. During the twelve months ended December 31, 1996, Maxus' average worldwide crude oil price of $19.22 per barrel ("bbl") increased $2.77 per bbl from $16.46 per bbl in 1995. 21 During the twelve months ended December 31, 1996, average U.S. natural gas sales volumes of 182 mmcfpd increased 11 mmcfpd over the same period a year ago. Continued successful Midgard infill drilling more than offset natural declines from the area during 1996. In the next several years, Maxus expects its Midgard infill drilling program to continue to offset any natural declines. Average U.S. natural gas prices rose significantly, from $1.48 per thousand cubic feet ("mcf") in 1995 to $1.96 per mcf 1996, although this price increase was net of losses of $13 million on natural gas price swap agreements and futures contracts. In Northwest Java, 1996 average net natural gas sales volumes of 69 mmcfpd increased 13 mmcfpd compared to the same period last year as a result of higher natural gas production in connection with new natural gas sales contracts as well as increased demand from existing contracts. Average Northwest Java natural gas prices rose slightly, from $2.63 per mcf in 1995 to $2.65 per mcf in 1996. Average 1996 net NGL sales volumes in the U.S. of 19 mbpd were relatively flat compared to the same period last year. Annual 1996 average U.S. NGL prices increased from $10.46 per bbl in 1995 to $13.23 per bbl in 1996, although this price increase was net of losses of $10 million on NGL price swap agreements. Costs and Expenses. Costs and expenses were $640 million during the twelve months ended December 31, 1996. Costs and expenses during this period included operating expenses of $202 million; gas purchase costs of $74 million; exploration expenses of $35 million; depreciation, depletion and amortization ("DD&A") of $169 million; interest and debt expenses of $135 million and other costs and expenses totaling $25 million. DD&A of $169 million during the twelve-month period ended December 31, 1996, included $43 million of additional DD&A reflecting the impact of the 1995 purchase price allocation which increased the book value of the Company's oil and gas properties and equipment. In the twelve-month period ended December 31, 1996, interest and debt expenses of $135 million included $31 million of interest expense associated with the Midgard and Indonesian credit facilities. Also included in interest and debt expenses during this period was $9 million of interest associated with the accretion of discount on the Company's long-term debt which was outstanding prior to the Merger. In 1995, these borrowings were recorded at their fair market value in the purchase method of accounting which resulted in a reduction in their carrying value of $115 million. This reduction in carrying value will continue to be amortized to interest expense over the remaining term of the borrowings. Other Revenues, Net. For the twelve months ended December 31, 1996, other revenues, net of $20 million included interest income, a refund from the United Mine Workers Association Combined Benefit Fund of assessments stemming from a discontinued business and litigation proceeds partially offset by a net loss on the sale of fixed assets, a contract signing bonus in Ecuador (See "Future Outlook" below), a performance bonus paid to all Company employees in connection with an incentive program designed to improve the Company's financial performance and certain other miscellaneous expenses. Income Taxes. Income tax expense of $78 million for the twelve-month period ended December 31, 1996, included $99 million of current income tax expense primarily from Indonesian operations partially offset by a $21 million deferred tax benefit due primarily to the higher DD&A associated with the increase in book value of the Company's oil and gas properties and equipment as a result of the purchase price allocation in 1995. In the future, the Company expects to realize additional deferred tax benefits as a result of the higher DD&A. Extraordinary Item. In December 1996, the Company used the proceeds of a $175 million loan from International to repay the Indonesian Facility. Unamortized debt issue costs associated with this early retirement were recorded as an extraordinary loss of $6 million, net of taxes. The tax impact of this transaction was less than $.1 million. Results for the Nine Months Ended December 31, 1995 For the nine months ended December 31, 1995, Maxus reported a net loss of $74 million. Comparative information for the nine months ended December 31, 1994, is not presented due to the Merger with YPF which was effective April 1, 1995. 22 Sales and Operating Revenues. Sales and operating revenues for the nine months ended December 31, 1995, were $464 million composed of $298 million from Maxus' Indonesian operations, $129 million from U.S. operations and $37 million from South American operations. Maxus' net worldwide crude oil sales volumes averaged 64 mbpd during the nine-month period ended December 31, 1995, which were comprised of 53 mbpd from Maxus' Indonesian operations, 10 mbpd from South American operations and one mbpd from U.S. operations. Maxus' net worldwide crude oil sales volumes increased from an average of 60 mbpd in the third quarter of 1995 to an average of 73 mbpd in the fourth quarter of 1995 due primarily to the recognition of cumulative year-to-date production from the Southern Amo Field in Ecuador in the fourth quarter of 1995, as this production had not previously been approved by the Ecuadorian government, and the sole crude oil sale in Bolivia in October 1995. Despite natural declines in gross crude oil production in Indonesia over the nine months ended December 31, 1995, Indonesian crude oil sales volumes increased slightly due primarily to higher cost recovery. During the nine months ended December 31, 1995, Maxus' average worldwide crude oil price was $16.31 per bbl. During the nine-month period ended December 31, 1995, U.S. net natural gas sales volumes averaged 172 mmcfpd and U.S. natural gas prices averaged $1.49 per mcf. Although U.S. natural gas sales volumes remained relatively flat over the nine months ended December 31, 1995, the success of the 1995 Midgard infill drilling program offset the natural declines from the area. Average U.S. natural gas prices rose from $1.40 per mcf in the third quarter of 1995 to $1.64 per mcf in the fourth quarter of 1995 which favorably impacted revenues $4 million. During the nine-month period ended December 31, 1995, Northwest Java net natural gas sales volumes averaged 61 mmcfpd and Northwest Java natural gas prices averaged $2.62 per mcf. During the nine months ended December 31, 1995, average NGL net sales volumes in the U.S. were 18 mbpd and U.S. NGL prices averaged $10.49 per bbl. Costs and Expenses. Costs and expenses were $536 million during the nine months ended December 31, 1995. Costs and expenses during this period included operating expenses of $174 million; gas purchase costs of $41 million; exploration expenses of $51 million; DD&A of $142 million; interest and debt expenses of $105 million and other costs and expenses totaling $23 million. DD&A of $142 million during the nine-month period ended December 31, 1995, included $43 million of additional DD&A reflecting the impact of the purchase price allocation which increased the book value of the Company's oil and gas properties and equipment. The book value of oil and gas properties and equipment increased approximately $1.3 billion as a result of the purchase price allocation. In the nine-month period ended December 31, 1995, interest and debt expenses of $105 million included $27 million of interest expense associated with the Purchaser, Midgard and Indonesian credit Facilities. Also included in interest and debt expenses during this period was $6 million of interest associated with the accretion of discount on the Company's long-term debt which was outstanding prior to the Merger. These borrowings were recorded at their fair market value in the purchase method of accounting which resulted in a reduction in their carrying value of $115 million. This reduction in carrying value will be amortized to interest expense over the remaining term of the borrowings. Other Revenues, Net. During the nine months ended December 31, 1995, other revenues, net were $7 million which included $10 million of interest income, a $2 million gain which represented the final settlement of the Company's sole interest rate swap agreement prior to its termination and a $2 million gain recognized on the sale of U.S. Treasury notes partially offset by a $3 million production bonus payment stemming from the Company's Indonesian operations and $5 million of accrued expenses. In the future, the Company anticipates recognizing less interest income as a result of maintaining only minimal balances of cash, cash equivalents and short-term investments to cover working capital fluctuations. Income Taxes. Income tax expense of $9 million for the nine-month period ended December 31, 1995, included $63 million of current foreign income tax expense primarily from Indonesian operations partially offset 23 by a $49 million deferred tax benefit due primarily to the higher DD&A associated with the increase in book value of the Company's oil and gas properties and equipment as a result of the purchase price allocation. In addition, the Company received $5 million of interest income on U.S. federal income tax refunds. This interest income was not previously accrued in prior periods. Comparison of Results Three Months Ended March 31, 1995 vs. Three Months Ended March 31, 1994 Maxus reported a net loss of $57 million for the first quarter of 1995 compared to a net loss of $11 million for the first quarter of 1994. The first quarter 1995 results reflect $42 million of pre-Merger costs incurred by the Company prior to the Merger. Such costs included expenses associated with financial consulting and legal services, severance payments pursuant to change of control agreements and payments for surrender of stock options and restricted stock. Sales and Operating Revenues. Sales and operating revenues for the first quarter of 1995 were $143 million, compared to $187 million for the same 1994 period. The loss of production from the Divested Properties which were sold in the second quarter of 1994 and lower volumes of purchased gas accounted for $45 million of the revenue decline. Additionally, U.S. natural gas prices fell, which also unfavorably impacted revenues $12 million for the three months ended March 31, 1995. These declines were partially offset by first quarter 1995 revenue of $8 million from South America. Initial sales from the Company's South American operations were recorded in the third quarter 1994. Net worldwide crude oil production averaged 60 mbpd in the first quarter 1995, compared to 69 mbpd in the same quarter in 1994. Average net domestic crude oil volumes declined four mbpd during the period due to the loss of production from the Divested Properties resulting in lower revenues of $5 million. Net crude oil sales from the Company's Indonesian operations were also down an average of 12 mbpd during the period primarily as a result of lower entitlements due to higher crude oil sales prices and lower production. Offsetting these declines, average net production from South America of seven mbpd provided an additional $8 million of revenues in 1995. Average net U.S. natural gas sales for the first quarter of 1995 were 167 mmcfpd, a decrease of 208 mmcfpd as compared to the first quarter 1994 resulting in lower revenues of $42 million. The decline was driven by the loss of production from the Divested Properties and lower volumes of gas purchased for resale. The average gas price received in the U. S. was $1.45 per mcf in the first quarter 1995 as compared to $2.24 per mcf in the same 1994 period. Average net Northwest Java natural gas volumes of 40 mmcfpd in the first quarter 1995 were eight mmcfpd higher than the first quarter 1994. Natural gas sales prices improved to an average of $2.65 per mcf during the first quarter 1995 from $1.81 per mcf during the same period in 1994 due to the change in contract terms which increased the price received for "old" gas production from $0.20 per mcf to $2.65 per mcf effective January 1, 1995. The higher Northwest Java natural gas volumes coupled with the higher average natural gas price resulted in increased revenues of $4 million in the first quarter of 1995. Average net NGL sales in the U. S. for the first quarter 1995 were 18 mbpd, a slight decrease over the first quarter of 1994. The average sales price for U.S. NGL in the first quarter of 1995 was $10.38 per barrel, an increase of $1.15 per bbl from 1994. Costs and Expenses. Costs and expenses for the first quarter of 1995 were $190 million which were relatively flat compared to the first quarter of 1994. Costs and expenses for the first quarter of 1995 included Maxus pre-Merger costs of $42 million which were partially offset by lower gas purchase costs of $31 million when compared to the first quarter of 1994. Gas purchase costs were $31 million lower in the first quarter of 1995 as compared to first quarter 1994 due to the lower volumes of gas purchased to aggregate with the production from the Divested Properties, the reduction in volumes of gas purchased for resale and lower natural gas prices. 24 DD&A of $30 million for the first quarter 1995 was $8 million lower than the same period in 1994. Approximately $11 million of this decline represents DD&A from the Divested Properties included in the first quarter of 1994. Partially offsetting this decline was $4 million of DD&A in the first quarter of 1995 associated with South American operations which did not go into production until late 1994. Income Taxes. Income tax expense was $19 million and $16 million in the first quarters of 1995 and 1994, respectively. The increase in income tax expense was primarily due to higher Indonesian taxes as a result of increased taxable income from the Company's Indonesian operations. Results for the Twelve Months Ended December 31, 1994 Maxus reported a net loss of $23 million in 1994. Sales and Operating Revenues. 1994 sales and operating revenues of $682 million were negatively impacted due primarily to the loss of production from the Divested Properties and lower volumes of purchased gas which were aggregated and sold with the production from the Divested Properties. Additionally, worldwide oil and gas prices fell, which further compounded the loss of revenues. However, initial production from South America and new gas production from Northwest Java added $54 million to revenues during 1994, partially offsetting the overall negative revenue variances. The Company's average net crude oil production was 67 mbpd in 1994 which was comprised of 60 mbpd from Maxus' Indonesian operations, five mbpd from South American operations and two mbpd from U.S. operations. Initial production from South American operations commenced during 1994 which favorably impacted revenues by $24 million. Crude oil volumes in the United States were negatively impacted by the loss of production from the Divested Properties. Additionally, crude oil sales from the Company's Indonesian operations reflected the unfavorable impact of temporary production problems in Northwest Java, which were corrected. Maxus' 1994 average worldwide crude price hit a five-year low of $15.31 per bbl. Average net U.S. natural gas sales volumes of 275 mmcfpd in 1994 included a decline attributable to the loss of production from the Divested Properties and a decrease in purchased gas volumes which were aggregated and sold with the production from the Divested Properties. Maxus' U.S. natural gas prices averaged $1.95 per mcf in 1994. Average net Northwest Java natural gas sales volumes were 44 mmcfpd during 1994. The Company realized an additional $30 million of revenues during 1994 from the Northwest Java gas project, which came on-stream in fourth quarter 1993. Average net NGL sales in the U.S. were 17.9 mbpd in 1994 and prices received averaged $10.07 per barrel. Costs and Expenses. Costs and expenses, excluding restructuring, were $728 million in 1994. Costs and expenses during this period included operating expenses of $243 million; gas purchase costs of $117 million; exploration expenses of $36 million; DD&A of $140 million; interest and debt expenses of $97 million; an environmental studies and remediation accrual of $60 million and other costs and expenses totaling $35 million. Overall, the favorable impact on costs and expenses related to the Divested Properties was partially offset by additional costs and expenses incurred in South America due to the start-up of production in Ecuador, Bolivia and Venezuela. The Company increased its reserve for environmental liabilities in 1994 by $60 million, primarily in response to the EPA's proposed chromium clean-up standards and for additional costs expected to be incurred at the Company's former Newark, New Jersey plant site. Restructuring. The 1994 results reflect a $101 million pre-tax net benefit from the Company's restructuring activities, which included a pre-tax gain of $202 million from the sale of the Divested Properties. This gain was 25 partially offset by restructuring costs, including a non-cash, pre-tax $70 million write-off associated with the Company's undeveloped Alaska coal leases. The restructuring also included costs associated with staff reductions and the write-off of non-producing assets outside the Company's core operating areas. Other Revenues, Net. Other revenues, net of $9 million in 1994 included primarily interest income partially offset by a net loss on the sale of the Company's geothermal subsidiary, Thermal Power Company. Income Taxes. The Company's provision for income taxes of $87 million in 1994 was comprised primarily of current and deferred foreign taxes in Indonesia. Liquidity and Capital Resources Liquidity refers to the ability of an enterprise to generate adequate amounts of cash to satisfy its financial needs. Maxus' primary needs for cash are to fund its exploration and development program, service debt, pay existing trade obligations, meet redemption obligations on redeemable preferred stock and pay dividends to preferred stockholders. The Company's primary sources of liquidity have been from operating activities, asset sales, debt financing, equity issuances, and capital contributions and cash advances from YPF and its subsidiaries. Pursuant to the Merger Agreement, in the event that 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 and the $2.50 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 Indonesian 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 non-redeemable preferred stock after the Merger Date. The foregoing obligations of YPF (the "Keepwell Covenant") will survive until June 8, 2004. During the twelve months ended December 31, 1996, YPF made capital contributions to the Company and CLH (see "Significant Events 1996") in the aggregate amount of $64 million and $8 million, respectively. These amounts represent the cumulative contribution received by Maxus and CLH from YPF pursuant to the terms of the Keepwell Covenant. Based on current projections, it is anticipated that YPF will make capital contributions to CLH in the aggregate amount of approximately $25 to $50 million under the Keepwell Covenant during 1997. No such capital contributions to the Company are projected during 1997. The Midgard Facility contains restrictive covenants including limitations upon the sale of assets, mergers and consolidations, the creation of liens and additional indebtedness, investments, dividends, the purchase or repayment of subordinated indebtedness, transactions with affiliates and modifications to certain material contracts. The obligors under the Midgard Facility may not permit (a) consolidated tangible net worth to be less than $200 million, plus (or minus) the amount of any adjustment in the book value of assets resulting from the merger of YPFA Corp. into the Company, (b) the ratio of consolidated cash flow to consolidated debt service to be less than 1.1 to 1.0 at the end of any fiscal quarter and (c) the ratio of consolidated cash flow to consolidated interest expense to be less than 1.25 to 1.0 at the end of any fiscal quarter. In addition, mandatory prepayments of the Midgard Facility may be required in connection with certain asset sales and casualty losses, upon the issuance of subordinated indebtedness and in 1997 and in each year thereafter if, after semi-annual review, the agent and the lenders determine that a borrowing base deficiency exists. No borrowing base deficiencies existed at December 31, 1996. Maxus has guaranteed the obligations of Midgard under the Midgard Facility (the "Midgard Guaranty"). The Midgard Guaranty contains restrictions upon mergers and consolidations, the creation of liens and the business activities in which Maxus and its subsidiaries may engage. In addition, Midgard is required to be a wholly owned subsidiary of Maxus, except to the extent YPF or a subsidiary of YPF (other than Maxus or a subsidiary of Maxus) makes capital contributions to Midgard. 26 In management's opinion, cash on hand and cash from operations will be inadequate to fund the 1997 program spending budget, service debt, meet redemption obligations on redeemable preferred stock 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. Operating Activities. For the twelve months ended December 31, 1996, net cash provided by operating activities was $152 million. Excluding the change in working capital requirements of $27 million, net cash from operating activities was $179 million for the year. Additional working capital was required primarily due to the recognition of deferred revenue in Northwest Java and Bolivia during 1996 as well as higher receivables in Ecuador. During the nine months ended December 31, 1995, net cash provided by operating activities was $57 million. Excluding the change in working capital requirements, net cash from operating activities was $44 million during this period. Working capital requirements provided an additional $13 million primarily as a result of U.S. federal income tax refunds of approximately $60 million. These tax refunds were partially offset by lower accrued liabilities of $32 million due primarily to payment of Maxus pre-Merger costs coupled with higher inventories of $13 million. Net cash provided by operating activities during the three months ended March 31, 1995, was $62 million of which $18 million was provided by operating activities and $44 million was from working capital. Working capital was favorably impacted by higher accrued liabilities of $26 million of which $11 million was due to higher accrued interest, lower oil and gas receivables of $24 million and a U.S. federal income tax refund of $9 million partially offset by lower accounts payable of $15 million. Investing Activities. Expenditures for properties and equipment, including dry hole costs, were $203 million in 1996, a slight increase from 1995. During 1996, the Company focused its spending efforts on developmental drilling in established areas of the United States, Indonesia and Ecuador with the intention of increasing reserves and production in already proven areas. In the U.S., the Company drilled over 100 development wells during 1996, which contributed to the 13% increase in total net production as compared to last year. In addition, due to the increased drilling and detailed engineering work, approximately 174 billion cubic feet of gas reserves were added. During 1996, natural declines in gross crude oil production in the Southeast Sumatra contract area of Indonesia were offset by new crude oil production resulting from the introduction of horizontal well technology combined with an active drilling program. Expenditures for the year also included the acquisition of a 25% interest in the Guarapiche block in Venezuela for $27 million, which was subsequently sold to International (see "Significant Events 1996"). During 1995, the Company concentrated its capital spending in core areas of the United States, Indonesia and Ecuador plus development of the emerging areas: the Mamore Block in Bolivia and the Quiriquire Block in Venezuela. Spending in 1995 increased modestly compared to 1994, with the largest increase occurring in the U.S. due to the implementation of an aggressive program of infill drilling designed to increase production and cash flow. Only Ecuador experienced lower capital spending in 1995 as spending for major infrastructure and facilities was completed in 1994. Approximately 45% of the 1994 capital spending was for development of oil reserves in South America. Initial production began in the third quarter of 1994 in Ecuador, Bolivia and Venezuela. In 1996 the Company sold Maxus Bolivia, Maxus Venezuela, and Maxus Guarapiche to YPF and its subsidiaries for approximately $293 million. The proceeds were used for general corporate purposes, including the redemption of the $4.00 Preferred Stock on August 13, 1996 for $221 million (see "Significant Events 1996"). The Company also received approximately $14 million from the sale of non-oil and gas properties, including the Company's ranch and other real estate holdings. 27 In December 1995, the Company sold its overriding royalty interest in the Recetor Block in Colombia to an unrelated party for $25 million. There was no gain or loss recognized on this transaction. On April 25, 1994, Offshore Partners sold its interests in Main Pass Blocks 72, 73 and 74. On April 26, 1994, Maxus and its subsidiaries sold all of their partnership interests in Offshore Partners. In the second quarter of 1994, Maxus also sold the McFarlan Field and Grand Isle Block 25, both producing oil and gas properties. In total, the Company received $325 million of proceeds and recorded a pre-tax gain of $202 million from these transactions. A portion of the proceeds from these sales was used to reduce senior debt by $70 million net and to redeem $63 million of the $9.75 Preferred Stock due in February 1995. During the second quarter of 1994, Maxus Bolivia signed an agreement to take BHP Petroleum as a partner in its Bolivian oil development project. The Company received $10 million from BHP in exchange for a 50% interest in the project. Also during the second quarter of 1994, Maxus Venezuela signed an agreement with BP Exploracion de Venezuela S.A., granting BP a 45% interest in the Quiriquire Unit in eastern Venezuela. Maxus Venezuela remained the operator with a 50% interest and Otepi Consultores, a Venezuelan company, held the remaining 5%. Both Maxus Bolivia and Maxus Venezuela were sold to YPF in 1996 (see "Significant Events 1996"). The Company sold its geothermal subsidiary, Thermal Power Company, in September 1994. The sale was for $58 million net in cash and a $7 million promissory note due from the purchaser in 1997. The Company recorded a loss of $13 million on the transaction. In 1996, the Company released $47 million of restricted cash of which $26 million had been backing trade letters of credit, $9 million was for assets held in trust as previously required by certain insurance policies, and $8 million had been required by the Indonesian Facility. During 1995, the Company was able to release a significant portion of its restricted cash, of which $48 million supporting letters of credit were released and $17 million of assets held in trust as required by certain insurance policies were released due to YPF's guarantees. Additionally, in 1995, the Company restricted $8 million as required by the Indonesian Facility. During 1994, $36 million in restricted cash backing letters of credit in Venezuela were released when the Company took on a partner and reduced its interest to 50%. During 1994, the Company purchased $112 million of short-term investments with the proceeds from the sales of assets. To partially fund the capital program budget and pay Merger-related costs in 1995, the Company liquidated all its short-term investments. Additionally, the Company sold its remaining long-term investment in U.S. Treasury notes for $31 million realizing a gain on the sale of $2 million. Financing Activities. In 1996 the Company received capital contributions in the aggregate amount of $64 million from YPF, for which the Company issued to YPF an additional 11,636,363 Shares at $5.50 per Share. The proceeds from this issuance were used for general corporate purposes including the mandatory redemption of 625,000 shares of the $9.75 Preferred Stock for $63 million. As discussed in "Significant Events 1996", the Company also redeemed its outstanding $4.00 Preferred Stock for $221 million (including accrued dividends of approximately $3 million) using proceeds provided by the sale of the Company's Bolivian and Venezuelan assets. International advanced the Company $175 million in the form of a demand note, bearing 5.75% interest compounded annually, to repay the Indonesian Facility. Additionally, the Company repaid $34 million of medium-term notes, which matured in 1996. The Company and YPF entered into a loan agreement (the "Loan Agreement") during 1996 to facilitate short-term loans by YPF to the Company and short- term loans by the Company to YPF of excess cash balances. At December 31, 1996, there were no loans outstanding under the Loan Agreement. It is expected that loans will be made by the parties under the loan agreement during 1997; however, the number and amounts thereof are not presently known. During 1995, most of Maxus' financing activity was impacted by the Merger. The Company received $851 million from the issuance of debt under the Purchaser Facility and the Midgard and Indonesian credit facilities 28 and a $250 million capital infusion from YPF to partially fund the Merger. In connection with the Merger, the Company also paid $14 million to redeem rights attached to Shares, repaid the Purchaser Facility and, pursuant to the Merger, either assumed or paid $746 million of purchase consideration for the Shares outstanding plus transaction costs. During the third quarter of 1995, the Company recorded a $2 million gain which represented the final settlement of the Company's sole interest rate swap agreement prior to its termination. This gain was recorded in other revenues, net. The Company also received a $5 million termination payment, which was deferred. During 1994, the Company was able to take advantage of lower interest rates and, at the same time, to extend the average debt maturities. Accordingly, the Company issued $101 million of additional long-term debt. Debt issuances, along with a portion of the proceeds from asset sales, were used to repay approximately $170 million of higher interest debt obligations due 1994 and beyond and to prepay $63 million of $9.75 Preferred Stock due in February 1995. In February 1994, the Company redeemed 625,000 shares of $9.75 Preferred Stock for $63 million, using proceeds received in 1993 from the issuance of the $2.50 Preferred Stock in 1993. Environmental Matters 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. 29 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 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 and CLH on the Company's behalf under this cost sharing arrangement was about $42 million as of December 31, 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 Henkel and the Company has appealed the judgment (see "Legal Proceedings"). In connection with the spin-off of Diamond Shamrock R&M, Inc., now known as Ultramar Diamond Shamrock Corporation ("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. Thereafter, such ongoing costs were borne one-third by DSI and two-thirds by the Company until DSI had borne an additional $47.5 million. As of December 31, 1996, DSI had fulfilled its remaining responsibility under the cost-sharing arrangement, and it has no further obligation thereunder. During the twelve months ended December 31, 1996, the Company spent $8 million in environmental related expenditures in its oil and gas operations. Expenditures for 1997 are expected to be approximately $13 million. 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 arrangement. At December 31, 1996, reserves for the environmental contingencies discussed herein totaled $101.6 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 CLH (see "Significant Events 1996") effective as of August 1, 1996. In connection with this transfer, CLH assumed 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 transferred to CLH its then 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 December 31, 1996, the outstanding funding guarantee totaled $102.6 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. 30 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 late 1997 or in 1998, cost approximately $23 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 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 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, 1996. 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 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 31 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 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 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 is 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 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. 32 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. 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. 3. Chemical Control Site; Elizabeth, New Jersey. The PRPs and the EPA have settled the federal claims for cost recovery and site remediation, and remediation is now complete. 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. Based on 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 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. 33 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 December 31, 1996, 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 approximately $4 million reserved. The Company cannot predict with any certainty what portion of the approximately $29 million unreserved portion of the $33 million amount remaining at December 31, 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. Future Outlook Maxus currently projects total program spending (capital expenditures plus exploration expenses) for 1997 to be approximately $221 million, compared to $233 million in 1996. The planned allocation is Indonesia $110 million, Midgard (U.S.) $66 million, Ecuador $26 million and domestic and overseas new ventures $19 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. 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. In addition to the general reorganization discussed in "Significant Events 1996" 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 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 the Block 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. 34 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 eventual permanent increase 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 the Block 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 produced 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 produces 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 its intention to solicit bids in early 1997 for the construction of a new pipeline system and expects completion of the pipeline within 18 to 24 months from the date of execution of a contract. It is unknown what impact, if any, a recent change in the country's political leadership will have on these plans to solicit such bids. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item appears on pages F-1 to F-23 and F-27 to F-70 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Executive Officers of the Company The following table sets forth certain information as of March 1, 1997 concerning the executive officers of the Company.
SERVED AS AN OFFICER NAME POSITION WITH THE COMPANY AGE SINCE ---- ------------------------- --- ------- Roberto Monti............. President and Chief Executive Officer* 58 1995 W. Mark Miller............ Executive Vice President and Treasurer 43 1995 Michael C. Forrest........ Senior Vice President 63 1992 David A. Wadsworth........ Vice President, Legal 47 1995 Linda R. Engelbrecht...... Controller 41 1995
Officers are elected annually by the Board of Directors (sometimes referred to as the "Board") and may be removed at any time by the Board. There are no family relationships among the executive officers listed and there are no arrangements or understandings with third parties pursuant to which any of them were elected as officers. Certain information regarding the principal occupations and employment of each of the officers named above during the prior five years is set forth below. - ---------- * YPF, the Company's indirect parent company, has announced that Mr. Monti will be presented for election as CEO and executive vice president of YPF as of April 30, 1997. Mario B. Rosso is expected to be nominated as president and chief executive officer of Maxus effective as of Mr. Monti's assumption of such position with YPF, and since February 15, 1997 during Mr. Monti's absence, Mr. Rosso acts as chief executive officer. Mr. Rosso, age 55, joined the Company as general manager of the Company's Indonesian operations, the position he currently holds, on May 1, 1996. Prior to joining the Company, Mr. Rosso was Vice President, Worldwide Operations of GeoQuest, an exploration and production software products and information technology services division of Schlumberger Limited. 35 Mr. Monti was elected President and Chief Executive Officer and a director of the Company in 1995. Prior to joining Maxus, Mr. Monti served as the President of Dowell, a division of Schlumberger Limited. Since joining the oilfield services company in 1963, Mr. Monti has held various positions with Schlumberger, including president and vice president of various divisions or subsidiaries. Mr. Miller was elected Executive Vice President and Treasurer of the Company in 1995. Mr. Miller joined a former subsidiary of Maxus in 1981 as Manager, Taxes and has held various positions with the Company since such time, including Director, Exploration and Production Taxes; Director, Operations Auditing; General Manager, Indonesia; and Vice President of the Company. Mr. Forrest joined the Company in 1992 as special assistant to the Chairman and later that year was elected Vice Chairman and Chief Operating Officer. Prior to 1992, he was with Shell U.S.A. for more than five years, last serving as President of its subsidiary, Pecten International Company. Mr. Forrest was named Senior Vice President, Business Development of the Company in 1994. Mr. Forrest has been a Senior Vice President of the Company since 1994. Mr. Wadsworth was elected Vice President, Legal of the Company in 1995. Mr. Wadsworth joined Natomas Company, a former subsidiary of Maxus, in 1979. He has served in various positions with the Company, including Associate General Counsel and Corporate Secretary, since such time. Mrs. Engelbrecht was elected Controller of the Company in 1995. She joined a former subsidiary of the Company in 1978 as a financial associate and has held various positions with the Company, including Director of Financial Reporting and Assistant Controller, since such time. Directors of the Company Certain information regarding each director, including his age, is set forth below. Each director is elected at the annual meeting of stockholders for a term of one year. CHARLES L. BLACKBURN: 69, a director of the Company since 1986. For more than five years prior to his retirement in 1995, he was also the Chairman, President and Chief Executive Officer of Maxus. He is currently an international consultant for the Company. Mr. Blackburn also serves as a director of Lone Star Technologies, Inc. and Landmark Graphics Corporation. CEDRIC BRIDGER: 61, a director of the Company since 1995. Mr. Bridger has been Vice President, Finance and Corporate Development of YPF since 1992. From 1989 to 1992, he was employed by CBV Industrias Mecanicas in Brazil, last serving as Marketing Manager. Previously, he was associated with Hughes Tool Company from 1964 to 1989. GEORGE L. JACKSON: 68, a director of the Company since 1987. Mr. Jackson has been an oil field service consultant for more than five years. NELLS LEON: 70, a director of the Company since 1995. Mr. Leon has been a director of YPF since 1991 and was elected President of YPF in 1995. He has been associated with YPF since 1990, serving as Executive Vice President. He was Vice President of Operations of Sol Petroleo S.A. from 1987 to 1990. JAMES R. LESCH: 75, a director of the Company since 1995. Mr. Lesch has been a director of YPF since 1993. He is currently retired, having retired from Hughes Tool Company in 1986. He was Chief Executive Officer (1979-1986) and Chairman of the Board (1981-1986) of Hughes Tool Company and also served as Commissioner, State of Texas Department of Commerce (1988-1992). Previously, he served as Director of the American Petroleum Institute. Mr. Lesch also serves as a director of TransTexas Gas Corporation. ROBERTO MONTI: 58, a director, President and Chief Executive Officer of the Company since 1995. Prior to such time, Mr. Monti had been employed since 1963 by Schlumberger Limited, an oil field services company, in 36 various capacities. He most recently served as President of Dowell, a division of Schlumberger Limited. Mr. Monti is an alternate director of YPF. P. DEXTER PEACOCK: 55, a director of the Company since 1995. Mr. Peacock has been a partner of the law firm of Andrews & Kurth L.L.P. since 1975. He is a member of the firm's Management Committee. He currently serves as a director of Texas Commerce Bank National Association and as an alternate director of YPF. R. A. WALKER: 40, a director of the Company since 1994. He is a Managing Director of Prudential Capital Group and a Vice President of The Prudential Insurance Company of America ("Prudential"). Mr. Walker has held similar positions with Prudential Capital Group for the past five years. He was originally elected to the Board of Directors of Maxus by Prudential pursuant to the terms of the $9.75 Preferred Stock. ITEM 11. EXECUTIVE COMPENSATION. DIRECTOR COMPENSATION The Company pays each director who is not an employee of the Company or YPF (other than Mr. Blackburn) an annual retainer of $20,000 and a fee of $1,000 for each meeting of the Board attended and for each committee meeting attended. Under the terms of Mr. Blackburn's consulting agreement with the Company, he will not be entitled to such compensation paid to other non- employee Directors for so long as he remains an international consultant to the Company. See--"Employment Contracts and Termination of Employment and Change in Control Agreements." EXECUTIVE OFFICER COMPENSATION The following tables set forth compensation awarded to, earned by or paid to the executive officers named below in 1994, 1995 and 1996. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION ---------------------- ------------ SECURITIES UNDERLYING ALL OTHER NAME AND SALARY BONUS OPTIONS/SARS COMPENSATION PRINCIPAL POSITION YEAR ($) ($) (#) ($) ------------------ ---- ---------- --------- ------------ ------------ Roberto Monti........... 1996 800,004 1,460 35,477(4) 48,000(1) President and Chief Ex- ecutive Officer 1995 302,052(2) 30,000(3) 0 10,923(1) 1994 N/A N/A N/A N/A W. Mark Miller.......... 1996 180,000 67,250 7,982(4) 87,392(5) Executive Vice Presi- dent and Treasurer 1995 174,900 60,000 0 87,086(6) 1994 N/A N/A N/A N/A Michael C. Forrest...... 1996 175,008 62,713 7,761(4) 192,602(7) Senior Vice President 1995 261,016 60,000 0 1,291,032(8) 1994 304,020 100,000 65,000 18,241(1) David A. Wadsworth...... 1996 164,448 63,950 0 9,869(1) Vice President, Legal 1995 155,640 52,000 0 9,338(1) 1994 N/A N/A N/A N/A Linda R. Engelbrecht.... 1996 132,000 51,460 0 7,920(1) Controller 1995 119,910 36,000 0 7,195(1) 1994 N/A N/A N/A N/A
37 - ---------- (1) These payments represent the Company's matching contributions to this individual's qualified and non-qualified savings plans' accounts. (2) Mr. Monti became a consultant, officer and director of the Company on August 21, 1995, and an employee of the Company on October 9, 1995. He received $120,000 of this amount from YPF in respect of his serving as President and Chief Executive Officer of the Company prior to the date on which he became an employee. (3) Mr. Monti was paid this amount as a signing bonus upon commencement of his employment with the Company. (4) Effective July 1, 1996, Messrs. Monti, Miller and Forrest were granted stock appreciation rights ("SARs") pursuant to the Maxus Energy Corporation Stock Appreciation Rights Plan (the "Probac") as indicated. The securities underlying the SARs granted pursuant to the Probac are YPF's Class D shares. Each such SAR represents the right to receive in cash on the exercise dates the amount, if any, by which the value of the YPF Class D shares on such exercise dates exceeds the "Initial Value" thereof as defined in the Probac, not to exceed 100%. The SARs are automatically exercised without any action by the holders in equal one- thirds on the third, fourth and fifth anniversaries of the grant date of such SARs. Under the Probac, holders of SARs do not acquire any right to receive YPF Class D shares; SARs are payable in cash only. (5) $76,592 of this amount represents a payment made in accordance with Mr. Miller's employment agreement (see --"Employment Contracts, Termination of Employment and Change in Control Agreements"), and $10,800 represents the Company's matching contribution to Mr. Miller's qualified and non- qualified savings plan account. (6) $76,592 of this amount represents a payment made in accordance with Mr. Miller's employment agreement (see --"Employment Contracts, Termination of Employment and Change in Control Agreements"), and $10,494 of such amount represents the Company's matching contribution to Mr. Miller's qualified and non-qualified savings plan accounts. (7) $182,102 of this amount represents payment in 1996 with respect to the surrender in 1995 pursuant to the terms of the Merger Agreement of options and SARs held by Mr. Forrest (see "Aggregated Option/SAR Exercises in the Last Fiscal Year and FY-End Option/SAR Values") and $10,500 represents the Company's matching contributions to Mr. Forrest's qualified and non- qualified savings plans' account. (8) $1,075,383 of this amount represents a payment made in accordance with Mr. Forrest's change in control agreement (see --"Employment Contracts, Termination of Employment and Change in Control Agreements"); $199,988 represents payment in respect of the surrender pursuant to the terms of the Merger Agreement of options and SARS held by Mr. Forrest; and $15,661 of such amount represents the Company's matching contributions to Mr. Forrest's qualified and non-qualified savings plan accounts. 38 OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1) ---------------------------------------------- NUMBER OF PERCENT OF TOTAL SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO GRANT DATE PRESENT OPTIONS/SARS EMPLOYEES IN EXERCISE OF BASE VALUE NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE $(2) ---- ------------ ---------------- ---------------- --------------- ------------------ Roberto Monti........... 35,477 44.8% $22.55 7/01/01 164,252.87 W. Mark Miller.......... 7,982 10.1% $22.55 7/01/01 36,955.39 Michael C. Forrest...... 7,761 9.8% $22.55 7/01/01 35,932.20 David A. Wadsworth...... 0 N/A N/A N/A N/A Linda R. Engelbrecht.... 0 N/A N/A N/A N/A
- ---------- (1) Effective July 1, 1996, Messrs. Monti, Miller and Forrest were granted SARs pursuant to the Probac. The securities underlying the SARs granted pursuant to the Probac are YPF's Class D shares. Each such SAR represents the right to receive in cash on the exercise dates the amount, if any, by which the value of the YPF Class D shares on such exercise dates exceeds the "Initial Value" thereof as defined in the Probac, not to exceed 100%. The SARs are automatically exercised without any action by the holders in equal one-thirds on the third, fourth and fifth anniversaries of the grant date of such SARs. Under the Probac, holders of SARs do not acquire any right to receive YPF Class D shares; SARs are payable in cash only. (2) The grant date present value was determined using a variation of the Black-Sholes option pricing model. In determining such value, the expected volatility of the YPF Class D shares was assumed to be 24%, the risk-free rate of return was based on zero-coupon Treasury yields as listed in "The Wall Street Journal" on July 1, 1996 for close of trading activity on July 1, 1996 (range from 6.4% to 6.6%), dividend yield was assumed to be 3.6%, and the time of exercise was assumed to be, as to one-third of the SARs granted on a particular date, the third, fourth and fifth anniversaries of such grant date. No adjustments were made for non-transferability or risk of forfeiture. AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED SHARES UNEXERCISED IN-THE-MONEY ACQUIRED OPTIONS/SARS AT OPTIONS/SARS ON VALUE FY-END (#) AT FY-END ($) EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/ NAME (#) ($) UNEXERCISABLE UNEXERCISABLE ---- -------- -------- --------------- ------------- Roberto Monti................... 0 0 0/0 0/0 W. Mark Miller.................. 0 0 0/0 0/0 Michael C. Forrest.............. 0 182,102* 0/0 0/0 David A. Wadsworth.............. 0 0 0/0 0/0 Linda R. Engelbrecht............ 0 0 0/0 0/0
- ---------- * Although Mr. Forrest surrendered all of his options and SARs in 1995, payment was not made in 1995 by the Company with respect to a certain number of such options and SARs due to then pending tax and other questions. Such questions have been resolved and Mr. Forrest received this amount in 1996 for his surrendered options and SARs. 39 EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS The Company entered into an agreement effective July 1, 1995 in replacement of a change in control agreement (discussed below under Change in Control Agreements) dated November 1, 1991 with Mr. Miller, Executive Vice President and Treasurer of the Company, under which Mr. Miller is to be employed for a term of four years from July 1, 1995 at not less than his then-current salary, plus an annual bonus not less than the amount of the largest bonus paid to Mr. Miller in respect of the years 1992, 1993 or 1994, and a "sign-on" bonus in the amount of $76,592. In addition, a "stay on" bonus in the amount of $76,592 is payable under this agreement on each of July 1, 1996, 1997 and 1998 provided, as to each such "stay on" bonus, that Mr. Miller continues to be an employee of the Company on the respective payment date. Under the agreement, in the event that Mr. Miller's employment is terminated under certain circumstances, severance compensation will be paid to Mr. Miller as specified therein. In December 1995, the Company entered an agreement with Mr. Monti, a director and the President and Chief Executive Officer of the Company, pursuant to which his Foreign Service Pay, as defined in such agreement, payable with respect to services rendered from and after January 1, 1996 will be credited by the Company to a deferral account which will bear interest at a specified rate and the balance of which will be paid to Mr. Monti under certain circumstances, including termination of his employment with the Company. Mr. Blackburn, a director and formerly the Chairman, President and Chief Executive Officer of the Company, became an international consultant during 1995 to YPF pursuant to a consulting agreement which was subsequently assigned to the Company. Under the two-year contract, Mr. Blackburn will be available to render consulting services for a minimum of 60 days per year and be paid a retainer of $180,000 per year. Mr. Blackburn will be paid $3,000 per day for each day of consulting provided in excess of 60 days per year. Office space is made available to him in Dallas and Buenos Aires. During 1996, Mr. Blackburn was paid a total of $180,000 under the terms of this contract which expires April 30, 1997. Termination of Employment Agreements. In August 1995, the Company entered into an agreement with Mr. Monti under which he will receive a severance payment from the Company in the amount of $3 million in the event that his employment with the Company is terminated (i) by Mr. Monti or the Company for reason of death or disability; (iii) by the Company other than for cause; (iii) by Mr. Monti for any reason within six months following a take-over (other than to accept employment with YPF); and (iv) by Mr. Monti for any reason after reaching age 65. Separation Pay Plan. Under the Separation Pay Plan, most employees (other than non-resident aliens), excluding Mr. Monti (who has waived any rights thereunder) but including the other named executive officers, are eligible for separation pay if their employment is terminated for any reason other than death, voluntary termination of employment, voluntary retirement or discharge for reasons of criminal activity, willful misconduct, gross negligence in the performance of duties or violation of Company policy. The payment to be received under the plan by a particular employee depends on his job classification and length of service and whether termination occurs after the elimination of the employee's position or a change in control of the Company (as defined in the plan). In the case of the named executive officers, the plan provides in most cases for separation pay in an amount equal to two- weeks' base pay for each year of service with the Company, plus three months' base pay, not to exceed a maximum of 12 months' base pay; and, in the case of a change in control of the Company, separation pay in an amount equal to one month's base pay for each year of service with the Company, but not less than 12 months' base pay nor more than 24 months' base pay. The plan requires that employees sign releases as a condition of receiving separation pay. Executive officers are not entitled to separation pay under the plan to the extent they receive severance payments under the change in control agreements discussed below or employment contracts discussed above. Change in Control Agreements. In 1987 or thereafter, the Company entered into agreements with certain executive officers including Messrs. Forrest and Miller which were binding upon execution but were to become operative on a change of control of the Company. Pursuant to the terms of said agreements, they became operative when YPF acquired control of the Company. 40 Under these agreements, the executive officer was entitled to continue in the employ of the Company until the earlier of the expiration of the third anniversary of the occurrence of a "change in control" or the executive's death at an annual base salary of not less than the rate in effect upon the occurrence of a change in control plus an incentive award of not less than the highest such award received by the executive for any year in the three calendar years immediately preceding the change in control. In the event the Company terminates the executive's employment during such term without cause, the executive will be entitled to receive as severance compensation a lump-sum payment equal to the present value of the cash compensation payable under the agreement in the absence of such termination, not to exceed 299% of his "base amount" as defined in the Internal Revenue Code of 1986, as amended (the "Code"), without any reduction for subsequent earnings. In April 1995, all of the Company's then executive officers, including Mr. Forrest, gave notice of their intent to resign under circumstances in which they had the right to receive severance payments under the change in control agreements, and the Company paid the prescribed severance amounts. Mr. Forrest subsequently agreed to continue in the employment of the Company as an "at will" employee at a reduced salary. RETIREMENT PROGRAM Effective February 1, 1987, the Company adopted a new retirement income plan (the "New Retirement Income Plan") applicable to most of its employees to replace the Company's former retirement income plans under which such employees ceased to accrue benefits on January 31, 1987. Under the New Retirement Income Plan, a covered employee acquires a right upon retirement to a yearly amount equal to 2% of the employee's earnings during each year from February 1, 1987 forward (rather than on final compensation or average final compensation) without offset for social security benefits. Benefits under the New Retirement Income Plan become vested after five years of service. Benefits may be paid in equal monthly installments, starting on the date of retirement and continuing until death, or employees may select one of a number of optional forms of payment having equal actuarial value as provided in the plan. The benefits payable under the New Retirement Income Plan are subject to maximum limitations under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code. In the case of the named executives, if benefits at the time of retirement exceed the then permissible limits of such statutes, the excess would be paid by the Company from the "SERP" described below. The Company has an unfunded Supplemental Executive Retirement Plan (the "SERP") that provides additional benefits to the Company's highest ranking officer, the other named executives and to certain executive employees designated by the highest ranking officer. Under the SERP, a participant acquires the right to a lump sum amount upon retirement which is the actuarial equivalent of a straight life or, if married, a 50% joint and survivor annuity payable monthly in an amount equal to (a) the sum of (i) 1.6% of the participant's average monthly compensation in 1986 times his years of service through January 31, 1987, plus (ii) 2% of the participant's average monthly compensation after January 31, 1987 times his years of service after January 31, 1987 plus an additional five years less (b) the amount of the benefits calculated for such participant under the Company's other retirement plans. The maximum benefit payable is 60% of the participant's high three-year average pay. The amounts calculated under the SERP are not subject to any reduction for Social Security and are not determined primarily by final compensation or average final compensation and years of service. If a participant dies while still employed by the Company and is survived by an eligible spouse, the surviving spouse will receive a lump-sum payment equal to the present value of one-half of the benefit which would have been payable to the participant at his normal retirement age under the SERP assuming the participant had terminated employment with the Company at the time of his death with a vested interest under the SERP and that the participant survived to his normal retirement age. In the case of retirement after age 55 but before age 60, the supplemental retirement benefits generally will be reduced by 5% for each year that the employee's actual retirement date precedes age 60. The benefits provided under the plan will vest upon completion of five years of service or attainment of age 55. The estimated annual benefits payable upon retirement at normal retirement age (or January 1, 1997 in those cases in which the participant's age on that date was greater than normal retirement age) under the Company's 41 retirement plans as supplemented by the SERP based on service and compensation through December 31, 1996 for the executive officers named in the compensation table are as follows: Mr. Monti--$98,668, Mr. Miller--$50,687, Mr. Forrest-- $63,622, Mr. Wadsworth--$56,356 and Mrs. Engelbrecht--$36,956. Whether any amounts actually become payable in whole or in part depends on the contingencies and conditions governing the applicable retirement plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1996, the Compensation Committee of the Board of Directors consisted of Nells Leon, Cedric Bridger and James R. Lesch. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. BENEFICIAL OWNERSHIP OF SECURITIES The following table sets forth the beneficial ownership (as defined in the rules of the Securities and Exchange Commission) as of February 1, 1997 of the equity securities of the Company and YPF by the directors, the named executive officers and all directors and executive officers as a group. At such date, none of the directors or executive officers beneficially owned any $2.50 Preferred Stock.
AMOUNT AND NATURE OF SECURITIES BENEFICIALLY NAME OF BENEFICIAL OWNER TITLE OF SECURITY OWNED - ------------------------ ----------------- ----------------- C. L. Blackburn..................... Common Stock............ 0 YPF Class "D"........... 0 Cedric Bridger...................... Common Stock............ 0(1) YPF Class "D"........... 3,942 Linda R. Engelbrecht................ Common Stock............ 0 YPF Class "D"........... 0 Michael C. Forrest.................. Common Stock............ 0 YPF Class "D"........... 4,000 George L. Jackson................... Common Stock............ 0 YPF Class "D"........... 0 Nells Leon.......................... Common Stock............ 0(1) YPF Class "D"........... 0(2) James R. Lesch...................... Common Stock............ 0(1) YPF Class "D"........... 2,000 W. Mark Miller...................... Common Stock............ 0 YPF Class "D"........... 0 Roberto Monti....................... Common Stock............ 0(1) YPF Class "D"........... 0 P. Dexter Peacock................... Common Stock............ 0(1) YPF Class "D"........... 0 David A. Wadsworth.................. Common Stock............ 0 YPF Class "D"........... 0 R. A. Walker........................ Common Stock............ 0 YPF Class "D"........... 0 Directors and Executive Officers as a group............................ Common Stock............ 0(1)(3) YPF Class "D"........... 9,942(2)(3)
- ---------- (1) Does not include Common Stock owned by YPF, as to which each of Messrs. Bridger, Leon, Lesch, Monti and Peacock disclaim any beneficial ownership. (2) Does not include 347 YPF Class "D" shares owned by Mr. Leon's wife, as to which Mr. Leon disclaims any beneficial ownership. (3) Directors and executive officers as a group owned no Common Stock and less than 1% of the YPF Class "D" shares. 42 To the knowledge of the Company, as of February 1, 1997, no person beneficially owned more than 5% of any class of the Company's voting securities except as set forth below:
AMOUNT AND NATURE OF SHARES BENEFICIALLY PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS OWNED OF CLASS - ------------------------------------ -------------- ------------ -------- YPF Sociedad Anonima................... Common Stock 147,246,135 100% Avenida Pte. Roque Saenz Pena 777 1364 Buenos Aires Argentina Kidder, Peabody Group Inc.............. Common Stock 8,000,000(1) 5.2% 10 Hanover Square New York, New York 10005
- ---------- (1) Kidder, Peabody Group Inc. ("Kidder") reported on Schedule 13D dated October 10, 1992 that it owns 8,000,000 warrants, each representing the right to purchase from the Company at any time prior to 5:00 p.m. on October 10, 1997 one share of Common Stock at a price of $13.00 per share. The 8,000,000 shares of Common Stock reported as beneficially owned by Kidder result from the assumed exercise of all 8,000,000 of such warrants. According to said Schedule 13D, General Electric Company is the indirect parent of Kidder. The information herein regarding such shares assumes that Kidder's beneficial ownership thereof had not changed as of February 1, 1997 and is included herein in reliance on such filing, except that the percent of class is based upon the Company's calculations made in reliance upon the information regarding such shares contained in such filing. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company has business transactions and relationships in the ordinary course of business with unaffiliated corporations and institutions with which certain of its directors, executive officers and substantial stockholders are affiliated, including the transactions discussed below. All such transactions are conducted on an arm's length basis. On July 1, 1996, Maxus International Energy Company ("Seller"), a wholly owned subsidiary of Maxus, sold all of the issued and outstanding stock of its wholly owned subsidiary, YPF International Ltd. ("International"), to YPF, the indirect parent of YPF Holdings, Inc., the owner of all of the issued and outstanding capital stock of Maxus. As of September 1, 1996, Seller sold all of the capital stock of Maxus Guarapiche Ltd., a wholly owned subsidiary of Maxus, to International. As of August 1, 1996, Maxus transferred certain liabilities related to environmental matters to Chemical Land Holdings, Inc. ("CLH"), an indirect wholly owned subsidiary of YPF. In connection with the transfer, CLH assumed (the "Assumption") the liabilities so transferred and YPF committed to contribute to the capital of CLH up to the amount of $108 million to enable CLH to satisfy its obligations under the Assumption. For a further discussion of these transactions, see "Item 1. Business and Properties--General Reorganization." During 1996 and in the ordinary course of its business, the Company sold electrical generators to YPF for $5.4 million. During the twelve months ended December 31, 1996, YPF made capital contributions to the Company in the aggregate amount of $64 million pursuant to the terms of the Keepwell Covenant (see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources"). It is not anticipated that YPF will be required to make capital contributions to the Company in 1997. However, should such capital contributions be required during 1997, they will be credited to YPF's obligations under the Keepwell Covenant and will entitle YPF to shares of Common Stock. In addition, YPF made capital contributions to CLH in 1996 in the amount of $8 million to enable CLH to perform its obligations under the Assumption, and it is anticipated that YPF could be required to make capital contributions in 1997 to CLH totalling $25 million to $50 million. 43 At December 31, 1996, advances to the Company from YPF were $182 million. Based on 1997 projections, the Company anticipates that YPF will make cash advances of approximately $150 to $200 million to the Company during 1997. The Company and YPF entered into a loan agreement ("Loan Agreement") during 1996 to facilitate short-term loans by YPF to the Company and short-term loans by the Company to YPF of excess cash balances. At December 31, 1996, there were no loans outstanding under the Loan Agreement. It is expected that loans will be made by the parties under the Loan Agreement during 1997, and while the number and amounts thereof are not presently known, it is expected that they will aggregate in excess of $60,000. Mr. Peacock, a director of the Company, is a partner in the law firm of Andrews & Kurth L.L.P. Andrews & Kurth provided certain legal services to the Company, the fees for which the Company paid the firm approximately $1.4 million in 1996. It is anticipated that Andrews & Kurth will continue to provide legal services to the Company during 1997 and that the fees for such services will be somewhat lower. During 1996, the Company and YPF entered into a services agreement ("Services Agreement") whereby the Company would render or arrange for services to be rendered to or for the benefit of YPF and YPF would render or arrange for services to be rendered to or for the benefit of the Company, and each party would be compensated on the basis of the cost to them of such services. During 1996, the Company did not render services to YPF under the Services Agreement. It is expected that the parties will render services to each other during 1997. The cost of these services is not presently known, but it is expected that it will exceed $60,000. During 1996, Prudential was the record or beneficial owner of more than 5% of one or more of the classes of the Company's voting securities. Mr. Walker, an officer of Prudential, was elected as a director of the Company by Prudential as holder of all of the $9.75 Preferred Stock and pursuant to the terms thereof. The Company offers its employees the opportunity to participate in medical programs administered by Prudential. In addition, Prudential provides services and coverages relating to pension and life insurance programs for retired employees of Gateway Coal Company, a partnership owned by the Company. During 1996, the Company paid Prudential approximately $200,000 for these services. The Company and Prudential have agreed that Prudential will continue to perform such services during 1997 and anticipate that the fees for the year will be somewhat higher. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)Documents filed as part of this report: (1) Financial Statements--The following financial statements appear on pages F-1 through F-23 and pages F-25 through F-70 of this report. Consolidated Statement of Operations for the three months ended March 31, 1995 and the year ended December 31, 1994. Consolidatd Balance Sheet at March 31, 1995. Consolidated Statement of Cash Flows for the three months ended March 31, 1995 and the year ended December 31, 1994. Notes to Consolidated Financial Statements. Report of Independent Public Accountants--Arthur Andersen LLP. Report of Independent Public Accountants--Price Waterhouse LLP. Financial Supplementary Information (unaudited). Consolidated Statement of Operations for the twelve months ended December 31, 1996 and the nine months ended December 31, 1995. Consolidated Balance Sheet at December 31, 1996 and 1995. Consolidated Statement of Cash Flows for the twelve months ended December 31, 1996 and the nine months ended December 31, 1995. Notes to Consolidated Financial Statements. Financial Supplementary Information (unaudited). Quarterly Data (unaudited). (2) Financial Statement Schedules. None 44 Condensed parent company financial information has been omitted, since the amount of restricted net assets of consolidated subsidiaries does not exceed 25% of total consolidated net assets. Also, footnote disclosure regarding restrictions on the ability of both consolidated and unconsolidated subsidiaries to transfer funds to the parent company has been omitted since the amount of such restrictions does not exceed 25% of total consolidated net assets. (3) Exhibits. Each document marked by an asterisk is incorporated herein by reference to the designated document previously filed with the Securities and Exchange Commission (the "Commission"). Each of Exhibits Nos. 10.1 through 10.23 is a management contract or compensatory plan, contract or arrangement required to be filed as an exhibit hereto by Item 14(c) of Form 10-K. 3(i) --Restated Certificate of Incorporation of the Company, filed herewith. 3(ii) --By-Laws of the Company (Exhibit 3(ii).2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995).* 4.1 --Indenture dated as of April 1, 1978 between Diamond Shamrock Corporation ("Diamond") and Mellon Bank, N.A. relating to Diamond's $150,000,000 8 1/2% Sinking Fund Debentures due April 1, 2008 (Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 [the "1992 Form 10-K"]).* 4.2 --First Supplemental Indenture dated as of January 26, 1984 among the Company, Diamond Shamrock Chemicals Company ("Chemicals") and Mellon Bank, N.A. supplementing the Indenture described in Exhibit 4.1 above (Exhibit 4.2 to the 1992 Form 10-K).* 4.3 --Tri Party Agreement dated January 24, 1993 appointing Chemical Bank as successor trustee under the Indenture described in Exhibit 4.1 above (Exhibit 4.3 to the Company's Current Report on Form 8-K dated January 12, 1994 [the "January 12 Form 8- K"]).* 4.4 --Indenture dated as of May 1, 1983 between Diamond and The Bank of New York, successor in interest to NationsBank of Texas, N.A., successor trustee to Mellon Bank, N.A. relating to unspecified Debt Securities of Diamond (Exhibit 4.4 to the 1992 Form 10-K).* 4.5 --Resolutions of the Board of Directors of Diamond supplementing the Indenture described in Exhibit 4.4 above and establishing terms and conditions of Diamond's $150,000,000 11 1/4% Sinking Fund Debentures due May 1, 2013 (Exhibit 4.5 to the 1992 Form 10-K).* 4.6 --First Supplemental Indenture dated as of January 26, 1984 among the Company, Chemicals and Mellon Bank, N.A. supplementing the Indenture and the resolutions described in Exhibits 4.4 and 4.5, respectively, above (Exhibit 4.6 to the 1992 Form 10-K).* 4.7 --Tri Party Agreement dated January 12, 1994 appointing NationsBank of Texas, N.A. as successor trustee under the Indenture described in Exhibit 4.4 above (Exhibit 4.1 to the January 12 Form 8-K).* 4.8 --Indenture dated as of November 1, 1985 between the Company and The Bank of New York, successor in interest to NationsBank of Texas, N.A., successor trustee to Mellon Bank, N.A. relating to unspecified Debt Securities of the Company (Exhibit 4.8 to the 1992 Form 10-K).* 4.9 --Resolutions of an ad hoc committee of the Board of Directors of the Company supplementing the Indenture described in Exhibit 4.8 above and establishing terms and conditions of the Company's $150,000,000 11 1/2% Sinking Fund Debentures due November 15, 2015 (Exhibit 4.9 to the 1992 Form 10-K).* 4.10 --Tri Party Agreement dated January 12, 1994 appointing NationsBank of Texas, N.A. as successor trustee under the Indenture described in Exhibit 4.8 above (Exhibit 4.2 to the January 12 Form 8-K).* 45 4.11 --Indenture dated as of April 1, 1988 between the Company and Chemical Bank relating to unspecified debt securities of the Company (Exhibit 4.11 to the 1992 Form 10-K).* 4.12 --Officers' Certificate dated June 1, 1988 establishing a series of debt securities ($150,000,000 Medium-Term Notes, Series A) to be issued under the Indenture described in Exhibit 4.11 above (Exhibit 4.12 to the 1992 Form 10-K).* 4.13 --Indenture dated as of November 1, 1990 between the Company and Chemical Bank relating to unspecified debt securities of the Company (Exhibit 4.13 to the 1992 Form 10-K).* 4.14 --Officers' Certificate dated February 13, 1991 establishing a series of debt securities ($150,000,000 Medium-Term Notes, Series B) to be issued under the Indenture described in Exhibit 4.13 above (Exhibit 4.14 to the 1992 Form 10-K).* 4.15 --Officers' Certificate dated September 28, 1992 establishing a series of debt securities ($250,000,000 9% Notes Due 2002) to be issued under the Indenture described in Exhibit 4.13 above (Exhibit 4.15 to the 1992 Form 10-K).* 4.16 --Officers' Certificate dated January 26, 1993 establishing a series of debt securities ($100,000,000 9 1/2% Notes Due 2003) to be issued under the Indenture described in Exhibit 4.13 above (Exhibit 4.16 to the 1992 Form 10-K).* 4.17 --Officer's Certificate dated June 30, 1993 establishing a series of debt securities ($150,000,000 Medium-Term Notes, Series C) to be issued under the Indenture described in Exhibit 4.13 above (Exhibit 4 to the Company's Current Report on Form 8-K dated June 21, 1993).* 4.18 --Officer's Certificate dated October 27, 1993 establishing a series of debt securities ($200,000,000 9 3/8% Notes due 2003) to be issued under the Indenture described in Exhibit 4.13 above (Exhibit 4 to the Company's current Report on Form 8-K dated October 20, 1993).* 4.19 --Officer's Certificate dated January 18, 1994 establishing a series of debt securities ($60,000,000 9 3/8% Notes due 2003) to be issued under the Indenture described in Exhibit 4.13 (Exhibit 4 to the Company's Current Report on Form 8-K dated January 10, 1994).* 4.20 --Warrant Certificate No. 1 dated October 10, 1992 issued to Kidder, Peabody Group Inc. for 8,000,000 warrants each representing the right to purchase from the Company on or prior to October 10, 1997 one share of common stock, $1.00 par value, of the Company at a price of $13.00 per share (Exhibit 4.23 to the 1992 Form 10-K).* 4.21 --Registration Rights Agreement dated as of October 10, 1992 between Kidder, Peabody Group Inc. and the Company (Exhibit 4.24 to the 1992 Form 10-K).* 4.22 --Agreement of Merger, dated February 28, 1995, among the Company, YPF Sociedad Anonima ("YPF") and YPF Acquisition Corp. ("YPFA") (Exhibit 3 to the Company's Schedule 14D-9 dated March 3, 1995 [the "Schedule 14D-9"]).* 4.23 --Credit Agreement dated as of June 8, 1995, between Midgard Energy Company, the lenders signatory thereto and The Chase Manhattan Bank (National Association) ("Chase"), as agent (Exhibit 4.1 to the Company's Current Report on Form 8-K dated June 8, 1995 [the "June 8, 1995 Form 8-K"]).* 4.24 --Assumption Agreement dated August 14, 1996 between the Company and Chemical Land Holdings, Inc., filed herewith. 10.1 --Performance Incentive Plan of the Company, as amended effective January 1, 1986 (Exhibit 10.6 to the 1992 Form 10-K).* 10.2 --Specimen copy of Change of Control Agreement between the Company and certain of its former executive officers (Exhibit 10.7 to the 1992 Form 10-K).* 46 10.3 --Specimen copy of letter agreement between the Company and certain of its former executive officers relating to the Agreements referred to in Exhibit 10.2 above (Exhibit 10.8 to the 1992 Form 10-K).* 10.4 --Specimen copy of disability benefit arrangement between the Company and its executive officers (Exhibit 10.10 to the 1992 Form 10-K).* 10.5 --Supplemental Executive Retirement Plan of the Company, effective May 1, 1987 (Exhibit 10.11 to the 1992 Form 10-K).* 10.6 --Supplemental Executive Retirement Plan of the Company, effective March 1, 1990 (Exhibit 10.12 to the 1992 Form 10-K).* 10.7 --Specimen copy of supplemental death benefit arrangement between the Company and its executive officers (Exhibit 10.13 to the 1992 Form 10-K).* 10.8 --Maxus Energy Corporation Supplemental Savings Plan (as amended and restated effective June 8, 1995) (Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 [the "1995 Form 10-K"]).* 10.9 --Trust Agreement dated December 18, 1986 between the Company and AmeriTrust Company National Association (Exhibit 10.15 to the 1992 Form 10-K).* 10.10 --Deferred Compensation Plan for Executives of the Company, effective September 28, 1993 (Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993).* 10.11 --Distribution Agreement dated as of April 22, 1987 between the Company and Diamond Shamrock R&M, Inc. (Exhibit 10.23 to the 1992 Form 10-K).* 10.12 --Stock Purchase Agreement by and among the Company and Occidental Petroleum Corporation, et. al. dated September 4, 1986 (Exhibit 10.25 to the 1992 Form 10-K).* 10.13 --Agreement of Merger dated as of February 28, 1995 among YPF, YPFA and the Company (Exhibit 3 to the Schedule 14D-9).* 10.14 --International Consulting Agreement, dated May 1, 1995 between C. L. Blackburn and YPF (Exhibit 10.15 to the 1995 Form 10-K).* 10.15 --Assignment of International Consulting Agreement, dated November 2, 1995 between C. L. Blackburn, YPF, and the Company (Exhibit 10.16 to the 1995 Form 10-K).* 10.16 --Maxus Severance Agreement dated August 3, 1995 between the Company and Roberto Luis Monti (Exhibit 10.17 to the 1995 Form 10-K).* 10.17 --Compensation Agreement dated December 27, 1995 between the Company and Roberto L. Monti (Exhibit 10.18 to the 1995 Form 10- K).* 10.18 --Amendment to Change in Control Agreement dated May 11, 1995 between the Company and W. Mark Miller (Exhibit 10.21 to the 1995 Form 10-K).* 10.19 --Employment Agreement effective as of July 1, 1995 between the Company and W. Mark Miller (Exhibit 10.22 to the 1995 From 10- K).* 10.20 --Specimen copy of a letter agreement regarding Change in Control Agreement dated April 7, 1995 between the Company and certain of its executive officers (Exhibit 10.23 to the 1995 Form 10-K).* 10.21 --Letter Agreement regarding Change in Control Agreement dated April 13, 1995 between the Company and Michael C. Forrest (Exhibit 10.24 to the 1995 Form 10-K).* 10.22 --Specimen copy of a letter agreement regarding Change in Control Agreement dated April 13, 1995 between the Company and certain of its executive officers (Exhibit 10.26 to the 1995 Form 10- K).* 47 10.23 --Maxus Energy Corporation Stock Appreciation Rights Plan dated August 30, 1996, filed herewith. 21.1 --List of Subsidiaries of the Company, filed herewith. 23.1 --Consent of Independent Accountants, filed herewith. 23.2 --Consent of Independent Accountants, filed herewith. 24.1 --Powers of Attorney of directors and officers of the Company, filed herewith. 24.2 --Power of Attorney of the Company, filed herewith. 27.1 --Financial Data Schedule, filed herewith. (b)Reports on Form 8-K. None. 48 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Maxus Energy Corporation Roberto Monti* By __________________________________ Roberto Monti President and Chief Executive Officer March 20, 1997 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED. SIGNATURE TITLE Roberto Monti* President and Chief Executive - ------------------------------------------ Officer and Director Roberto Monti W. Mark Miller* Executive Vice President and - ------------------------------------------ Treasurer (principal financial W. Mark Miller officer) Linda R. Engelbrecht* Controller (principal accounting - ------------------------------------------ officer) Linda R. Engelbrecht Charles L. Blackburn* Director - ------------------------------------------ Charles L. Blackburn Cedric Bridger* Director - ------------------------------------------ Cedric Bridger George L. Jackson* Director - ------------------------------------------ George L. Jackson Nells Leon* Director - ------------------------------------------ Nells Leon James R. Lesch* Director - ------------------------------------------ James R. Lesch P. Dexter Peacock* Director - ------------------------------------------ P. Dexter Peacock R. A. Walker* Director - ------------------------------------------ R. A. Walker Lynne P. Ciuba, by signing her name hereto, does hereby sign this report on Form 10-K on behalf of each of the above-named officers and directors of the registrant pursuant to a power of attorney executed by each of such officers and directors. /s/ Lynne P. Ciuba March 20, 1997 *By ______________________________________ Lynne P. Ciuba Attorney-in-fact 49 MAXUS ENERGY CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, 1995 1994 ------------ ------------ (IN MILLIONS, EXCEPT PER SHARE) Revenues Sales and operating revenues........................ $142.5 $ 682.1 Other revenues, net................................. 9.6 9.0 ------ ------- 152.1 691.1 Costs and Expenses Operating expenses.................................. 64.6 242.8 Gas purchase costs.................................. 12.7 116.9 Exploration, including exploratory dry holes........ 8.9 35.5 Depreciation, depletion and amortization............ 29.9 140.2 General and administrative expenses................. 4.2 22.4 Taxes other than income taxes....................... 3.1 12.9 Interest and debt expenses.......................... 24.1 96.7 Pre-merger costs.................................... 42.4 Environmental studies and remediation............... 60.5 Restructuring: Gain on sale of assets............................ (201.9) Restructuring costs............................... 100.9 ------ ------- 189.9 626.9 ------ ------- Income (Loss) Before Income Taxes..................... (37.8) 64.2 Income Taxes........................................ 19.1 86.9 ------ ------- Net Loss.............................................. (56.9) (22.7) Dividend requirement on Preferred Stock............. (9.6) (43.6) ------ ------- Net Loss Applicable to Common Shares.................. $(66.5) $ (66.3) ====== ======= Net Loss Per Common Share............................. $ (.49) $ (.49) ====== ======= Average Common Shares Outstanding..................... 135.5 134.7
See Notes to Consolidated Financial Statements. F-1 MAXUS ENERGY CORPORATION CONSOLIDATED BALANCE SHEET
MARCH 31, ASSETS 1995 ------ -------------- (IN MILLIONS, EXCEPT SHARES) Current Assets Cash and cash equivalents..................................... $ 91.6 Short-term investments........................................ 65.0 Receivables, less allowance for doubtful accounts............. 127.8 Taxes receivable.............................................. 13.7 Inventories................................................... 28.6 Restricted cash............................................... 48.5 Prepaids and other current assets............................. 19.4 --------- Total Current Assets........................................ 394.6 Properties and Equipment, less accumulated depreciation, deple- tion and amortization.......................................... 1,110.7 Investments and Long-Term Receivables........................... 41.5 Restricted Cash................................................. 79.9 Intangible Assets, less accumulated amortization................ 35.5 Deferred Income Taxes........................................... 9.4 Deferred Charges................................................ 20.5 --------- $ 1,692.1 ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities Long-term debt................................................ $ 4.7 Accounts payable.............................................. 49.8 Accrued liabilities........................................... 169.8 --------- Total Current Liabilities................................... 224.3 Long-Term Debt.................................................. 970.9 Deferred Income Taxes........................................... 199.7 Other Liabilities and Deferred Credits.......................... 158.7 $9.75 Redeemable Preferred Stock, $1.00 par value Authorized and issued shares--1,250,000........................ 125.0 Stockholders' Equity $2.50 Preferred Stock, $1.00 par value Authorized shares--5,000,000 Issued shares--3,500,000..................................... 3.5 $4.00 Preferred Stock, $1.00 par value Authorized shares--5,915,017 Issued shares--4,356,958..................................... 4.4 Common Stock, $1.00 par value Authorized shares--300,000,000 Issued shares--135,897,899................................... 135.9 Paid-in capital............................................... 966.2 Accumulated deficit........................................... (1,073.3) Minimum pension liability..................................... (18.3) Unrealized loss on marketable securities...................... (1.3) Common Treasury Stock, at cost--310,535....................... (3.6) --------- Total Stockholders' Equity.................................. 13.5 --------- $ 1,692.1 =========
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. F-2 MAXUS ENERGY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS TWELVE MONTHS ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 ------------ ------------- (IN MILLIONS) Cash Flows From Operating Activities: Net loss.......................................... $(56.9) $ (22.7) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization........ 29.9 140.2 Dry hole costs.................................. 1.0 2.8 Deferred income taxes........................... 0.4 (9.3) Net gain on sale of assets and investments...... (1.7) (166.7) Postretirement benefits......................... 1.4 6.2 Pre-merger costs................................ 42.4 Restructuring costs............................. 91.0 Environmental studies and remediation........... 60.5 Other........................................... 1.3 9.2 Changes in components of working capital: Receivables................................... 23.8 (1.8) Inventories, prepaids and other current assets....................................... (1.4) (2.3) Accounts payable.............................. (15.1) (22.3) Accrued liabilities........................... 26.3 (12.5) Taxes payable/receivable...................... 10.1 (2.8) ------ ------- Net Cash Provided by Operating Activities... 61.5 69.5 ------ ------- Cash Flows From Investing Activities: Expenditures for properties and equipment-- including dry hole costs......................... (53.6) (166.2) Expenditures for investments...................... (20.1) Proceeds from sales of assets..................... 2.1 377.0 Proceeds from sale/maturity of short-term investments...................................... 63.4 10.9 Purchases of short-term investments............... (24.6) (111.8) Restricted cash................................... 12.2 19.6 Other............................................. 9.8 (10.8) ------ ------- Net Cash Provided by Investing Activities... 9.3 98.6 ------ ------- Cash Flows From Financing Activities: Net borrowings from joint venture partners........ (4.4) Interest rate swap................................ 3.4 (7.9) Proceeds from issuance of short-term debt......... 30.0 Repayment of short-term debt...................... (69.1) Proceeds from issuance of long-term debt.......... 101.3 Repayment of long-term debt....................... (137.5) Stock rights redemption........................... (13.6) Redemption of Preferred Stock..................... (125.0) Dividends paid on Preferred Stock................. (9.6) (43.6) ------ ------- Net Cash Used in Financing Activities....... (19.8) (256.2) ------ ------- Net Increase (Decrease) in Cash and Cash Equivalents........................................ 51.0 (88.1) Cash and Cash Equivalents at Beginning of Year...... 40.6 128.7 ------ ------- Cash and Cash Equivalents at End of Year............ $ 91.6 $ 40.6 ====== =======
See Notes to Consolidated Financial Statements. F-3 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PRESENTATION On June 8, 1995, a special meeting of the stockholders of Maxus Energy Corporation (together with its foreign and domestic subsidiaries, the "Company" or "Maxus") was held to approve the Agreement of Merger ("Merger Agreement") dated February 28, 1995, between the Company, YPF Acquisition Corp. (the "Purchaser") and YPF Sociedad Anonima ("YPF"). The holders of the Company's common stock, $1.00 par value per share, and $4.00 Cumulative Convertible Preferred Stock approved the Merger Agreement, and the Purchaser was merged into the Company (the "Merger") on June 8, 1995. 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 acquired assets and assumed liabilities based on their fair values at the date of acquisition. As a result, the Company's assets and liabilities were revalued to reflect the approximate $762 million cash purchase price paid by YPF to acquire the Company. The Company's pre-Merger Consolidated Balance Sheet as of March 31, 1995, together with the purchase method accounting adjustments became the Company's opening post-Merger Consolidated Balance Sheet on April 1, 1995. The following pre-Merger data is for the three months ended March 31, 1995, and the year ended December 31, 1994 and dollar amounts in tables are in millions, except per share amounts. The financial statements for the three- month period ended March 31, 1995, and the year ended December 31, 1994 are presented separately as pre-Merger and post-Merger financial information are not comparable. 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. Consolidation and Equity Accounting The Consolidated Financial Statements include the accounts of Maxus Energy Corporation and all domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated. 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. Net cash provided by operating activities reflects cash receipts for interest income and cash payments for interest expense and income taxes as follows:
THREE MONTHS TWELVE MONTHS ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 ------------ ------------- Interest receipts............................... $ 7.0 $12.4 Interest payments............................... 12.2 98.7 Income tax payments............................. 18.6 98.1
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. F-4 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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 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 total proved reserves. Other properties and equipment are depreciated generally on the straight-line method over their estimated useful lives. Intangible assets are amortized on the straight-line method over their legal or estimated useful lives, not to exceed 40 years. 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 being amortized over the useful lives, and applying the same depreciation method, 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. The Company's gross underproduced and overproduced values at March 31, 1995, are not material. F-5 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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. 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 period. 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. 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. Additionally, SFAS 109 requires that annual taxes are to be allocated to interim periods on the basis of the requirements of Accounting Principles Board Opinion No. 28 ("APB 28"), Interim Financial Reporting. The reporting requirements of APB 28 are based on the view that each interim period is an integral part of the related annual period. Because the tax year of the Company did not close in any relevant jurisdiction on March 31, 1995, taxes were not measured on deferred tax liabilities and assets at that time. In accordance with APB 28 and SFAS 109, taxes were allocated to the period based on the estimated annual effective tax rate for the period ended December 31, 1995. Earnings per Share Primary earnings per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding, unless the inclusion of common stock equivalents has an antidilutive effect on earnings per share. Fully diluted earnings per share are not presented due to the antidilutive effect of including all potentially dilutive common stock equivalents. F-6 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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, 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 its interest rate swap agreement, 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. The Company's gross unrealized loss on its involvement in marketable securities which are included in long-term investments at March 31, 1995, was $1.3 million which was entirely comprised of unrealized losses on the Company's investment in U. S. Treasury Notes. Derivatives The Company periodically hedges the effects of fluctuations in the price of crude oil and natural gas through price swap agreements and futures contracts. The Company historically has hedged no more than 50% of its U. S. gas production. 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 a decrease or increase 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 March 31, 1995, the Company had $13.6 million in deferred revenue as a result of a take-or-pay payment received related to its Indonesian operations. NOTE TWO--PRE-MERGER COSTS In March 1995, the Company recorded $42.4 million of pre-merger costs associated with the Merger. Such costs, which included expenses associated with financial consulting and legal services, severance payments pursuant to change of control agreements and payments for surrender of stock options and restricted stock, were recorded in accrued liabilities in the consolidated balance sheet. F-7 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE THREE--RESTRUCTURING Asset Sales On April 25, 1994, Diamond Shamrock Offshore Partners Limited Partnership ("Offshore Partners") sold its interests in Main Pass Blocks 72, 73 and 74. On April 26, 1994, Maxus and its subsidiaries sold all of their partnership interests in Offshore Partners. Maxus Offshore Exploration Company, a wholly owned subsidiary of the Company, and the Company had a combined 1% general partner's interest in offshore partners and were the managing general partner and special general partner, respectively. The Company had an aggregate interest in Offshore Partners of approximately 87.1% at the time of the sale. On June 22, 1994, Maxus also sold the McFarlan Field and Grand Isle Block 25, both producing oil and gas properties. In total, the Company received $324.6 million of proceeds and recorded a net gain of $201.9 million from these transactions. Restructuring Costs In June 1994, the Company recorded a $100.9 million restructuring charge. The charge included a $69.8 million write-off associated with undeveloped Alaska coal leases, the development of which did not fit within the Company's strategy to commit funds only to oil and gas exploration and production. The charge also included costs associated with staff reductions and the write-off of non-producing assets outside the Company's core areas. NOTE FOUR--ASSET DIVESTITURES In September of 1994, the Company sold its geothermal subsidiary, Thermal Power Company, for approximately $58 million net in cash and a $6.5 million promissory note due from the purchaser in 1997. A $12.6 million loss on the sale of these assets was recognized. During the second quarter of 1994, Maxus Venezuela (C.I.) Ltd., a subsidiary of Maxus, signed an agreement with BP Exploration de Venezuela S.A., granting BP a 45% interest in the Quiriquire Unit in eastern Venezuela. Maxus Venezuela remained the operator with a 50% interest and Otepi Consultores, a Venezuelan company, holds the remaining 5%. Also, during the second quarter of 1994, Maxus Bolivia, Inc., a subsidiary of Maxus, signed an agreement to take BHP Petroleum as a partner in its Bolivian oil development project. The Company received $10 million from BHP in exchange for a 50% interest in the project. NOTE FIVE--GEOGRAPHIC DATA The Company is engaged primarily in the exploration for and the production and sale of crude oil and natural gas. Sales, operating profit and identifiable assets by geographic area were as follows:
SALES AND OPERATING REVENUES ---------------------------- THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 --------------- ------------ United States................................. $ 41.6 $276.9 Indonesia..................................... 93.1 381.2 South America................................. 7.8 24.0 ------ ------ $142.5 $682.1 ====== ======
F-8 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OPERATING PROFIT (LOSS) ---------------------------- THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 --------------- ------------ United States................................. $ 2.9 $ 35.0 Indonesia..................................... 36.8 138.5 South America................................. (3.7) (2.6) Other foreign................................. (1.7) (11.6) ------ ------- 34.3 159.3 Equity earnings............................... 5.2 General corporate expenses.................... (5.6) (104.6) Interest and debt expenses.................... (24.1) (96.7) Pre-merger costs.............................. (42.4) Restructuring costs........................... 101.0 ------ ------- $(37.8) $ 64.2 ====== =======
IDENTIFIABLE ASSETS ---------------------- MARCH 31, DECEMBER 31, 1995 1994 --------- ------------ United States....................................... $ 295.7 $ 327.0 Indonesia........................................... 639.0 647.5 South America....................................... 317.2 304.2 Other foreign....................................... 15.3 11.4 -------- -------- 1,267.2 1,290.1 Corporate assets.................................... 424.9 416.6 -------- -------- $1,692.1 $1,706.7 ======== ========
Net foreign assets were $685.5 million at March 31, 1995 and $701.4 million at December 31, 1994. Income from foreign operations, after applicable local income taxes, was $16.7 million for the three months ended March 31, 1995 and $63.9 million for the year ended December 31, 1994. Sales to three customers for the three months ended March 31, 1995 and the year ended December 31, 1994 each represented 10% or more of consolidated sales:
THREE MONTHS TWELVE MONTHS ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 ------------ ------------- Phillips Petroleum Company...................... $14.3 $ 56.4 Mitsubishi Corporation.......................... 23.4 66.5 Indonesian Government........................... 36.4 145.8
The Company does not believe that the loss of Mitsubishi Corporation and Phillips Petroleum Company as customers would adversely affect the Company's ability to market its oil and gas production. Sales to the Company's largest customer, the Indonesian Government, are made primarily pursuant to long-term production sharing contracts between the Company's Indonesian operations and the Indonesian Government. The Indonesian Government is required to purchase a specified amount of the Company's oil and gas production throughout the life of its operations in Indonesia based on these contracts. F-9 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE SIX--TAXES Income before income taxes was comprised of income (loss) from:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 --------------- ------------ United States................................. $(69.2) $(60.1) Foreign....................................... 31.4 124.3 ------ ------ $(37.8) $ 64.2 ====== ======
The Company's provision for income taxes was comprised of the following:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 --------------- ------------ Current Federal..................................... $(20.1) Foreign..................................... $18.7 73.7 State and local............................. 5.5 ----- ------ 18.7 59.1 Deferred Federal..................................... 24.7 Foreign..................................... .4 3.1 ----- ------ .4 27.8 ----- ------ Provision for income taxes.................... $19.1 $ 86.9 ===== ======
The principal reasons for the difference between tax expense at the statutory federal income tax rate of 35% and the Company's provision for income taxes were:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 --------------- ------------ Tax expense at statutory federal rate........ $(13.2) $ 22.5 Increase (reduction) resulting from: Taxes on foreign income.................... 12.4 49.5 Excess statutory depletion................. (.7) Asset sales................................ 20.5 Alternative minimum tax.................... (.3) Nondeductible pre-Merger costs............. 4.4 Valuation allowance........................ 13.9 24.9 Items not related to current year earn- ings...................................... 1.5 (33.4) Other, net................................. .1 3.9 ------ ------ Provision for income taxes................. $ 19.1 $ 86.9 ====== ======
"Items not related to current year earnings" in 1994 includes a tax benefit from the favorable resolution of a federal tax refund suit. F-10 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities for the three months ended March 31, 1995 were as follows:
MARCH 31, 1995 --------- U. S. deferred tax liabilities Properties and equipment....................................... $ 5.1 Other.......................................................... .2 ------- Deferred U. S. tax liabilities............................... 5.3 ------- U. S. deferred tax assets Foreign deferred taxes......................................... (69.9) Book accruals.................................................. (34.4) Loss carryforwards............................................. (50.8) Credit carryforwards........................................... (23.2) Other.......................................................... (.6) ------- Gross deferred U. S. tax assets.............................. (178.9) ------- Valuation allowance.............................................. 163.9 ------- Net deferred U. S. tax assets.................................... (15.0) ------- Net deferred U. S. taxes......................................... (9.7) ------- Foreign deferred tax liabilities Properties and equipment....................................... 199.7 ------- Net deferred foreign taxes................................... 199.7 ------- Net deferred taxes............................................... $ 190.0 =======
The valuation allowance was $116.0 million at December 31, 1994. The valuation allowance was increased $13.9 million during the first three months of 1995, primarily due to the increase in loss carryforwards. Because the tax year of the Company did not close on March 31, 1995, tax carryovers are not measured at that date. At December 31, 1994, the Company had $13.1 million of general business credit carryforwards that expire between 1996 and 2002; $103.8 million of U.S. net operating loss carryforwards that expire in 2003, 2005 and 2008; and $10.1 million of minimum tax credit that can be carried forward indefinitely. As a result of the Merger, effective April 1, 1995, the Company's ability to utilize its existing net operating loss carryforwards will be limited by statute to approximately $92.0 million each year until exhausted. To the extent certain gains are recognized in the future, the annual limitation may be increased to the extent that the gains are built-in gains within the meaning of the U.S. Internal Revenue Code. There are accumulated undistributed earnings after applicable local taxes of foreign subsidiaries of $6.4 million at March 31, 1995 for which no provision was necessary for foreign withholding or other income taxes because that amount had been reinvested in properties and equipment and working capital in the foreign jurisdictions. Taxes other than income taxes were comprised of the following:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 --------------- ------------ Gross production.............................. $1.2 $ 6.5 Real and personal property.................... 1.8 5.5 Other......................................... .1 .9 ---- ----- $3.1 $12.9 ==== =====
F-11 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE SEVEN--POSTEMPLOYMENT BENEFITS Pensions The components of net periodic pension expense are as follows:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 --------------- ------------ Service cost for benefits earned during the period..................................... $ .5 $ 2.9 Interest cost on projected benefit obliga- tion....................................... 2.2 8.7 Actual return on plan assets................ (4.5) (2.5) Net amortization and deferrals.............. 2.5 (5.4) ----- ----- $ .7 $ 3.7 ===== =====
Due to an early retirement program offered to former employees, the Company recognized a settlement loss of $1.7 million on one of its plans in 1994. Plan assets are primarily invested in short-term investments and stocks and bonds. The principal assumptions used to estimate the benefit obligations of the plans on the measurement date, October 1, 1994 were as follows: Discount rate......................................................... 8.5% Expected long-term rate of return on plan assets...................... 9.0% Rate of increase in compensation levels............................... 5.5%
The funded status of the plans at March 31, 1995 was as follows:
PLANS WITH ----------------------- ACCUMULATED ASSETS BENEFITS EXCEEDING EXCEEDING ACCUMULATED ASSETS BENEFITS 3/31/95 3/31/95 ----------- ----------- Actuarial present value of: Vested benefit obligation....................... $ 86.3 $ 9.8 ------ ----- Accumulated benefit obligation.................. $ 90.6 $11.9 ------ ----- Projected benefit obligation.................... $ 91.4 $15.0 Plan assets at fair value......................... 76.2 14.5 ------ ----- Plan assets less than projected benefit obliga- tion............................................. $(15.2) $ (.5) Unrecognized net loss............................. 24.1 1.0 Unrecognized net transition obligation (asset).... (3.8) .1 Unrecognized prior service cost................... (.3) (.9) Adjustment required to recognize minimum liabili- ty............................................... (18.3) ------ ----- Prepaid (accrued) pension cost.................... $(13.5) $ (.3) ====== =====
At March 31, 1995 and December 31, 1994, the Company's accumulated postretirement benefit obligation ("APBO") exceeded the plan assets. In accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," the Company recorded a minimum pension liability of $19.2 million and a charge to equity of $18.3 million at March 31, 1995 and December 31, 1994. F-12 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In addition to the defined benefit plans, the Company has a defined contribution plan which covers Indonesian nationals. Employee contributions of 2% of each covered employee's compensation are matched by the Company with a contribution of 6% of compensation by the Company. Contributions to the plan were $.1 million in the first quarter of 1995 and $.4 million in 1994. Other Postretirement Benefits The Company reports its obligation for postretirement benefits other than pensions in accordance with Statement of Financial Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions," for its retiree health and welfare benefits plan. Under SFAS 106, the Company is required to accrue the estimated cost of retiree benefit payments, other than pensions, during employees' active service period. The Company currently administers several unfunded postretirement medical and life insurance plans covering primarily U. S. employees which are, depending on the type of plan, either contributory or noncontributory. Employees become eligible for these benefits if they meet minimum age and service requirements. During 1994, the Company's postretirement medical and life insurance plans experienced a partial curtailment due to the Company's decision to reduce staff. The effect of the curtailment was a $6.6 million charge to earnings in 1994, which was included as a component of the restructuring costs (See Note Three), primarily due to accelerated recognition of the transition obligation. The components of net periodic postretirement benefit expense for the three months ended March 31, 1995 and for the year ended December 31, 1994 are as follows:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 --------------- ------------ Service cost for benefits earned during the period...................................... $ .1 $ .5 Interest cost on accumulated postretirement benefit obligation.......................... .9 3.4 Amortization of transition obligation........ .5 2.3 ---- ---- $1.5 $6.2 ==== ====
The APBO as of March 31, 1995 was $44.4 million. The amount recognized in the Company's statement of financial position at March 31, 1995 is as follows:
MARCH 31, 1995 -------------- Retirees.................................................... $ 39.0 Fully eligible active employees............................. 1.8 Other active employees...................................... 3.6 ------ Total..................................................... 44.4 Unrecognized transition obligation.......................... (33.7) Unrecognized net gain....................................... 2.1 ------ $ 12.8 ======
A discount rate of 8.5% was used in determining the APBO for the three months ended March 31, 1995. The APBO was based on a 10.4% increase in the medical cost trend rate, with the rate trending downward .6% per year to 5% in 2003 and remaining at 5% thereafter. This assumption has a significant effect on annual F-13 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) expense, as it is estimated that a 1% increase in the medical trend rate would increase the APBO by $4.2 million and increase the net periodic postretirement benefit cost by $.4 million per year. Other Postemployment Benefits The Company reports its obligation for postemployment benefits in accordance with Statement of Financial Accounting Standards No. 112 ("SFAS 112"), "Employers' Accounting for Postemployment Benefits," to account for benefits provided after employment but before retirement. SFAS 112 requires an accrual method of recognizing the cost of providing postemployment benefits. This liability primarily represents medical benefits for long-term disability recipients. Annual costs are expected to be immaterial. Net periodic postemployment benefit expense was insignificant for the three months ended March 31, 1995 and for the year ended December 31, 1994. NOTE EIGHT--FINANCIAL INSTRUMENTS The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Unless otherwise disclosed, the fair value of financial instruments approximates their recorded values. Restricted Cash The fair value of the Company's restricted cash, which is invested primarily in U. S. Treasury notes, marketable securities and trust accounts is based on the quoted market prices for the same or similar securities at the reporting date. Long-Term Investments The fair value of the Company's long-term investments, which are primarily U. S. Treasury notes and long-term notes receivable, is based on the quoted market prices for the same or similar investments at the reporting date. Long-Term Debt The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The estimated fair value of the Company's financial instruments are as follows:
MARCH 31, 1995 ----------------- FAIR CARRYING VALUE OF AMOUNT ASSETS -------- -------- ASSETS Restricted cash, including current and long-term portion.... $128.4 $125.6 Long-term investments....................................... 41.5 36.7 LIABILITIES Long-term debt, including current portion................... 975.6 862.4
For information on the Company's derivative financial instruments, see Note Sixteen. F-14 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE NINE--RECEIVABLES
MARCH 31, 1995 -------------- Trade receivables........................................... $ 97.0 Notes and other receivables................................. 32.0 Less--Allowance for doubtful receivables.................... 1.2 ------ $127.8 ======
NOTE TEN--PROPERTIES AND EQUIPMENT
MARCH 31, 1995 -------------- Proved properties.......................................... $2,445.5 Unproved properties........................................ 31.7 Gas plants and other....................................... 220.0 -------- Total Oil and Gas........................................ 2,697.2 -------- Corporate.................................................. 51.5 2,748.7 Less--Accumulated depreciation, depletion and amortiza- tion...................................................... 1,638.0 -------- $1,110.7 ========
The charge against earnings for depreciation, depletion and amortization of property and equipment was $29.9 million for the three months ended March 31, 1995, and $138.9 million for the year ended December 31, 1994. The charge against earnings for maintenance and repairs was $7.4 million for the three months ended March 31, 1995, and $38.9 million for the year ended December 31, 1994. NOTE ELEVEN--INVESTMENTS AND LONG-TERM RECEIVABLES
MARCH 31, 1995 -------------- Investments, at cost, and long-term receivables............. $12.0 U. S. Treasury notes........................................ 29.5 ----- $41.5 =====
In September 1994, the Company sold its geothermal subsidiary, Thermal Power Company, which owned Union-Magma-Thermal Tax Partnership ("UMT") (See Note Four). The investment in UMT was carried on the equity method prior to the sale of Thermal Power Company. The following schedule presents certain summarized financial information of UMT:
DECEMBER 31, 1994 ----------------- Summarized Statement of Income: Sales.................................................. $50.0 Gross profit........................................... 24.8 Net income............................................. 24.8
The Company's equity earnings are principally from UMT and were $5.2 million in 1994. F-15 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE TWELVE--RESTRICTED CASH At March 31, 1995, the Company had $128.4 million in restricted cash, of which $64.0 million represented collateral for outstanding letters of credit. Assets held in trust as required by certain insurance policies were $64.4 million in 1995. Approximately $48.5 million of collateral for outstanding letters of credit at March 31, 1995 was classified as a current asset. NOTE THIRTEEN--INTANGIBLE ASSETS Intangibles, primarily the excess of cost over fair market value of net assets acquired, were $50.0 million at March 31, 1995. Accumulated amortization at March 31, 1995 was $14.5 million. The charge against earnings for amortization of intangible assets was $0.3 million for the three months ended March 31, 1995 and $1.3 million for the year ended December 31, 1994. NOTE FOURTEEN--ACCRUED LIABILITIES
MARCH 31, 1995 -------------- Accrued interest payable.................................... $ 34.8 Joint interest billings for international operations........ 32.3 Merger reserve.............................................. 41.0 Environmental reserve....................................... 14.9 Overlift payable............................................ 12.2 Postretirement and postemployment benefits.................. 4.5 Accrued compensation, benefits and withholdings............. 5.0 Other....................................................... 25.1 ------ $169.8 ======
NOTE FIFTEEN--LONG-TERM AND CREDIT ARRANGEMENTS
MARCH 31, 1995 -------------- Senior Indebtedness Sinking Fund Debentures 11 1/4% due 2013.......................................... $ 16.9 11 1/2% due 2001-2015..................................... 109.0 8 1/2% due 1998-2008...................................... 93.4 Notes 9 7/8% due 2002........................................... 247.3 9 1/2% due 2003........................................... 99.5 9 3/8% due 2003........................................... 260.0 Medium-term notes........................................... 149.3 Bank and other loans........................................ .2 ------ Total senior indebtedness................................. 975.6 Less--current portion....................................... 4.7 ------ $970.9 ======
F-16 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The aggregate maturities of long-term debt outstanding at March 31, 1995, for the next five years will be as follows: April 1, 1995--March 31, 1996....................................... $ 4.7 April 1, 1996--March 31, 1997....................................... 34.3 April 1, 1997--March 31, 1998....................................... 14.2 April 1, 1998--March 31, 1999....................................... 20.5 April 1, 1999--March 31, 2000....................................... 8.5
At March 31, 1995, the Company had $149.3 million of medium-term notes outstanding, which were issued in prior years, with maturities from 1995 to 2004 and annual interest rates ranging from 7.57% to 11.08%. The Company maintains a $25.0 million uncommitted credit facility (the "credit facility") which is used for the issuance of documentary or standby letters of credit and/or the payment of shipping documents. The credit facility can be secured by cash or the accounts receivable which are financed through the letters of credit. At March 31, 1995, there were $24.5 million of cash collateralized letters of credit outstanding under this credit facility. Total interest and debt expenses incurred, including capitalized interest, were as follows:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 --------------- ------------ Interest and debt expenses.................... $24.1 $96.7 Capitalized interest.......................... .1 3.2 ----- ----- $24.2 $99.9 ===== =====
NOTE SIXTEEN--DERIVATIVE FINANCIAL INSTRUMENTS The Company's only derivative financial instruments are an interest rate swap agreement with an investment broker, natural gas price swap agreements and crude oil and natural gas futures contracts, which are not used for trading purposes. Interest Rate Swap Agreement Effective January 27, 1993, the Company entered into an interest rate swap agreement under which it pays the counterparty interest at a variable rate based on the London Interbank Offering Rate (LIBOR) and the counterparty pays the Company interest at 6.73% on the notional principal of $100.0 million. This agreement is effective through January 27, 2003. The Company is not required to collateralize its obligation under this agreement unless it is in an unfavorable position. Due to higher interest rates in 1994, the Company's position in the interest rate swap became unfavorable. As a result, the Company was required to collateralize $7.9 million, which was recorded in deferred charges at December 31, 1994. As interest rates declined during the first three months of 1995, the Company reduced its collateralized position by $3.4 million, leaving a balance of $4.5 million recorded in deferred charges at March 31, 1995. Natural Gas Price Swap Agreements Under the price swap agreements used to hedge fluctuations in the price of natural gas, the Company receives or makes payments based on the differential between the Company's specified price and the counterparty's specified price of natural gas. Depending on the agreement, the Company pays a fixed or variable F-17 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) price per million British Thermal Units ("Mmbtu") and receives a fixed or variable price per Mmbtu. During the three months ended March 31, 1995, the Company had swap agreements with other companies to exchange payments on 0.8 million Mmbtu of gas. Under these swap agreements, the Company paid fixed or variable prices averaging $1.61 per Mmbtu and received fixed or variable prices averaging $1.58 per Mmbtu. Gross gains and gross losses realized on these swap agreements were immaterial. Natural Gas and Crude Oil Futures Contracts Under the natural gas futures contracts used to hedge fluctuations in the price of natural gas, the Company receives or makes payments based on the differential between the selling price and the settlement price per Mmbtu. During the three months ended March 31, 1995, the Company settled futures contracts with other companies on 1.2 million Mmbtu of gas. Under these futures contracts, the Company received selling prices averaging $1.65 per Mmbtu and paid settlement prices averaging $1.46 per Mmbtu. Realized gross gains on these futures contracts were $0.2 million. Under the crude oil futures contracts used to hedge fluctuations in the price of crude oil, the Company receives or makes payments based on the differential between the selling price and the settlement price per barrel. During the three-month period ended March 31, 1995, crude oil volumes hedged under these futures contracts were insignificant as were gross unrealized gains and losses. NOTE SEVENTEEN--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. $9.75 Cumulative Convertible Preferred Stock In 1987, the Company sold 3,000,000 shares of $9.75 Cumulative Convertible Preferred Stock (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 March 31, 1995, 1,250,000 shares of $9.75 Preferred Stock were outstanding, each receiving an annual cash dividend of $9.75. In addition, 375,000 of such shares (the "Conversion Waiver Shares") each received an additional quarterly cash payment of $.25 ($.50 in certain circumstances). For the 12-month period commencing February 1, 1995, each share of the $9.75 Preferred Stock has a liquidation value of $101.0836 ($126.4 million in the aggregate) which reduces to $100 at February 1, 1996, in each case plus accrued dividends. Since February 1, 1994, the stock has been subject to mandatory redemption at the rate of 625,000 shares per year. 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, and the $9.75 Preferred Stock other than the Conversion Waiver Shares entitles the holder to elect one individual to the Board of Directors of the Company. 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. $4.00 Cumulative Convertible Preferred Stock Each outstanding share of $4.00 Cumulative Convertible Preferred Stock (the "$4.00 Preferred Stock") was entitled to one vote, was convertible at any time into shares of the Company's Common Stock (2.29751 shares F-18 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) at March 31, 1995), was entitled to receive annual cash dividends of $4.00 per share, was callable at and had a liquidation value of $50.00 per share ($217.8 million in the aggregate at March 31, 1995) plus accrued but unpaid dividends, if any. The Company redeemed the $4.00 Preferred Stock on August 13, 1996. $2.50 Cumulative Preferred Stock Each outstanding share of the $2.50 Preferred is entitled to receive annual cash dividends of $2.50 per share, is callable after December 1, 1998 at and has a liquidation value of $25.00 per share ($87.5 million in the aggregate at March 31, 1995) plus accrued but unpaid dividends, if any. The holders of the shares 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. NOTE EIGHTEEN--COMMON STOCK
SHARES AMOUNT ----------- ------ January 1, 1994....................................... 134,373,523 $134.4 Employee Shareholding and Investment Plan........... 830,798 .8 Restricted stock.................................... 490,430 .5 Fractional shares exchanged for cash................ (29) ----------- ------ January 1, 1995....................................... 135,694,722 135.7 Employee Shareholding and Investment Plan........... 199,274 .2 Conversion of $4.00 Preferred Stock................. 5,588 Fractional shares exchanged for cash................ (1,685) ----------- ------ March 31, 1995........................................ 135,897,899 $135.9 =========== ======
In 1991, the Company's Dividend Reinvestment and Stock Purchase Plan (the "Plan") became effective. The Plan allowed holders of Common Stock to purchase additional shares at a 3% discount from the current market prices without paying brokerage commissions or other charges. In addition, if the Company were to pay a dividend on its Common Stock in the future, common stockholders could reinvest the amount of those dividends in additional shares also at a 3% discount from the current market prices. In November 1992, the Company effectively suspended the Plan by raising the threshold price. At March 31, 1995, there were 32.4 million shares of Common Stock reserved for issuance upon conversion of Preferred Stock, exercises of stock options or issuance under certain employee benefit plans. In 1992, Kidder, Peabody Group Inc. purchased eight million warrants from the Company. Each warrant represents the right to purchase one share of the Company's Common Stock at $13.00 per share at any time prior to the expiration of the warrants on October 10, 1997. The Company has an Employee Shareholding and Investment Plan, now known as the Employee Savings Plan ("ESIP"), which allows eligible participating employees to contribute a certain percentage of their salaries (1%-10%) to a trust for investment in any of six funds, one of which consists of the Company's Common Stock. The Company matches the participating employee's contribution to the ESIP (up to 6% of base pay); such matching contribution is charged against earnings and invested in the ESIP fund which consists of the Company's Common Stock. The charge against earnings for the Company's contribution to the ESIP was $0.6 F-19 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) million and $2.8 million at March 31, 1995 and December 31, 1994, respectively. Subsequent to the Merger, contributions can no longer be invested in the Company's Common Stock. In 1988, the Company adopted a Preferred Share Purchase Rights Plan. The plan issued one right for each share of Common Stock and 7.92 rights for each share of $9.75 Preferred Stock outstanding as of the close of business on September 12, 1988. The rights, which entitled the holder to purchase from the Company one one-hundredth of a share of a new series of junior preferred stock at $23.00 per share, became exercisable if a person had become the beneficial owner of 20% or more of the Company's Common Stock or of an amount that the Board of Directors determined was intended to cause the Company to take certain actions not in the best long-term interests of the Company and its stockholders. The rights also became exercisable if a person made a tender offer or exchange offer for 30% or more of the Company's outstanding Common Stock. The rights could be redeemed at $.10 per right under certain circumstances. In the Merger Agreement, the Company agreed to redeem the rights. On February 28, 1995, the Board of Directors of the Company took action to redeem the rights, effective as of March 22, 1995. Holders of Common Stock on the close of business on that date received the redemption price of $0.10 per right. Under a separate agreement with the sole holder of the $9.75 Preferred Stock, such holder waived its right to receive the redemption price with respect to the rights associated with the $9.75 Preferred Stock, subject to consummation of the Merger. NOTE NINETEEN--PAID-IN CAPITAL AND ACCUMULATED DEFICIT
PAID-IN ACCUMULATED CAPITAL DEFICIT -------- ----------- January 1, 1994..................................... $1,026.2 $ (993.7) Net loss.......................................... (22.7) Dividends on Preferred Stock...................... (43.6) Employee Shareholding and Investment Plan......... 3.1 Restricted stock.................................. 2.4 -------- --------- January 1, 1995..................................... 988.1 (1,016.4) Net loss.......................................... (56.9) Dividends on Preferred Stock...................... (9.6) Stock rights redemption........................... (13.6) Restricted stock.................................. .6 Employee Shareholding and Investment Plan......... .7 -------- --------- March 31, 1995...................................... $ 966.2 $(1,073.3) ======== =========
NOTE TWENTY--UNREALIZED LOSS ON INVESTMENT IN MARKETABLE SECURITIES The amortized cost and estimated fair value of marketable securities at March 31, 1995 are as follows:
MARCH 31, 1995 --------------------------- GROSS AMORTIZED UNREALIZED MARKET COST LOSS VALUE --------- ---------- ------ Held-to-maturity: Corporate and other debt securities......... $280.0 $2.8 $277.2 Held-for-sale: Corporate and other debt securities......... 30.7 1.3 29.4
F-20 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At March 31, 1995, securities categorized as held-to-maturity are included in cash equivalents, short-term investments and short- and long-term restricted cash. The securities held-for-sale consist of U. S. Treasury notes which mature in August 2002 and are classified as long-term investments (See Note Eleven). NOTE TWENTY-ONE--COMMON TREASURY STOCK
SHARES AMOUNT -------- ------ January 1, 1994.......................................... (173,963) $(2.5) Restricted Stock....................................... (122,032) (1.0) -------- ----- January 1, 1995.......................................... (295,995) (3.5) Restricted Stock....................................... (14,540) (.1) -------- ----- March 31, 1995........................................... (310,535) $(3.6) ======== =====
NOTE TWENTY-TWO--STOCK OPTIONS Two plans, a Long-Term Incentive Plan and a Director Stock Option Plan, were approved by the stockholders in 1992. The Company's 1986 and 1992 Long-Term Incentive Plans (the "Incentive Plans"), administered by the Compensation Committee of the Board of Directors, permitted the grant to officers and certain key employees of stock options, stock appreciation rights ("SARs"), performance units and awards of Common Stock or other securities of the Company on terms and conditions determined by the Compensation Committee of the Board of Directors. The Director Stock Option Plan became effective on September 1, 1992. Under this plan, non-employee directors received options to purchase shares of Common Stock on the effective date of the plan. Thereafter, upon initial election or re-election of a non-employee director at an annual meeting, the non-employee directors automatically received options to purchase shares of Common Stock. The plan terminated on June 7, 1995. The grant or exercise of an option did not result in a charge against the Company's earnings because all options have been granted at exercise prices approximating the market value of the stock at the date of grant. However, any excess of Common Stock market price over the option price of options, which includes SARs, would result in a charge against the Company's earnings; a subsequent decline in market price would result in a credit to earnings, but only to a maximum of the earnings charges incurred in prior years on SARs. Stock option activity was as follows:
MARCH 31, DECEMBER 31, 1995 1994 --------- ------------ Outstanding at January 1......................... 2,268,068 1,694,445 Granted........................................ 758,000 Cancelled...................................... (77,495) (184,377) --------- ------------ Outstanding at end of period..................... 2,190,573 2,268,068 Grant price.................................... $5.00-$8.625 Available for future grants at end of period..... 2,496,936 2,419,441 Restricted stock held for vesting at end of peri- od.............................................. 936,066 951,410 Performance units held for vesting at end of pe- riod............................................ 653,355 653,355
Exercise prices of stock options outstanding at March 31, 1995 ranged from $5.00 to $13.75 per share. No stock options were exercised during 1994 or the first three months of 1995. There was no earnings activity related to SARs in 1994 or for the period ended March 31, 1995. Effective upon the Merger, all stock options and restricted stock outstanding under Company-sponsored incentive plans were surrendered to the Company. F-21 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Under the 1986 Long-Term Incentive Plan, the Company granted Restricted Stock. The amount of the grant price was amortized over the vesting period of the grant as a charge against earnings. The charge against earnings was $0.5 million for the period ended March 31, 1995 and $1.4 million in 1994. Effective upon the Merger, all stock options and restricted stock outstanding under Company-sponsored incentive plans were surrendered to the Company. In March 1995, the Company recorded a $9.9 million charge to earnings to record the estimated cost to redeem all outstanding options and restricted stock. This charge was included in pre-Merger costs in the Company's consolidated statement of operations (See Note Two). NOTE TWENTY-THREE--LEASES The Company leases certain machinery and equipment, facilities and office space under cancelable and noncancelable operating leases, most of which expire within 20 years and may be renewed. Minimum annual rentals for non-cancelable operating leases at March 31, 1995, were as follows: March 31, 1996..................................................... $ 34.4 March 31, 1997..................................................... 19.4 March 31, 1998..................................................... 15.7 March 31, 1999..................................................... 9.0 March 31, 2000..................................................... 8.2 March 31, 2001 and thereafter...................................... 34.0 ------ $120.7 ======
Minimum annual rentals have not been reduced by minimum sublease rentals of $38.7 million due in the future under noncancelable subleases. Rental expense for operating leases was as follows:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1995 1994 --------------- ------------ Total rentals................................. $14.0 $60.1 Less--Sublease rental income.................. .9 2.9 ----- ----- Rental expense................................ $13.1 $57.2 ===== =====
NOTE TWENTY-FOUR--COMMITMENTS AND CONTINGENCIES Like other energy companies, Maxus' operations are subject to various laws related to the handling and disposal of hazardous substances which require the cleanup of deposits and spills. Compliance with the laws and protection of the environment worldwide is of the highest priority to Maxus management. In the first quarter of 1995, the Company spent $1.4 million in environmental related expenditures for its oil and gas operations. In addition, the Company is implementing certain environmental projects related to its former chemicals business ("Chemicals") sold to an affiliate of Occidental Petroleum Corporation (collectively, "Occidental") in 1986 and certain other disposed of businesses. The environmental projects discussed below relating to Chemicals' business are being conducted on behalf of Occidental pursuant to the sale agreement. The Company has agreed to remediate the site of the former agricultural chemical plant in Newark, New Jersey as required by a consent decree entered into in 1990 by Occidental, the United States Environmental F-22 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Protection Agency (the "EPA") and the New Jersey Department of Environmental Protection and Energy (the "DEP"). Pursuant to an agreement with the EPA, the Company is conducting further testing and studies to characterize contaminated sediment in a portion of the Passaic River near the plant site. The Company has been conducting similar studies under its own auspices for several years. Under an Administrative Consent Order issued by the DEP in 1990, covering sites primarily in Kearny and Secaucus, New Jersey, the Company will continue to implement interim remedial measures and to perform remedial investigations and feasibility studies and, if necessary, will implement additional remedial actions at various locations where chromite ore residue, allegedly from the former Kearny plant, was utilized, as well as at the plant site. Until 1976, Chemicals operated manufacturing facilities in Painesville, Ohio. The Company has heretofore conducted many remedial, maintenance and monitoring activities at this site. The former Painesville plant area has been proposed for listing on the national priority list of Superfund sites. The scope and nature of further investigation or remediation which may be required cannot be determined at this time. The Company also has responsibility for Chemicals' share of the remediation cost for a number of other non-plant sites where wastes from plant operations by Chemicals were allegedly disposed of or have come to be located, including several commercial waste disposal sites. At the time of the spin-off by the Company of Diamond Shamrock, Inc. ("DSI") in 1987, the Company executed a cost-sharing agreement for the partial reimbursement by DSI of environmental expenses related to the Company's disposed of businesses, including Chemicals. DSI was expected to reach its total reimbursement obligation in 1996. The Company's total expenditures for environmental compliance for disposed of businesses, including Chemicals, were $7.9 million in the first quarter of 1995, $2.6 million of which was recovered from DSI under the cost-sharing agreement. Reserves have been established for environmental liabilities where they are material and probable and can be reasonably estimated. At March 31, 1995 and December 31, 1994, reserves for the above environmental contingencies totaled $84.7 million and $87.1 million, respectively. During 1994, the Company increased its reserve for future environmental liabilities by $60.5 million, primarily in response to the EPA's proposal of chromium clean-up standards and for additional costs expected to be incurred at Chemicals' former Newark, New Jersey plant site. The Company enters 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, guerrilla activities and insurrection. Areas in which the Company had significant operations include the United States, Indonesia, Ecuador, Bolivia and Venezuela. F-23 REPORT OF MANAGEMENT To the Stockholders of Maxus Energy Corporation The Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles and have been audited by Arthur Andersen LLP, independent accountants, for the three months ended March 31, 1995, the nine months ended December 31, 1995 and the year ended December 31, 1996 and have been audited by Price Waterhouse LLP, independent accountants, for the year ended December 31, 1994. In meeting its responsibility for the reliability of the Consolidated Financial Statements, the Company depends on its accounting and control systems. These systems are designed to provide reasonable assurance that assets are safeguarded against loss from unauthorized use and that transactions are executed in accordance with the Company's authorizations and are recorded properly. The Company believes that its accounting and control systems provide reasonable assurance that errors or irregularities that could be material to the Consolidated Financial Statements are prevented or would be detected within a timely period. The Company also requires that all officers and other employees adhere to a written business conduct policy. The independent accountants provide an objective review as to the Company's reported operating results and financial position. The Company also has an active operations auditing program which monitors the functioning of the Company's accounting and control systems and provides additional assurance that the Company's operations are conducted in a manner which is consistent with applicable laws. The Board of Directors pursues its oversight role for the Consolidated Financial Statements through the Audit Review Committee which is composed solely of directors who are not employees of the Company. The Audit Review Committee meets with the Company's financial management and operations auditors periodically to review the work of each and to monitor the discharge of their responsibilities. The Audit Review Committee also meets periodically with the Company's independent accountants without representatives of the Company present to discuss accounting, control, auditing and financial reporting matters. /s/ W. Mark Miller W. Mark Miller Vice President and Chief Financial Officer /s/ Linda R. Engelbrecht Linda R. Engelbrecht Controller Dallas, Texas January 29, 1997 F-24 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Maxus Energy Corporation We have audited the accompanying consolidated balance sheets of Maxus Energy Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995 and March 31, 1995, and the related consolidated statements of operations and cash flows for the year ended December 31, 1996, the nine months ended December 31, 1995 and the three months ended March 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxus Energy Corporation and its subsidiaries as of December 31, 1996 and 1995 and March 31, 1995, and the results of its operations and its cash flows for the year ended December 31, 1996, the nine months ended December 31, 1995, and the three months ended March 31, 1995, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Dallas, Texas January 29, 1997 F-25 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Maxus Energy Corporation In our opinion, the accompanying consolidated statements of operations and of cash flows present fairly, in all material respects, the results of operations and cash flows of Maxus Energy Corporation and its subsidiaries for the year ended December 31, 1994 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Maxus Energy Corporation for any period subsequent to December 31, 1994. /s/ Price Waterhouse LLP Price Waterhouse LLP Dallas, Texas February 28, 1995 F-26 FINANCIAL SUPPLEMENTARY INFORMATION (UNAUDITED) (DATA IS AS OF DECEMBER 31 FOR THE YEAR ENDED 1994 AND AS OF MARCH 31 FOR THE FIRST QUARTER THEN ENDED 1995. THE DOLLAR AMOUNTS IN TABLES ARE IN MILLIONS, EXCEPT PER SHARE) Oil and Gas Producing Activities The following are disclosures about the oil and gas producing activities of the Company as required by Statement of Financial Accounting Standards No. 69 ("SFAS 69"). RESULTS OF OPERATIONS Results of operations from all oil and gas producing activities are shown below. These results exclude revenues and expenses related to the purchase of natural gas and the subsequent processing and resale of such natural gas plus the sale of natural gas liquids extracted therefrom.
UNITED STATES INDONESIA ----------------------- ---------------------- MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1995 1994 1995 1994 --------- ------------ --------- ------------ Sales........................... $22.7 $ 132.3 $93.1 $381.2 ----- ------- ----- ------ Production costs................ 7.4 35.0 39.7 151.5 Exploration costs............... 3.7 12.2 2.7 13.8 Depreciation, depletion and am- ortization..................... 7.0 45.3 16.9 75.6 (Gain) loss on sale of assets... (.1) (201.8) Other........................... 2.9(a) 10.8(a) (3.0) 1.8 ----- ------- ----- ------ 20.9 (98.5) 56.3 242.7 ----- ------- ----- ------ Income (loss) before tax provi- sion........................... 1.8 230.8 36.8 138.5 Provision (benefit) for income taxes.......................... 4.6 18.7 74.4 ----- ------- ----- ------ Results of operations........... $ 1.8 $ 226.2 $18.1 $ 64.1 ===== ======= ===== ======
SOUTH AMERICA OTHER FOREIGN WORLDWIDE ---------------------- ---------------------- ---------------------- MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1995 1994 1995 1994 1995 1994 --------- ------------ --------- ------------ --------- ------------ Sales................... $ 7.8 $24.0 $123.6 $ 537.5 ----- ----- ------ ------- Production costs........ 6.8 17.8 53.9 204.3 Exploration costs....... .4 2.4 $ 2.2 $ 7.2 9.0 35.6 Depreciation, depletion and amortization....... 3.9 7.5 .4 2.7 28.2 131.1 (Gain) loss on sale of assets................. .2 (1.1) (1.2) (201.6) Other................... .4 (1.4) (.3) .3 10.9 ----- ----- ----- ----- ------ ------- 11.5 26.5 1.5 9.6 90.2 180.3 ----- ----- ----- ----- ------ ------- Income (loss) before tax provision.............. (3.7) (2.5) (1.5) (9.6) 33.4 357.2 Provision (benefit) for income taxes........... .5 5.2 (.2) 19.2 84.0 ----- ----- ----- ----- ------ ------- Results of operations... $(4.2) $(7.7) $(1.5) $(9.4) $ 14.2 $ 273.2 ===== ===== ===== ===== ====== =======
- ---------- (a) Includes United States gathering and processing costs related to sales. Such costs were $3.1 million and $11.8 million for March 31, 1995, December 31, 1994, respectively. F-27 CAPITALIZED COSTS Included in properties and equipment are capitalized amounts applicable to the Company's oil and gas producing activities. Such capitalized amounts include the cost of mineral interests in properties, completed and incomplete wells and related support equipment as follows:
UNITED STATES INDONESIA ---------------------- ---------------------- MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1995 1994 1995 1994 --------- ------------ --------- ------------ Proved properties................ $605.4 $584.0 $1,588.1 $1,572.9 Unproved properties.............. 10.7 7.8 .7 .7 ------ ------ -------- -------- 616.1 591.8 1,588.8 1,573.6 ------ ------ -------- -------- Less--Accumulated depreciation, depletion and amortization...... 422.6 416.8 1,060.6 1,043.7 ------ ------ -------- -------- $193.5 $175.0 $ 528.2 $ 529.9 ====== ====== ======== ========
SOUTH AMERICA OTHER FOREIGN WORLDWIDE ---------------------- ---------------------- ---------------------- MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1995 1994 1995 1994 1995 1994 --------- ------------ --------- ------------ --------- ------------ Proved properties....... $252.1 $240.8 $2,445.6 $2,397.7 Unproved properties..... 15.2 15.2 $5.0 $5.4 31.6 29.1 ------ ------ ---- ---- -------- -------- 267.3 256.0 5.0 5.4 2,477.2 2,426.8 ------ ------ ---- ---- -------- -------- Less--Accumulated depreciation, depletion and amortization....... 12.3 8.5 4.2 4.0 1,499.7 1,473.0 ------ ------ ---- ---- -------- -------- $255.0 $247.5 $ .8 $1.4 $ 977.5 $ 953.8 ====== ====== ==== ==== ======== ========
COSTS INCURRED Costs incurred by the Company in its oil and gas producing activities (whether capitalized or charged against earnings) were as follows:
UNITED STATES INDONESIA ---------------------- ---------------------- MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1995 1994 1995 1994 --------- ------------ --------- ------------ Property acquisition costs........ $13.6 $ 2.4 Exploration costs................. 7.0 12.8 $ 7.0 $13.8 Development costs................. 8.2 20.9 10.9 58.7 ----- ----- ----- ----- $28.8 $36.1 $17.9 $72.5 ===== ===== ===== =====
SOUTH AMERICA OTHER FOREIGN WORLDWIDE ---------------------- ---------------------- ---------------------- MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1995 1994 1995 1994 1995 1994 --------- ------------ --------- ------------ --------- ------------ Property acquisition costs.................. $13.6 $ 2.4 Exploration costs....... $ .4 $ 3.4 $2.2 $7.4 16.6 37.4 Development costs....... 11.3 77.7 30.4 157.3 ----- ----- ---- ---- ----- ------ $11.7 $81.1 $2.2 $7.4 $60.6 $197.1 ===== ===== ==== ==== ===== ======
F-28 OIL AND GAS RESERVES The following table represents the Company's net interest in estimated quantities of developed and undeveloped reserves of crude oil, condensate, natural gas liquids and natural gas and changes in such quantities at quarter- end March 31, 1995 and at year-end 1994. Net proved reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserve volumes that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are proved reserve volumes that are expected to be recovered from new wells on undrilled acreage or from existing wells where a significant expenditure is required for recompletion. Estimates of reserves were prepared by the Company using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). The choice of method or combination of methods employed in the analysis of each reservoir was determined by experience in the area, stage of development, quality and completeness of basic data, and production history. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. Reserve engineering is a subjective process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers often vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of crude oil and natural gas that are ultimately recovered. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumption upon which they were based. The reserve estimates were subjected to economic tests to determine economic limits. The estimates may change as a result of numerous factors including, but not limited to, additional development activity, evolving production history, and continued reassessment of the viability of production under varying economic conditions.
MARCH 31, 1995(D) DECEMBER 31, 1994 ------------------------------ ----------------------------------- UNITED SOUTH UNITED SOUTH CRUDE OIL STATES INDONESIA AMERICA TOTAL STATES INDONESIA AMERICA TOTAL --------- ------ --------- ------- ----- ------ --------- ------- ----- (MILLIONS OF BARRELS) Net Proved Developed and Undeveloped Reserves Beginning of period..... 3.5 158.8 67.1 229.4 12.3 180.1 71.6 264.0 Revisions of previous estimates............ .2 (3.2)(a) 5.1 2.1 Purchase of reserves in place............. .3 .3 Extensions, discoveries and other additions............ .1 3.5(a) 3.6 Production............ (.1) (4.7) (.8) (5.6) (.9) (21.6) (1.8)(c) (24.3) Sales of reserves in place................ (8.2) (7.8) (16.0) --- ----- ---- ----- ---- ----- ---- ----- End of period........... 3.7 154.1 66.3 224.1 3.5 158.8 67.1 229.4 --- ----- ---- ----- ---- ----- ---- ----- Net Proved Developed Reserves Beginning of period..... 2.9 141.5 14.8 159.2 11.0 161.1 14.1 186.2 End of period........... 2.8 136.8 14.0 153.6 2.9 141.5 14.8 159.2 === ===== ==== ===== ==== ===== ==== =====
F-29
MARCH 31, 1995(D) DECEMBER 31, 1994 ---------------------- ---------------------- UNITED UNITED NATURAL GAS(B) STATES INDONESIA TOTAL STATES INDONESIA TOTAL -------------- ------ --------- ----- ------ --------- ----- (BILLIONS OF CUBIC FEET) Net Proved Developed and Undeveloped Reserves Beginning of period.............. 492 304 796 679 262 941 Revisions of previous estimates..................... 21 1 22 Purchase of reserves in place.. 24 24 Extensions, discoveries and other additions............... 13 58 71 Production..................... (11) (4) (15) (57) (17) (74) Sales of reserves in place..... (164) (164) ---- --- ---- ---- ---- ---- End of period.................... 505 300 805 492 304 796 ---- --- ---- ---- ---- ---- Net Proved Developed Reserves Beginning of period.............. 384 107 491 507 85 592 End of period.................... 373 103 476 384 107 491 ==== === ==== ==== ==== ==== MARCH 31, 1995(D) DECEMBER 31, 1994 ---------------------- ---------------------- UNITED UNITED NATURAL GAS LIQUIDS STATES INDONESIA TOTAL STATES INDONESIA TOTAL ------------------- ------ --------- ----- ------ --------- ----- (MILLIONS OF BARRELS) Net Proved Developed and Undeveloped Reserves Beginning of period.............. 36.5 9.4 45.9 37.1 10.2 47.3 Revisions of previous estimates..................... 2.0 (.7) 1.3 Purchase of reserves in place.. .4 .4 Extensions, discoveries and other additions............... .4 .7 1.1 Production..................... (.8) (.1) (.9) (3.0) (.8) (3.8) ---- --- ---- ---- ---- ---- End of period.................... 36.1 9.3 45.4 36.5 9.4 45.9 ---- --- ---- ---- ---- ---- Net Proved Developed Reserves Beginning of period............. 29.7 3.2 32.9 29.5 3.3 32.8 End of period.................... 28.9 3.1 32.0 29.7 3.2 32.9 ==== === ==== ==== ==== ====
- -------- (a) The changes reflect the impact of the change in the price of crude oil on the barrels to which the Company is entitled under the terms of the Indonesian production sharing contracts. The Indonesian production sharing contracts allow the Company to recover tangible production and exploration costs, as well as operating costs. As the price of crude oil fluctuates, the Company is entitled to more or less barrels of cost recovery oil. Increasing prices at the end of 1994 resulted in a decrease of 11.7 million barrels. (b) Natural gas is reported on the basis of actual or calculated volumes which remain after removal, by lease or field separation facilities, of liquefiable hydrocarbons and of non-hydrocarbons where they occur in sufficient quantities to render the gas unmarketable. Natural gas reserve volumes include liquefiable hydrocarbons approximating 11% of total gas reserves in the United States and 5% in Indonesia which are recoverable at natural gas processing plants downstream from the lease or field separation facilities. Such recoverable liquids also have been included in natural gas liquids reserve volumes. (c) Reserves in Venezuela attributable to an operating service agreement under which all hydrocarbons are owned by the Venezuelan government have not been included. Production reported in Oil and Gas reserves does not include Venezuela production but it is included in net oil sales reported in Exploration and Production Statistics. The SFAS 69 Results of Operations, Capitalized Costs and Costs Incurred disclosures include costs related to Venezuela. (d) Reserves are estimated at year end only. Reserves at March 31, 1995 are December 31, 1994 reserves adjusted only for the production for the first quarter of 1995 and purchase of properties in the United States. F-30 FUTURE NET CASH FLOWS The standardized measure of discounted future net cash flows relating to the Company's proved oil and gas reserves is calculated and presented in accordance with Statement of Financial Accounting Standards No. 69. Accordingly, future cash inflows were determined by applying year-end oil and gas prices (adjusted for future fixed and determinable price changes) to the Company's estimated share of future production from proved oil and gas reserves. Future income taxes were derived by applying year-end statutory tax rates to the estimated net future cash flows. A prescribed 10% discount factor was applied to the future net cash flows. In the Company's opinion, this standardized measure is not a representative measure of fair market value, and the standardized measure presented for the Company's proved oil and gas reserves is not representative of the reserve value. The standardized measure is intended only to assist financial statement users in making comparisons between companies. Future net cash flows and changes in the standardized measure are only prepared at year-end; therefore, no data is presented as of March 31, 1995. Information as of December 31, 1995 is included in the post-Merger section.
DECEMBER 31, 1994 ------------------------------------------------ UNITED STATES INDONESIA SOUTH AMERICA WORLDWIDE ------------- --------- ------------- --------- Future cash flows............ $ 967.3 $ 3,389.0 $ 831.9 $ 5,188.2 Future production and devel- opment costs................ (324.7) (2,246.8) (371.8) (2,943.3) Future income tax expenses... (92.8) (503.1) (53.6) (649.5) ------- --------- ------- --------- Future net cash flows........ 549.8 639.1 406.5 1,595.4 Annual discount at 10% rate.. (241.1) (261.7) (162.8) (665.6) ------- --------- ------- --------- Standardized measure of dis- counted future net cash flows....................... $ 308.7 $ 377.4 $ 243.7 $ 929.8 ======= ========= ======= =========
The following are the principal sources for change in the standardized measure:
DECEMBER 31, 1994 ----------------- Beginning of year....................................... $1,061.3 Sales and transfers of oil and gas produced, net of production costs..................................... (333.2) Net changes in prices and production costs............ 103.4 Extensions, discoveries and improved recovery, less related costs........................................ 68.0 Development costs incurred during the year that reduced future development costs..................... 123.2 Revisions of previous quantity estimates.............. 56.6 Purchase of reserves in place......................... .4 Sale of reserves in place............................. (275.7) Net change in income taxes............................ (22.6) Accretion of discount................................. 132.4 Other................................................. 16.0 -------- End of year............................................. $ 929.8 ========
F-31 MAXUS ENERGY CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1996 1995 ------------- ------------ (IN MILLIONS) Revenues Sales and operating revenues...................... $718.0 $463.8 Other revenues, net............................... 20.1 7.1 ------ ------ 738.1 470.9 Costs and Expenses Operating expenses................................ 201.5 173.5 Gas purchase costs................................ 74.4 41.4 Exploration, including exploratory dry holes...... 35.1 51.2 Depreciation, depletion and amortization.......... 168.9 142.1 General and administrative expenses............... 11.4 12.7 Taxes other than income taxes..................... 14.0 9.7 Interest and debt expenses........................ 134.6 104.9 ------ ------ 639.9 535.5 ------ ------ Income (Loss) Before Income Taxes and Extraordinary Item............................................... 98.2 (64.6) Income Taxes...................................... 77.6 9.1 ------ ------ Net Income (Loss) Before Extraordinary Item......... 20.6 (73.7) Extraordinary Item................................ (5.6) ------ ------ Net Income (Loss)................................... $ 15.0 $(73.7) ====== ======
See Notes to Consolidated Financial Statements. F-32 MAXUS ENERGY CORPORATION CONSOLIDATED BALANCE SHEET
DECEMBER 31, DECEMBER 31, ASSETS 1996 1995 ------ ------------ ------------ (IN MILLIONS, EXCEPT SHARES) Current Assets Cash and cash equivalents.......................... $ 28.9 $ 38.3 Receivables, less allowance for doubtful accounts.. 199.0 141.8 Funding guarantee from parent...................... 27.4 Inventories........................................ 26.3 40.8 Restricted cash.................................... 7.3 19.0 Deferred income taxes.............................. 15.3 6.9 Prepaid expenses................................... 10.5 19.6 -------- -------- Total Current Assets............................. 314.7 266.4 Properties and Equipment, less accumulated depreciation, depletion and amortization............ 2,022.2 2,363.6 Investments and Long-Term Receivables................ .4 7.1 Restricted Cash...................................... 26.5 61.4 Funding Guarantee from Parent........................ 75.2 Deferred Charges..................................... 17.5 18.3 -------- -------- $2,456.5 $2,716.8 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt.................. $ 54.1 $ 34.3 Accounts payable................................... 98.1 59.0 Taxes payable...................................... 44.6 39.7 Accrued liabilities................................ 158.0 173.4 -------- -------- Total Current Liabilities........................ 354.8 306.4 Long-Term Debt....................................... 1,034.4 1,254.6 Advances from Parent................................. 182.2 6.6 Deferred Income Taxes................................ 502.7 551.2 Other Liabilities and Deferred Credits............... 171.0 233.0 $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.......................... 57.8 66.5 $4.00 Preferred Stock, $1.00 par value Authorized shares--0 and 5,915,017 Issued shares--0 and 4,356,958.................... 11.7 Common Stock, $1.00 par value Authorized shares--300,000,000 Issued shares--147,246,364 and 135,609,772........ 147.2 135.6 Paid-in capital.................................... 216.4 105.8 Accumulated deficit................................ (272.3) (73.7) Minimum pension liability.......................... (.2) (5.9) -------- -------- Total Stockholders' Equity....................... 148.9 240.0 -------- -------- $2,456.5 $2,716.8 ======== ========
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. F-33 MAXUS ENERGY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
TWELVE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1996 1995 ------------- ------------ (IN MILLIONS) Cash Flows From Operating Activities: Net income/(loss)................................. $ 15.0 $( 73.7) Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Extraordinary item.............................. 5.6 Depreciation, depletion and amortization........ 168.9 142.1 Dry hole costs.................................. 5.5 18.8 Income taxes.................................... (26.2) (49.2) Net (gain)/loss on sale of assets and investments.................................... 2.3 (5.9) Postretirement benefits......................... 3.8 3.1 Accretion of discount on long-term debt......... 9.0 7.3 Release of excess insurance reserves............ (13.6) Other........................................... 8.2 1.4 Changes in components of working capital: Receivables................................... (72.9) (5.4) Inventories, prepaids and other current assets....................................... 19.4 (12.8) Accounts payable.............................. 42.7 9.2 Accrued liabilities........................... (25.7) (31.5) Taxes payable/receivable...................... 9.8 53.4 ------- ------- Net Cash Provided by Operating Activities... 151.8 56.8 ------- ------- Cash Flows From Investing Activities: Expenditures for properties and equipment-- including dry hole costs......................... (203.3) (137.4) Proceeds on asset sales to parent................. 292.7 Proceeds from sales of assets..................... 13.7 27.4 Proceeds from sale/maturity of short- and long- term investments................................. 96.3 Restricted cash................................... 46.6 45.3 Other............................................. (29.5) (34.3) ------- ------- Net Cash Provided by/(Used in) Investing Activities................................. 120.2 (2.7) ------- ------- Cash Flows From Financing Activities: Interest rate swap................................ 6.9 Proceeds from issuance of short-term debt......... 17.2 Repayment of short-term debt...................... (60.7) (21.8) Net proceeds from issuance of long-term debt...... 839.8 Repayment of long-term debt....................... (148.7) (425.1) Cash advance from parent.......................... 175.6 Acquisition of common stock, including payment of merger costs..................................... (3.7) (746.6) Issuance of common stock to parent................ 64.0 Capital contribution from parent.................. 250.5 Redemption of preferred stock..................... (280.5) Dividends paid on preferred stock................. (27.4) (28.8) ------- ------- Net Cash Used in Financing Activities....... (281.4) (107.9) ------- ------- Net Decrease in Cash and Cash Equivalents........... (9.4) (53.8) Cash and Cash Equivalents at Beginning of Period.... 38.3 92.1 ------- ------- Cash and Cash Equivalents at End of Period.......... $ 28.9 $ 38.3 ======= =======
See Notes to Consolidated Financial Statements. F-34 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. Effective April 1, 1995, the Company used the purchase method of accounting to record the acquisition of the Company by YPF Sociedad Anonima ("YPF") as discussed in Note Two. Financial statements presented for periods after April 1, 1995 reflect the effects of the Merger-related transactions. Post-Merger financial information is not comparable to prior periods due to the application of purchase accounting effective April 1, 1995. The following post-Merger data is for the twelve months ended December 31, 1996, and the nine months ended December 31, 1995 and dollar amounts in tables are in millions. In June 1996, YPF 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 Three). 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. Net cash provided by operating activities reflects cash receipts for interest income and cash payments for interest expense and income taxes as follows:
TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ------------------ Interest receipts................... $ 9.3 $ 11.8 Interest payments................... 127.4 107.9 Income tax payments................. 93.0 64.7
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. F-35 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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, which includes 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. The Company's gross underproduced and overproduced volumes at December 31, 1996 are not material. F-36 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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 Three). 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 U. S. corporation. The Company subsequently transferred its ownership of the common stock of CLH to a subsidiary of Holdings (See Note Three). 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 United States Internal Revenue Code, to file a consolidated federal income tax return having Holdings as 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 Standard, No. 109 ("SFAS 109"), "Accounting for Income Taxes." It is F-37 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) based on a calculation of income tax for the Company as a separate entity, adjusted to reflect certain attributes of Holdings' consolidated income tax return. 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 Three); thus, current taxes and deferred taxes associated with the assumption of these liabilities have been transferred to the accounts of CLH. 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, restricted cash and trade receivables. The Company's cash equivalents 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 derivative 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 ("NGL") through price swap agreements and futures contracts. During 1996, the Company hedged approximately 35% of its NGL sales and 60% of its U. S. natural gas production and anticipates hedging approximately 40% of its U. S. NGL sales and 85% of its U. S. natural gas production in 1997. 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 entered into interest rate swap agreements to hedge interest on long-term debt; however, during the nine-month period ended December 31, 1995, the Company unwound its sole interest rate swap agreement. 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 Consolidated Statement of Operations as quantities are delivered which fulfill the take-or-pay obligation. At December 31, 1996 and 1995, the Company had $3.1 million and $12.4 million, respectively, in deferred revenue as a result of a take-or-pay payment received in 1995 related to its Indonesian operations. F-38 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Uncertainties Involving Forward-Looking Disclosure Certain of the statements set forth in the accompanying "Notes to Consolidated Financial Statements," such as the statements regarding expected cash advances from parents, projected environmental expenditures and the percentage of U. S. natural gas production anticipated to be hedged, are forward-looking (within the meaning of the U. S. Private Securities Litigation Reform Act of 1995) and are based upon assumptions that in the future may prove not to have been accurate. Such statements are subject to a number of risks and uncertainties including volatility of crude oil and natural gas prices, uncertainties regarding program spending commitments, environmental risks and operating hazards and risks. Because of the foregoing matters, the Company's actual results for 1997 and beyond could differ from those expressed in the forward-looking statements. NOTE TWO--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. ("YPFA Corp.") 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 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 YPFA Corp. for all the outstanding Shares at $5.50 per Share. Pursuant to the Offer, in April 1995 YPFA Corp. 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 YPFA Corp., 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 total amount of funds required by YPFA Corp. 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, YPFA Corp. assumed all outstanding obligations of the Company. On April 5, 1995, YPFA Corp. entered into a credit agreement with lenders for which The Chase Manhattan Bank (National Association) ("Chase") acted as agent, pursuant to which the lenders extended to YPFA Corp. 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. YPFA Corp. 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 "Indonesian Facility") extended to Maxus Indonesia, Inc., a wholly owned subsidiary of the Company. The proceeds of the loans made pursuant to F-39 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. In December 1996, YPF International Ltd. ("International"), the parent of Holdings, loaned the Company approximately $175 million to repay the Indonesian Facility (See Note Thirteen). NOTE THREE--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 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, 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 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. 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 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 had 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 Holdings of approximately $55.6 million to redeem the $4.00 Preferred Stock. As a 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 environmental contingencies discussed in Note F-40 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Twenty-Two 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 Ultramar Diamond Shamrock 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. At December 31, 1996, the outstanding funding guarantee totaled $102.6 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 shall reduce the obligation of YPF to capitalize Maxus pursuant to the Merger Agreement. During 1996, capital contributions of $8.0 million were made 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, Holdings. NOTE FOUR--ASSET ACQUISITION AND DIVESTITURES 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 Three). In December 1995, the Company sold its overriding royalty interest in the Recetor Block in Colombia for $25 million. There was no gain or loss recognized on this transaction as the sales price approximated the carrying value of the investment in the Recetor Block. NOTE FIVE--GEOGRAPHIC DATA AND SIGNIFICANT CUSTOMERS The Company is engaged primarily in the exploration for and the production and sale of crude oil and natural gas. Sales, operating profit and identifiable assets by geographic area were as follows:
SALES AND OPERATING REVENUES -------------------------------------- TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ------------------ United States....................... $232.7 $128.9 Indonesia........................... 403.9 298.3 South America....................... 81.4 36.6 ------ ------ $718.0 $463.8 ====== ======
F-41 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OPERATING PROFIT/(LOSS) -------------------------------------- TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ------------------ United States...................... $ 37.8 $ (15.1) Indonesia.......................... 157.1 88.7 South America...................... 29.5 (11.5) Other foreign...................... (7.8) (15.9) ------- ------- 216.6 46.2 General corporate income/(expenses)................. 16.2 (5.9) Interest and debt expenses......... (134.6) (104.9) ------- ------- $ 98.2 $ (64.6) ======= =======
IDENTIFIABLE ASSETS ----------------------------------- DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- United States.......................... $ 737.6 $ 715.9 Indonesia.............................. 1,174.0 1,157.1 South America.......................... 320.2 666.6 Other foreign.......................... 21.9 24.3 -------- -------- 2,253.7 2,563.9 Corporate assets....................... 202.8 152.9 -------- -------- $2,456.5 $2,716.8 ======== ========
Sales to three customers for the twelve months ended December 31, 1996 and for the nine months ended December 31, 1995, each represented 10% or more of consolidated sales:
TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ------------------ Phillips Petroleum Company........... $ 88.7 $ 44.4 Mitsubishi Corporation............... 61.0 49.6 Indonesian Government................ 123.1 102.4
The Company does not believe that the loss of Mitsubishi Corporation or Phillips Petroleum Company as a customer would adversely affect the Company's ability to market its oil and gas production. Sales to the Company's largest customer, the Indonesian Government, are made primarily pursuant to long-term production sharing contracts between the Company's Indonesian subsidiaries and the Indonesian Government. The Indonesian Government is required to purchase a specified amount of the Company's oil and gas production throughout the life of its operations in Indonesia based on these contracts. NOTE SIX--TAXES Income (loss) before income taxes was comprised of income (loss) from:
TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ------------------ United States....................... $(80.6) $(125.9) Foreign............................. 178.8 61.3 ------ ------- $ 98.2 $ (64.6) ====== =======
F-42 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company's provision/(benefit) for income taxes was comprised of the following:
TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ----------------- Current Federal............................ $ 2.6 $ (7.9) Foreign............................ 101.2 64.9 State and local.................... (5.0) 1.3 ------ ------ 98.8 58.3 Deferred Federal............................ (20.4) (15.2) Foreign............................ (.8) (34.0) ------ ------ (21.2) (49.2) ------ ------ Provision for income taxes........... $ 77.6 $ 9.1 ====== ======
As a result of signing the production sharing contract in Ecuador in 1996 (See Note Twenty-Two), foreign deferred tax expense was reduced by $3.5 million. The principal reasons for the difference between tax expense at the statutory federal income tax rate of 35% and the Company's provision for income taxes were:
TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ----------------- Tax expense (benefit) at statutory federal rate...................... $ 34.4 $(22.6) Increase (reduction) resulting from: Taxes on foreign income.......... 65.0 19.8 Asset sales...................... 2.0 1.5 Non-deductible depreciation and amortization of net purchase price adjustments............... 4.7 4.4 Valuation allowance.............. (24.6) 11.7 Audit settlements and other changes in tax position......... (3.6) (5.0) Other, net....................... (.3) (.7) ------ ------ Provision for income taxes....... $ 77.6 $ 9.1 ====== ======
F-43 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1996 and 1995, were as follows:
NINE MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31, DECEMBER 31, 1996 1995 ------------------- ----------------- U. S. deferred tax liabilities Properties and equipment.......... $ 241.7 $ 296.3 Discount on long-term debt........ 35.2 38.7 Other............................. 2.4 ------- ------- Deferred U. S. tax liabilities.. 279.3 335.0 ------- ------- U. S. deferred tax assets Foreign deferred taxes............ (133.5) (139.8) Book accruals..................... (33.2) (68.4) Interest limitation carryforwards.................... (16.4) Loss carryforwards................ (46.0) (72.7) Credit carryforwards.............. (20.6) (19.9) Other............................. (4.3) (7.1) ------- ------- Gross deferred U. S. tax as- sets........................... (237.6) (324.3) ------- ------- Valuation allowance............... 64.4 87.1 ------- ------- Net deferred U. S. tax assets... (173.2) (237.2) ------- ------- Net deferred U. S. taxes........ 106.1 97.8 ------- ------- Foreign deferred tax liabilities Properties and equipment.......... 381.4 446.5 ------- ------- Net deferred foreign taxes...... 381.4 446.5 ------- ------- Net deferred taxes.................. $ 487.5 $ 544.3 ======= =======
As a result of a decrease in U. S. net operating loss carryforwards, the valuation allowance was decreased $22.7 million during the twelve months ended December 31, 1996. At December 31, 1996, the Company had $13.5 million of general business credit carryforwards that expire between 1997 and 2002; $132.1 million of U. S. net operating loss carryforwards that expire from 2004 to 2010 and $7.1 million of minimum tax credit that can be carried forward indefinitely. As a result of the Merger, effective April 1, 1995, the Company's ability to utilize its existing net operating loss carryforwards will be limited by statute to approximately $92.0 million each year until exhausted. To the extent certain gains are recognized in the future, the annual limitation may be increased to the extent that the gains are built-in gains within the meaning of the U. S. Internal Revenue Code. There are accumulated undistributed earnings after applicable local taxes of foreign subsidiaries of $6.6 million for which no provision was necessary for foreign withholding or other income taxes because that amount had been reinvested in properties and equipment and working capital. On August 13, 1996, the Company became a member of an affiliated group of corporations having YPF Holdings, Inc., as common U. S. parent, and which will file a consolidated federal income tax return (See Note Three). As a member of the group, the Company is jointly and severally liable for the consolidated federal income tax liability of the group. The Company and its subsidiaries may also be included in certain state and local income or franchise tax returns of members of the group. F-44 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Taxes other than income taxes were comprised of the following:
TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ----------------- Gross Production..................... $ 7.8 $4.1 Real and Personal Property........... 5.2 5.2 Other................................ 1.0 .4 ----- ---- $14.0 $9.7 ===== ====
NOTE SEVEN--POSTEMPLOYMENT BENEFIT Pensions The components of net periodic pension expense are as follows:
TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ----------------- Service cost for benefits earned during the period................. $ 2.1 $ 1.4 Interest cost on projected benefit obligation........................ 8.9 6.5 Actual return on plan assets....... (9.1) (13.4) Net amortization and deferrals..... .4 7.4 ----- ------ $ 2.3 $ 1.9 ===== ======
Plan assets are primarily invested in short-term investments, stocks and bonds. The principal assumptions used to estimate the benefit obligations of the plans on the measurement dates, October 1, 1996 and 1995, were as follows:
1996 1995 ----- ---- Discount rate................................................... 7.75% 7.5% Expected long-term rate of return on plan assets................ 9.0% 9.0% Rate of increase in compensation levels......................... 4.5% 4.5%
The funded status of the plans at December 31, 1996 and 1995 were as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 PLANS WITH PLANS WITH ---------------------------------------- ---------------------------------------- ACCUMULATED ASSETS ACCUMULATED ASSETS BENEFITS EXCEEDING EXCEEDING ACCUMULATED BENEFITS EXCEEDING EXCEEDING ACCUMULATED ASSETS BENEFITS ASSETS BENEFITS ------------------ --------------------- ------------------ --------------------- Actuarial present value of: Vested benefit obligation........... $25.0 $82.9 $111.7 $1.1 ----- ----- ------ ---- Accumulated benefit obligation........... $28.0 $85.8 $117.6 $1.1 ----- ----- ------ ---- Projected benefit obligation........... $33.8 $85.8 $122.6 $1.1 Plan assets at fair value.................. 23.9 93.6 102.8 1.3 ----- ----- ------ ---- Plan assets (less) more than projected benefit obligation............. $(9.9) $ 7.8 $(19.8) $ .2 Unrecognized net loss (gain)................. 7.6 (7.8) 10.1 Adjustment required to recognize minimum liability.............. (.2) (5.9) ----- ----- ------ ---- Prepaid (accrued) pension cost........... $(2.5) $ $(15.6) $ .2 ===== ===== ====== ====
F-45 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) As a result of the Merger, the Company was required to fully accrue its obligation for pension benefits in purchase accounting (See Note Two). Therefore, effective April 1, 1995, the Company increased its balance sheet liability to reflect any previously unrecognized gains and losses, transition obligations and prior service costs. Additionally, several of the Company's pension plans experienced a partial curtailment due to workforce reductions following the Merger. The impact of the partial curtailment, which had no impact on the Company's net periodic pension expense, reduced the Company's projected benefit obligation by $1.1 million. At December 31, 1996 and 1995, the Company's accumulated postretirement benefit obligation ("APBO") exceeded the plan assets. In accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," the Company recorded a minimum pension liability of $.2 million and $5.9 million and a charge to equity of $.2 million and $5.9 million at December 31, 1996 and 1995, respectively. The Company also has a defined contribution plan which covers Indonesian nationals. In addition to employee contributions of 2% of each covered employee's compensation, the Company contributes 6% of such employees' compensation to the plan. The Company's contributions to the plan were $.4 million for 1996 and $.4 million in the last three quarters of 1995. Other Postretirement Benefits As a result of the Merger, the Company was required to fully accrue its obligation for postretirement benefits other than pensions in purchase accounting (See Note Two). Therefore, effective April 1, 1995, the Company increased its balance sheet liability by $31.7 million to reflect any previously unrecognized gains and unrecognized transition obligation at March 31, 1995. The components of net periodic postretirement benefit expense for the twelve months ended December 31, 1996 and for the nine months ended December 31, 1995 are as follows:
TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ----------------- Service cost for benefits earned during the period.................. $ .3 $ .3 Interest cost on accumulated postretirement benefit obligation.. 3.0 2.6 ---- ---- $3.3 $2.9 ==== ====
The Company's current policy is to fund postretirement health care benefits on a pay-as-you-go basis as in prior years. The APBO as of December 31, 1996 was $41.7 million. The amount recognized in the Company's statement of financial position at December 31, 1996 and 1995, is as follows:
DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ Retirees........................................ $36.4 $39.9 Fully eligible active employees................. 1.8 2.3 Other active employees.......................... 3.5 4.4 Total APBO...................................... 41.7 46.6 Unrecognized net gain (loss) and changes in assumptions.................................... 2.8 (1.6) Prior year service cost......................... .6 ----- ----- Net postretirement benefit liability............ $45.1 $45.0 ===== =====
F-46 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A discount rate of 7.75% was used in determining the APBO at December 31, 1996. The APBO was based on a 9% increase in the medical cost trend rate, with the rate trending downward .5% per year to 5% in 2004 and remaining 5% thereafter. This assumption has a significant effect on annual expense, as it is estimated that a 1% increase in the medical trend rate would increase the APBO at December 31, 1996 by $3.4 million and increase the net periodic postretirement benefit cost by $.3 million per year. NOTE EIGHT--FINANCIAL INSTRUMENTS The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Unless otherwise disclosed, the fair value of financial instruments approximates their recorded values. Restricted Cash The fair value of the Company's restricted cash, which is invested primarily in U.S. Treasury notes, marketable securities and trust accounts, is based on the quoted market prices for the same or similar securities at the reporting date. The Company's gross unrealized gain on its restricted cash was $1.0 million and $2.3 million at December 31, 1996 and December 31, 1995, respectively. Such unrealized gain has not been reflected in the accompanying Consolidated Balance Sheet as the Company has classified these investments as held-to-maturity in accordance with Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments In Debt and Equity Securities." Long-Term Debt The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The estimated fair value of the Company's financial instruments are as follows:
DECEMBER 31, 1996 -------------------------- CARRYING AMOUNT FAIR VALUE --------------- ---------- ASSETS Restricted cash, including current and long- term portion................................ $ 33.8 $ 34.8 LIABILITIES Long-term debt, including current portion.... 1,270.7 1,415.4 $9.75 Preferred Stock........................ 62.5 62.6 DECEMBER 31, 1995 -------------------------- CARRYING AMOUNT FAIR VALUE --------------- ---------- ASSETS Restricted cash, including current and long- term portion................................ $ 80.4 $ 82.7 LIABILITIES Long-term debt, including current portion.... 1,295.5 1,408.7 $9.75 Preferred Stock........................ 125.0 125.8
For information on the Company's derivative financial instruments, see Note Fourteen. F-47 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE NINE--RECEIVABLES
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- Trade receivables..................... $157.9 $101.4 Notes and other receivables........... 36.4 41.3 Receivable from YPF for generator sale................................. 5.4 Less--Allowance for doubtful receiv- ables................................ .7 .9 ------ ------ $199.0 $141.8 ====== ======
NOTE TEN--PROPERTIES AND EQUIPMENT
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- Proved properties..................... $1,618.1 $1,512.6 Unproved properties................... 453.3 768.8 Gas plants and other.................. 244.6 208.8 -------- -------- Total Oil and Gas..................... 2,316.0 2,490.2 Corporate............................. 5.3 13.3 -------- -------- 2,321.3 2,503.5 Less--Accumulated depreciation, depletion and amortization........... 299.1 139.9 -------- -------- $2,022.2 $2,363.6 ======== ========
The charge against earnings for depreciation, depletion and amortization of property and equipment was $168.9 million and $142.1 million for the twelve months ended December 31, 1996 and for the nine months ended December 31, 1995 and the charge against earnings for maintenance and repairs, which is included in operating expenses, was $32.2 million and $25 million, respectively. NOTE ELEVEN--RESTRICTED CASH At December 31, 1996, the Company had $33.8 million in restricted cash of which $.6 million represented collateral for outstanding letters of credit and $33.2 million represented assets held in trust as required by certain insurance policies. At December 31, 1996, approximately $7.3 million of assets held in trust as required by certain insurance policies were classified as a current asset. At December 31, 1995, the Company had $80.4 million in restricted cash, of which $30.7 million represented collateral for outstanding letters of credit, $7.4 million represented six months of interest on outstanding borrowings as required by a credit agreement and $42.3 million represented assets held in trust as required by certain insurance policies. At December 31, 1995, approximately $19.0 million of collateral for outstanding letters of credit were classified as a current asset. NOTE TWELVE--ACCRUED LIABILITIES
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- Accrued interest payable.............. $ 21.6 $ 24.2 Joint interest billings for interna- tional operations.................... 37.0 41.7 Merger reserve........................ 12.8 31.4 Environmental reserve................. 27.4 28.5 Overlift payable...................... 15.6 6.6 Postretirement and postemployment ben- efits................................ 4.5 4.5 Accrued compensation, benefits and withholdings......................... 6.0 8.1 Other................................. 33.1 28.4 ------ ------ $158.0 $173.4 ====== ======
F-48 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE THIRTEEN--LONG-TERM DEBT AND CREDIT ARRANGEMENTS
DECEMBER 31, 1996 ------------------------------------- UNAMORTIZED FACE VALUE DISCOUNT CARRYING VALUE ---------- ----------- -------------- Senior Indebtedness Sinking Fund Debentures 11 1/4% due 2013, effective rate 13.45%........................... $ 16.9 $ 2.5 $ 14.4 11 1/2% due 2001-2015, effective rate 13.82%...................... 109.6 14.5 95.1 8 1/2% due 1998-2008, effective rate 12.60%...................... 93.8 16.0 77.8 Notes 9 7/8% due 2002, effective rate 12.26%........................... 247.8 24.0 223.8 9 1/2% due 2003, effective rate 12.22%........................... 100.0 11.5 88.5 9 3/8% due 2003, effective rate 12.03%........................... 260.0 31.6 228.4 Medium-term notes................... 110.6 .1 110.5 Midgard Facility.................... 250.0 250.0 Advances from parent................ 182.2 182.2 -------- ------ -------- Total senior indebtedness......... 1,370.9 100.2 1,270.7 Less--current portion............... 54.1 54.1 -------- ------ -------- $1,316.8 $100.2 $1,216.6 ======== ====== ======== DECEMBER 31, 1995 ------------------------------------- UNAMORTIZED FACE VALUE DISCOUNT CARRYING VALUE ---------- ----------- -------------- Senior Indebtedness Sinking Fund Debentures 11 1/4% due 2013, effective rate 13.45%........................... $ 16.9 $ 2.5 $ 14.4 11 1/2% due 2001-2015, effective rate 13.82%...................... 109.6 15.0 94.6 8 1/2% due 1998-2008, effective rate 12.60%...................... 93.8 17.7 76.1 Notes 9 7/8% due 2002, effective rate 12.26%........................... 247.8 26.7 221.1 9 1/2% due 2003, effective rate 12.22%........................... 100.0 12.7 87.3 9 3/8% due 2003, effective rate 12.03%........................... 260.0 34.5 225.5 Medium-term notes................... 144.9 .1 144.8 Bank and other loans................ .1 .1 Midgard Facility.................... 250.0 250.0 Indonesian Facility................. 175.0 175.0 Advances from parent................ 6.6 6.6 -------- ------ -------- Total senior indebtedness......... 1,404.7 109.2 1,295.5 Less--current portion............... 34.3 34.3 -------- ------ -------- $1,370.4 $109.2 $1,261.2 ======== ====== ========
As a result of the Merger, the Company was required to revalue its outstanding debt to market value. Consequently, the Company reduced the carrying amount of its debt by recording $115.1 million of unamortized discount on April 1, 1995. For the twelve months ended December 31, 1996 and the nine months ended F-49 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) December 31, 1995, discount amortization of $9.0 million and $5.9 million, respectively, was included as a component of interest expense. The aggregate maturities of long-term debt outstanding at December 31, 1996 for the next five years will be as follows: 1997................................................................. $54.1 1998................................................................. 60.5 1999................................................................. 48.5 2000................................................................. 46.0 2001................................................................. 54.1
At December 31, 1996, the Company had $110.5 million of medium-term notes outstanding, which were issued in prior years, with maturities from 1997 to 2004 and annual interest rates ranging from 7.57% to 11.08%. The Company maintains three credit facilities which are used for the issuance of documentary or standby letters of credit. At December 31, 1996, there were $.6 million of cash collateralized letters of credit outstanding under an uncommitted credit facility. Also, at December 31, 1996, there were $9.1 million of letters of credit outstanding under an uncommitted credit facility of $10.0 million which is backed by a YPF guaranty. Finally, at December 31, 1996, there were $11.5 million of letters of credit outstanding under a committed credit facility of $40 million, which is also backed by a YPF guaranty. During 1996, the Company repaid $34.2 million of medium-term notes maturing in 1996. To fund this repayment, the Company used a portion of the proceeds from the sale of the outstanding shares of capital stock of an indirect, wholly owned subsidiary of Maxus (See Note Three). Total interest and debt expenses incurred, including capitalized interest, were as follows:
TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ----------------- Interest and debt expenses........... $134.6 $104.9 Capitalized interest................. 1.6 1.4 ------ ------ $136.2 $106.3 ====== ======
CREDIT FACILITIES On April 5, 1995, the Company borrowed $442 million under the Purchaser Facility (See Note Two) 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. Pursuant to a commitment letter from Chase, Chase provided two additional credit facilities aggregating $425 million: (i) a credit facility of $250 million extended to Midgard Energy Company ("Midgard"), a wholly owned subsidiary of the Company and (ii) a credit facility of $175 million extended to Maxus Indonesia, Inc. ("Indonesia"), a wholly owned subsidiary of the Company. The proceeds of these loans were used to repay in part, the Purchaser Facility, which was assumed by the Company. In addition, the Company applied $8 million of its available cash to repayment of the Purchaser Facility. The Company capitalized $16.8 million of debt issue costs during 1995 in connection with the Midgard and Indonesia credit facilities. These costs are recorded as deferred charges and amortized over the terms of the related borrowings. For the twelve months ended December 31, 1996, $2.0 million of debt issue costs amortization was included as a component of interest expense. Such costs were $1.2 million for the nine months ended December 31, 1995. F-50 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Indonesian Facility. Approximately $175 million of the Purchaser Facility was repaid with funds provided on June 16, 1995 to the Company by Indonesia. Indonesia provided these funds from the proceeds of a $175 million loan (the "Subsidiaries Loan") extended to it pursuant to a credit agreement (the "Indonesian Facility") entered into on such date. In December 1996, International advanced the Company $175 million in the form of a demand note bearing 5.75% interest compounded annually, to repay the Indonesian Facility. Unamortized debt issue costs associated with this early retirement were recorded as an extraordinary loss of $5.6 million, net of taxes. The tax impact of this transaction was less than $.1 million. Midgard Facility. Approximately $250 million of the loans under the Purchaser Facility were repaid on June 8, 1995 with funds provided to the Company by Midgard. Midgard provided these funds from the proceeds of a $250 million loan (the "Midgard Loan") extended to it pursuant to a credit agreement (the "Midgard Facility") entered into on such date. In addition, approximately $8 million of the loans outstanding under the Purchaser Facility, including accrued interest on the Purchaser Facility loans, were repaid on June 8, 1995 utilizing cash held by the Company. The Midgard Loan, which was made in a single drawing, will mature on December 31, 2003 and will be repaid in up to 28 consecutive quarterly installments commencing on March 31, 1997, subject to semi-annual borrowing base redeterminations. At Midgard's option, the interest rate applicable to the Midgard Loan will be, until March 31, 1997, either (i) the one-, two- or three-month London Interbank Offered Rate ("LIBOR") plus a margin of 1 3/4% or (ii) the Base Rate (as defined in the Midgard Facility) plus a margin of 3/4% and, thereafter, either (iii) the one-, two- or three-month LIBOR plus a margin of 2 1/4% or (iv) the Base Rate plus a margin of 1 1/4%. At December 31, 1996, the interest rate on the Midgard Facility based on the two-month LIBOR plus 1 3/4% was 7.375%. The Midgard Loan is not secured but is guaranteed by YPF and the Company. The agreement evidencing the Midgard Loan contains, among other things, a negative pledge on all assets of Midgard, subject to customary exceptions. It is anticipated that the Midgard Loan will be repaid with funds generated by Midgard's business operations. The Midgard Facility contains restrictive covenants including limitations upon the sale of assets, mergers and consolidations, the creation of liens and additional indebtedness, investments, dividends, the purchase or repayment of subordinated indebtedness, transactions with affiliates and modifications to certain material contracts. The obligors under the Midgard Facility may not permit (a) consolidated tangible net worth to be less than $200 million, plus (or minus) the amount of any adjustment in the book value of assets (b) the ratio of consolidated cash flow to consolidated debt service to be less than 1.1 to 1.0 at the end of any fiscal quarter and (c) the ratio of consolidated cash flow to consolidated interest expense to be less than 1.25 to 1.0 at the end of any fiscal quarter. In addition, mandatory prepayments of the loans under the Midgard Facility may be required in connection with certain asset sales and casualty losses, upon the issuance of subordinated indebtedness and in 1996 and in each year thereafter if, after semi-annual review, the agent and the lenders determine that a borrowing base deficiency exists. At December 31, 1996, the borrowing base for the Midgard Facility was $250 million. The borrowing base is subject to redetermination on April 1, 1997. No borrowing base deficiencies existed at December 31, 1996. The guaranty by Maxus of the obligations of Midgard under the Midgard Facility (the "Midgard Guaranty") contains restrictions upon mergers and consolidations, the creation of liens and the business activities in which Maxus and its subsidiaries may engage. In addition, Midgard, is required to be wholly owned subsidiary of Maxus, except to the extent YPF or a subsidiary of YPF (other than Maxus or a subsidiary of Maxus) makes capital contributions to Midgard. F-51 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Keepwell Covenant Pursuant to the Merger Agreement, in the event that 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 and the $2.50 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 Indonesian 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 non-redeemable preferred stock after the Merger Date. The foregoing obligations of YPF (the "Keepwell Covenant") will survive until June 8, 2004. During the twelve months ended December 31, 1996, YPF made capital contributions to the Company and CLH (See Note Three) in the aggregate amount of $64 million and $8 million, respectively. These amounts represent the cumulative contribution received by Maxus and CLH from YPF pursuant to the terms of the Keepwell Covenant. Based on current projections, it is anticipated that YPF will make capital contributions to CLH in the aggregate amount of approximately $25 to $50 million under the Keepwell Covenant during 1997. In addition, YPF has guaranteed the Company's outstanding debt as of the Merger Date, the principal amount of which was approximately $976 million. At December 31, 1996, the principal amount of outstanding debt guaranteed by YPF was approximately $939 million. The debt covered by the YPF guarantee includes the Company's outstanding 11 1/4%, 11 1/2% and 8 1/2% Sinking Fund Debentures, its outstanding 9 7/8%, 9 1/2% and 9 3/8% Notes, and its outstanding medium- term notes. YPF has also guaranteed the payment and performance of the Company's obligations to the holders of its $9.75 Preferred Stock (which was redeemed in accordance with its terms on January 31, 1997). Advances from Parent At December 31, 1996 and 1995, the Company had $182.2 million and $6.6 million, respectively, outstanding in advances from parent. As discussed above, in December 1996 the Company received a $175 million cash advance from International to fund the early repayment of the Subsidiaries Loan. Based on current projections, the Company anticipates that Holdings could be required to make cash advances of approximately $150 million to $200 million during 1997. At December 31, 1996, the Company's outstanding advances from parent of $182.2 million included a $175.3 million note payable to International. The note is a demand note, bearing 5.75% annual compound interest. It is not anticipated that International will request repayment of this note during 1997. The Company and YPF entered into a loan agreement (the "Loan Agreement") during 1996 to facilitate short-term loans by YPF to the Company and short- term loans by the Company to YPF of excess cash balances. At December 31, 1996, there were no loans outstanding under the Loan Agreement. It is expected that loans will be made by the parties under the Loan Agreement during 1997; however, the number and amounts thereof are not presently known. NOTE FOURTEEN--DERIVATIVE FINANCIAL INSTRUMENTS 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. During the nine-month period ended December 31, 1995, the Company unwound its sole interest rate swap agreement and recorded a $2.4 million final settlement gain in other revenues. The Company also received a $4.5 million termination payment, which was deferred. F-52 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Natural Gas Price Swap Agreements Under the price swap agreements used to hedge fluctuations in the price of natural gas, the Company receives or makes payments based on the differential between the Company's specified price and the counterparty's specified price of natural gas. Typically, the Company pays a variable price per million British Thermal Units ("Mmbtu") and receives a fixed price per Mmbtu. During the twelve months ended December 31, 1996, the Company had swap agreements with other companies to exchange payments on 32.3 million Mmbtu of gas. Under these swap agreements, the Company paid variable prices averaging $2.14 per Mmbtu and received fixed prices averaging $1.79 per Mmbtu. Gross losses realized on these swap agreements of $11.4 million were partially offset by gross gains of $.1 million resulting in a net loss of $11.3 million. During the nine months ended December 31, 1995, the Company had swap agreements with other companies to exchange payments on 10.7 million Mmbtu of gas. Under these swap agreements, the Company paid variable prices averaging $1.68 per Mmbtu and received fixed prices averaging $1.53 per Mmbtu. Gross losses realized on these swap agreements of $2.1 million were partially offset by gross gains of $.5 million resulting in a net loss of $1.6 million. As of December 31, 1996, the Company has outstanding price swap agreements with other companies to exchange payments on 36.5 million Mmbtu of gas during 1997. Under these swap agreements, the Company will receive fixed prices averaging $2.08 per Mmbtu. Actual gains and losses realized upon settlement of these price swap agreements will depend upon the variable prices paid at the time of settlement. Natural Gas Liquids Price Swap Agreements Under the price swap agreements used to hedge fluctuations in the price of NGL, the Company receives or makes payments based on the differential between the Company's specified price and the counterparty's specified price of natural gas. Typically, the Company pays a variable price per barrel ("bbl") and receives a fixed price per bbl. During the twelve months ended December 31, 1996, the Company had swap agreements with other companies to exchange payments on 2.3 million barrels ("mmb") of NGL. Under these swap agreements, the Company paid variable prices averaging $17.64 per bbl and received fixed prices averaging $13.55 per bbl. Gross losses realized on these swap agreements totaled $9.5 million during 1996. There were no NGL price swap agreements in place during 1995. As of December 31, 1996, the Company had outstanding price swap agreements with other companies to exchange payments on 2.5 mmb of NGL during 1997. Under these swap agreements, the Company will receive fixed prices averaging $14.84 per bbl. Actual gains and losses realized upon settlement of these price swap agreements will depend upon the variable prices paid at the time of settlement. Natural Gas Futures Contracts Under the natural gas futures contracts used to hedge fluctuations in the price of natural gas, the Company receives or makes payments based on the differential between the selling price of natural gas and the settlement price per Mmbtu. During the twelve months ended December 31, 1996, the Company settled futures contracts on 3.6 million Mmbtu of gas. Under these futures contracts, the Company received selling prices averaging $2.01 per Mmbtu and paid settlement prices averaging $2.57 per Mmbtu. Realized gross losses on these futures contracts totaled $2.0 million during 1996. During the nine months ended December 31, 1995, the Company settled futures contracts with other companies on 4.9 million Mmbtu of natural gas. Under these futures contracts, the Company received selling prices averaging $1.71 per Mmbtu and paid settlement prices averaging $1.70 per Mmbtu. Realized gross gains and losses on these futures contracts were immaterial. At December 31, 1996, the Company had no open futures contracts. F-53 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE FIFTEEN--PREFERRED STOCK Maxus 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. $9.75 Cumulative Convertible Preferred Stock In 1987, Maxus sold 3,000,000 shares of the $9.75 Preferred Stock. Since such time, Maxus 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, Maxus has repurchased 500,000 shares and the parties have waived or amended various covenants, agreements and restrictions relating to such stock. At December 31, 1996, 625,000 shares of $9.75 Preferred Stock were outstanding, each receiving an annual cash dividend of $9.75. Pursuant to the terms of the $9.75 Preferred Stock, on January 31, 1997, Maxus redeemed the remaining 625,000 shares for $62.5 million. $4.00 Cumulative Convertible Preferred Stock As part of Maxus' internal reorganization (See Note Three), 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). Prior to the redemption date, each outstanding share of $4.00 Preferred Stock was convertible into shares of Maxus' Common Stock (2.29751 shares at the redemption date). 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. YPF provided funding to Maxus to redeem the $4.00 Preferred Stock. $2.50 Cumulative Preferred Stock Each outstanding share of the $2.50 Preferred Stock is entitled to receive annual cash dividends of $2.50, is redeemable after December 1, 1998 and has a liquidation value of $25.00 ($87.5 million in the aggregate at December 31, 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 Maxus 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. NOTE SIXTEEN--COMMON STOCK
SHARES AMOUNT ----------- ------ April 1, 1995......................................... 135,897,899 $135.9 Employee Savings Plan............................... 18,182 Cancellation of treasury shares..................... (306,307) (.3) Fractional shares exchanged for cash................ (2) ----------- ------ December 31, 1995..................................... 135,609,772 $135.6 Conversion of $4.00 Preferred Stock................. 229 Shares issued to parent............................. 11,636,363 11.6 ----------- ------ December 31, 1996..................................... 147,246,364 $147.2 =========== ======
Pursuant to the Offer in April 1995, YPF acquired 120,000,613 Shares at $5.50 per Share representing 88.5% of the then-outstanding Shares of the Company. As a result of the Merger, each outstanding Share (other F-54 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) than Shares held by YPF or any of their subsidiaries or in the treasury of the Company, all of which were cancelled 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 per share, and, accordingly, the Company's Common Stock ceased to be publicly traded. (See Note Two). During 1996, YPF contributed $64 million of capital to the Company, for which YPF received 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. In 1992, Kidder, Peabody Group Inc. purchased eight million warrants from the Company. Each warrant represents the right to purchase one share of the Company's Common Stock at $13.00 per share at any time prior to the expiration of the warrants on October 10, 1997. The Company has an Employee Savings Plan ("ESP") which presently allows eligible participating employees to contribute a certain percentage of their salaries (1%-10%) to a trust for investment in any of ten funds. Prior to the Merger employees could invest in a fund consisting of the Company's Common Stock. However, the Maxus Energy Stock Fund was eliminated from the ESP effective April 19, 1995. The Company matches the participating employees contributions to the ESP (up to 6% of base pay). Such matching contribution is charged against earnings. For the twelve months ended December 31, 1996 and the nine months ended December 31, 1995, the charge against earnings for the Company's contribution was $1.9 million and $1.7 million, respectively. NOTE SEVENTEEN--PAID-IN CAPITAL AND ACCUMULATED DEFICIT
PAID-IN ACCUMULATED CAPITAL DEFICIT ------- ----------- April 1, 1995.......................................... $118.2 Net loss............................................. $ (73.7) Dividends on Preferred Stock......................... (9.2) Cancellation of treasury shares...................... (3.2) Employee Shareholding and Investment Plan............ .1 Restricted stock..................................... (.1) ------ ------- January 1, 1996........................................ 105.8 (73.7) Net income........................................... 15.0 Redemption of $4.00 Preferred Stock.................. (213.6) Dividends on Preferred Stock......................... (11.3) Transfer of investment in CLH (See Note Three)....... 69.5 Issuance of Common Stock to parent................... 52.4 ------ ------- December 31, 1996...................................... $216.4 $(272.3) ====== =======
F-55 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE EIGHTEEN--UNREALIZED GAIN ON INVESTMENT IN MARKETABLE SECURITIES At December 31, 1996 and December 31, 1995, securities categorized as held- to-maturity are included in cash equivalents and short- and long-term restricted cash. The amortized cost and estimated fair value of marketable securities at December 31, 1996 and 1995 are as follows:
DECEMBER 31, 1996 -------------------------------------------- GROSS UNREALIZED AMORTIZED COST GAINS MARKET VALUE -------------- ---------------- ------------ Held-to-maturity: Corporate and other debt securities................ $ 51.0 $1.0 $ 52.0 DECEMBER 31, 1995 -------------------------------------------- GROSS UNREALIZED AMORTIZED COST GAINS MARKET VALUE -------------- ---------------- ------------ Held-to-maturity: Corporate and other debt securities................ $108.4 $2.3 $110.7
NOTE NINETEEN--STOCK OPTIONS In 1996, the Company established a Stock Appreciation Rights Plan (the "SAR Plan"). The SAR Plan permits the grant to officers and certain key employees of Stock Appreciation Rights ("SARs"), the value of which is based upon the price of American Depository Receipts with respect to YPF's Class D shares ("ADRs"). The excess of the ADRs market price over the grant price results in a charge against the Company's earnings; a subsequent decline in market price results in a credit to earnings, but only to a maximum of the earnings charges incurred in prior years on SARs. During 1996, the Company charged $.1 million against earnings related to the SAR Plan. NOTE TWENTY--LEASES The Company leases certain machinery and equipment, facilities and office space under cancelable and noncancelable operating leases, most of which expire within 20 years and may be renewed. Minimum annual rentals for non-cancelable operating leases at December 31, 1996, were as follows: 1997............................................................... $ 28.0 1998............................................................... 23.2 1999............................................................... 18.4 2000............................................................... 15.5 2001............................................................... 15.3 December 31, 2002 and thereafter................................... 60.2 ------ $160.6
Minimum annual rentals have not been reduced by minimum sublease rentals of $34.0 million due in the future under noncancelable subleases. F-56 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rental expense for operating leases was as follows:
TWELVE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ----------------- Total rentals........................ $46.2 $44.1 Less--Sublease rental income......... 2.9 2.1 ----- ----- Rental expense....................... $43.3 $42.0 ===== =====
NOTE TWENTY-ONE--RELATED PARTY TRANSACTIONS A director of the Company, who is also a member of the Audit Committee of the Board of Directors, is a partner in a law firm which provides legal services to the Company. Fees for such services amounted to $1.4 million and $3.2 million during 1996 and 1995, respectively. Additionally, at December 31, 1996 and 1995, the Company had $182.2 million and $6.6 million outstanding, respectively, in advances from its parent. During 1996, the Company sold electrical generators to YPF for $5.4 million. NOTE TWENTY-TWO--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 F-57 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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 $42 million as of December 31, 1996. OxyChem and 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 Henkel 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 Ultramar Diamond Shamrock Corporation ("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. Thereafter, such ongoing costs were borne one-third by DSI and two-thirds by the Company until DSI had borne an additional $47.5 million. As of December 31, 1996, DSI had fulfilled its remaining responsibility under the cost-sharing arrangement, and it has no further obligation thereunder. During the twelve months ended December 31, 1996, the Company spent $8 million in environmental related expenditures in its oil and gas operations. Expenditures for 1997 are expected to be approximately $13 million. 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 arrangement. At December 31, 1996, reserves for the environmental contingencies discussed herein totaled $101.6 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 CLH (See Note Three) 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 F-58 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Company transferred to CLH its then 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 December 31, 1996, the outstanding funding guarantee totaled $102.6 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. 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 late 1997 or in 1998, cost approximately $23 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 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 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, 1996. 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. F-59 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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 approximately $47 million at December 31, 1996. 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 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 F-60 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 is 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 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. 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. 3. Chemical Control Site; Elizabeth, New Jersey. The PRPs and the EPA have settled the federal claims for cost recovery and site remediation, and remediation is now complete. The DEP has demanded of PRPs F-61 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (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. Based on 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 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 December 31, 1996, 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 approximately $4 million reserved. The Company cannot predict with any certainty what portion of the approximately $29 million unreserved portion of the $33 million amount remaining at December 31, 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 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 the Block 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 eventual permanent increase of F-62 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 the Block 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 produced 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 produces 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 its intention to solicit bids in early 1997 for the construction of a new pipeline system and expects completion of the pipeline within 18 to 24 months from the date of execution of a contract. It is unknown what impact, if any, a recent change in the country's political leadership will have on these plans to solicit such bids. 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 changes in governments, civil strife, acts of war, guerrilla activities and insurrection. Areas in which the Company has significant operations include the United States, Indonesia and Ecuador. NOTE TWENTY-THREE--SUBSEQUENT EVENTS 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. F-63 FINANCIAL SUPPLEMENTARY INFORMATION (UNAUDITED) (Data is for the twelve months ended December 31, 1996 and the nine months ended December 31, 1995. The dollar amounts in tables are in millions, except per share) Oil and Gas Producing Activities The following are disclosures about the oil and gas producing activities of the Company as required by Statement of Financial Accounting Standards No. 69 ("SFAS 69"). RESULTS OF OPERATIONS Results of operations for the twelve months ended December 31, 1996 and the nine months ended December 31, 1995 from all oil and gas producing activities are shown below. These results exclude revenues and expenses related to the purchase of natural gas and the subsequent processing and resale of such natural gas plus the sale of natural gas liquids extracted therefrom.
TWELVE MONTHS ENDED DECEMBER 31, 1996 ------------------------------------------------------------- UNITED STATES INDONESIA SOUTH AMERICA OTHER FOREIGN WORLDWIDE ------------- --------- ------------- ------------- --------- Sales................... $131.6 $403.9 $81.3 $616.8 ------ ------ ----- ----- ------ Production costs........ 32.2 147.0 20.6 199.8 Exploration costs....... 8.8 14.6 4.0 $ 7.7 35.1 Depreciation, depletion and amortization....... 51.5 87.0 25.8 .2 164.5 Loss on sale of assets.. .2 1.5 1.7 Other................... 13.3(a) (2.4) (.1) (.1) 10.7 ------ ------ ----- ----- ------ 106.0 246.2 51.8 7.8 411.8 ------ ------ ----- ----- ------ Income (loss) before tax provision.............. 25.6 157.7 29.5 (7.8) 205.0 Provision (benefit) for income taxes........... .5 89.9 12.3 (.2) 102.5 ------ ------ ----- ----- ------ Results of operations... $ 25.1 $ 67.8 $17.2 $(7.6) $102.5 ====== ====== ===== ===== ======
NINE MONTHS ENDED DECEMBER 31, 1995 ------------------------------------------------------------- UNITED STATES INDONESIA SOUTH AMERICA OTHER FOREIGN WORLDWIDE ------------- --------- ------------- ------------- --------- Sales................... $ 75.4 $298.3 $ 36.5 $410.2 ------ ------ ------ ------ ------ Production costs........ 21.2 114.5 21.5 157.2 Exploration costs....... 10.8 18.0 6.9 $ 15.5 51.2 Depreciation, depletion and amortization....... 48.8 67.7 20.8 .2 137.5 Gain on sale of assets.. (.1) (.1) Other................... 8.5(a) 9.4 (1.2) (.1) 16.6 ------ ------ ------ ------ ------ 89.2 209.6 48.0 15.6 362.4 ------ ------ ------ ------ ------ Income (loss) before tax provision.............. (13.8) 88.7 (11.5) (15.6) 47.8 Provision (benefit) for income taxes........... 43.5 (12.7) 30.8 ------ ------ ------ ------ ------ Results of operations... $(13.8) $ 45.2 $ 1.2 $(15.6) $ 17.0 ====== ====== ====== ====== ======
- -------- (a) Includes United States gathering and processing costs related to sales. Such costs were $13.8 million for the twelve months ended December 31, 1996 and $9.1 million for the nine months ended December 31, 1995. CAPITALIZED COSTS Included in properties and equipment are capitalized amounts applicable to the Company's oil and gas producing activities. Such capitalized amounts include the cost of mineral interests in properties, completed and F-64 incomplete wells and related support equipment. In addition, the Company's gas plants that process not only the Company's gas but also third party gas, has been included in capitalized costs. Approximately 56% of the volumes processed through the Company's gas plants is the Company's gas. Only the revenue and cost related to the Company's produced gas is included in results of operations and costs incurred. Capitalized costs at December 31, 1996 and 1995 were:
UNITED STATES INDONESIA ------------- ----------------- 1996 1995 1996 1995 ------ ------ -------- -------- Proved properties: Wells and related equipment and facilities... $591.9 $501.6 $ 761.7 $ 704.0 Support equipment and facilities............. 176.5 128.7 Uncompleted well, equipment and facilities... 17.9 11.0 17.2 18.6 Unproved properties.......................... 4.1 79.9 445.1 435.3 ------ ------ -------- -------- 790.4 721.2 1,224.0 1,157.9 ------ ------ -------- -------- Less--Accumulated depreciation, depletion and amortization.................................. 104.4 50.4 154.7 67.7 ------ ------ -------- -------- $686.0 $670.8 $1,069.3 $1,090.2 ====== ====== ======== ========
SOUTH AMERICA OTHER FOREIGN WORLDWIDE ------------- ------------- ----------------- 1996 1995 1996 1995 1996 1995 ------ ------ ------ ------ -------- -------- Proved properties: Wells and related equipment and facilities.................... $264.5 $307.0 $1,618.1 $1,512.6 Support equipment and facilities.................... 176.5 128.7 Uncompleted well, equipment and facilities.................... 33.0 50.5 68.1 80.1 Unproved properties............ 252.3 $ 4.2 $ 1.3 453.4 768.8 ------ ------ ------ ------ -------- -------- 297.5 609.8 4.2 1.3 2,316.1 2,490.2 ------ ------ ------ ------ -------- -------- Less--Accumulated depreciation, depletion and amortization...... 38.7 20.9 .4 .2 298.2 139.2 ------ ------ ------ ------ -------- -------- $258.8 $588.9 $ 3.8 $ 1.1 $2,017.9 $2,351.0 ====== ====== ====== ====== ======== ========
COSTS INCURRED Costs incurred by the Company in its oil and gas producing activities for the twelve months ended December 31, 1996 and the nine months ended December 31, 1995 (whether capitalized or charged against earnings) were as follows:
UNITED STATES INDONESIA ------------- ----------- 1996 1995 1996 1995 ------ ------ ----- ----- Property acquisition costs........................... $ 3.2 $ 2.1 Exploration costs.................................... 9.9 10.1 $14.9 $19.8 Development costs.................................... 55.1 37.5 67.3 44.2 ------ ------ ----- ----- $ 68.2 $ 49.7 $82.2 $64.0 ====== ====== ===== =====
SOUTH AMERICA OTHER FOREIGN WORLDWIDE ------------- ------------- ------------- 1996 1995 1996 1995 1996 1995 ------ ------ ------ ------ ------ ------ Property acquisition costs............ $ 27.3 $ 30.5 $ 2.1 Exploration costs..................... 11.2 $ 7.6 $ 10.3 $ 15.7 46.3 53.2 Development costs..................... 19.2 28.2 .6 .3 142.2 110.2 ------ ------ ------ ------ ------ ------ $ 57.7 $ 35.8 $ 10.9 $ 16.0 $219.0 $165.5 ====== ====== ====== ====== ====== ======
F-65 OIL AND GAS RESERVES The following table represents the Company's net interest in estimated quantities of developed and undeveloped reserves of crude oil, condensate, natural gas liquids and natural gas and changes in such quantities for the twelve months ended December 31, 1996 and for the nine months ended December 31, 1995. Net proved reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserve volumes that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are proved reserve volumes that are expected to be recovered from new wells on undrilled acreage or from existing wells where a significant expenditure is required for recompletion. Estimates of reserves for December 31, 1996 and 1995 were prepared by Gaffney, Cline & Associates, petroleum engineers, using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). The choice of method or combination of methods employed in the analysis of each reservoir was determined by experience in the area, stage of development, quality and completeness of basic data, and production history. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. Reserve engineering is a subjective process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers often vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of crude oil and natural gas that are ultimately recovered. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumption upon which they were based. The reserve estimates were subjected to economic tests to determine economic limits. The estimates may change as a result of numerous factors including, but not limited to, additional development activity, evolving production history, and continued reassessment of the viability of production under varying economic conditions.
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------------------------- ----------------------------------- UNITED SOUTH UNITED SOUTH CRUDE OIL STATES INDONESIA AMERICA TOTAL STATES INDONESIA AMERICA TOTAL --------- ------ --------- ------- ----- ------ --------- ------- ----- (MILLIONS OF BARRELS) Net Proved Developed and Undeveloped Reserves Beginning of period, April 1, 1995 or January 1, 1996........ 4.1 144.1 61.1 209.3 3.7 154.1 66.3 224.1 Revisions of previous estimates............ .6 (15.6)(a) 5.4 (9.6) .2 (2.6)(a) (4.5) (6.9) Purchase of reserves in place............. Extensions, discoveries and other additions............ 1.0 8.4 (a) 12.0 21.4 .5 7.1 (a) 2.7 10.3 Production............ (.5) (15.9) (4.4)(c) (20.8) (.3) (14.5) (3.4)(c) (18.2) Sales of reserves in place................ (12.1) (12.1) --- ----- ----- ----- --- ----- ---- ----- End of period........... 5.2 121.0 62.0 188.2 4.1 144.1 61.1 209.3 --- ----- ----- ----- --- ----- ---- ----- Net Proved Developed Reserves Beginning of period..... 3.6 128.1 32.8 164.5 2.8 136.8 14.0 153.6 End of period........... 4.9 99.1 25.1 129.1 3.6 128.1 32.8 164.5 === ===== ===== ===== === ===== ==== =====
F-66
DECEMBER 31, 1996 DECEMBER 31, 1995 ---------------------- ---------------------- UNITED UNITED NATURAL GAS(B) STATES INDONESIA TOTAL STATES INDONESIA TOTAL -------------- ------ --------- ----- ------ --------- ----- (BILLIONS OF CUBIC FEET) Net Proved Developed and Undeveloped Reserves Beginning of period, April 1, 1995 or January 1, 1996........................... 570 313 883 505 300 805 Revisions of previous estimates.................... 83 15 98 7 18 25 Purchase of reserves in place........................ 2 2 Extensions, discoveries and other additions.............. 91 12 103 94 14 108 Production.................... (53) (30) (83) (36) (19) (55) Sales of reserves in place --- --- ----- --- --- --- End of period................... 693 310 1,003 570 313 883 --- --- ----- --- --- --- Net Proved Developed Reserves Beginning of period............. 449 138 587 373 103 476 End of period................... 573 136 709 449 138 587 === === ===== === === ===
DECEMBER 31, 1996 DECEMBER 31, 1995 ---------------------- ---------------------- UNITED UNITED NATURAL GAS LIQUIDS STATES INDONESIA TOTAL STATES INDONESIA TOTAL ------------------- ------ --------- ----- ------ --------- ----- (MILLIONS OF BARRELS) Net Proved Developed and Undeveloped Reserves Beginning of period, April 1, 1995 or January 1, 1996............................ 42.6 9.0 51.6 36.1 9.3 45.4 Revisions of previous estimates..................... 8.6 (.1) 8.5 1.5 .1 1.6 Purchase of reserves in place.. Extensions, discoveries and other additions............... 6.0 .1 6.1 7.4 7.4 Production..................... (3.1) (.9) (4.0) (2.4) (.4) (2.8) ---- --- ---- ---- --- ---- End of period.................... 54.1 8.1 62.2 42.6 9.0 51.6 ---- --- ---- ---- --- ---- Net Proved Developed Reserves Beginning of period.............. 33.4 4.3 37.7 28.9 3.1 32.0 End of period.................... 44.5 3.5 48.0 33.4 4.3 37.7 ==== === ==== ==== === ====
- -------- (a) The changes reflect the impact of the change in the price of crude oil on the barrels to which the Company is entitled under the terms of the Indonesian production sharing contracts. The Indonesian production sharing contracts allow the Company to recover tangible production and exploration costs, as well as operating costs. As the price of crude oil fluctuates, the Company is entitled to more or less barrels of cost recovery oil. Increasing prices resulted in a decrease of 15.9 million barrels in 1996 and 9.9 million barrels in 1995. (b) Natural gas liquids reserve volumes are presented separately for information purposes only. Natural gas liquids are extracted from the Company's natural gas volumes and are recoverable at natural gas processing plants downstream from the lease or field separation facility. The volumes presented for natural gas reserves are prior to the extraction of natural gas liquids. (c) Reserves in Venezuela are attributable to an operating service agreement under which all hydrocarbons are owned by the Venezuelan Government, however, the Company receives payment for production and development services performed based on production. During 1996, the Company sold Maxus Venezuela to YPF. F-67 FUTURE NET CASH FLOWS The standardized measure of discounted future net cash flows relating to the Company's proved oil and gas reserves as of December 31, 1996 and 1995 is calculated and presented in accordance with Statement of Financial Accounting Standards No. 69. Accordingly, future cash inflows were determined by applying year-end oil and gas prices (adjusted for future fixed and determinable price changes) to the Company's estimated share of future production from proved oil and gas reserves. Future income taxes were derived by applying year-end statutory tax rates to the estimated net future cash flows. A prescribed 10% discount factor was applied to the future net cash flows. In the Company's opinion, this standardized measure is not a representative measure of fair market value, and the standardized measure presented for the Company's proved oil and gas reserves is not representative of the reserve value. The standardized measure is intended only to assist financial statement users in making comparisons between companies.
UNITED STATES INDONESIA SOUTH AMERICA WORLDWIDE ------------------- -------------------- ----------------- -------------------- 1996 1995 1996 1995 1996 1995 1996 1995 --------- -------- --------- --------- -------- ------- --------- --------- Future cash flows....... $ 2,826.9 $1,161.0 $ 3,604.6 $ 3,461.9 $1,030.3 $ 822.5 $ 7,461.8 $ 5,445.4 Future production costs.................. (543.2) (331.2) (1,843.0) (2,004.7) (317.4) (221.3) (2,703.6) (2,557.2) Future development costs.................. (77.0) (70.6) (293.2) (288.2) (104.2) (122.3) (474.4) (481.1) --------- -------- --------- --------- -------- ------- --------- --------- Future net cash flows, before income taxes.... 2,206.7 759.2 1,468.4 1,169.0 608.7 478.9 4,283.8 2,407.1 Discount for estimated timing of future cash flows.................. (1,101.9) (342.9) (578.7) (459.4) (246.6) (200.0) (1,927.2) (1,002.3) --------- -------- --------- --------- -------- ------- --------- --------- Present value of future net cash flows, before income taxes........... 1,104.8 416.3 889.7 709.6 362.1 278.9 2,356.6 1,404.8 Future income taxes, discounted at 10%(a)... (172.0) (67.8) (388.9) (321.7) (99.6) (34.3) (660.5) (423.8) --------- -------- --------- --------- -------- ------- --------- --------- Standardized measure of discounted future net cash flows............. $ 932.8 $ 348.5 $ 500.8 $ 387.9 $ 262.5 $ 244.6 $ 1,696.1 $ 981.0 ========= ======== ========= ========= ======== ======= ========= =========
- -------- (a) Future income taxes undiscounted are $491.6 for the United States, $618.4 for Indonesia and $168.3 for South America at December 31, 1996 and $161.6 for the United States, $508.2 for Indonesia and $57.1 for South America at December 31, 1995. F-68 The following are the principal sources for change in the standardized measure:
1996 1995(A) -------- ------- January 1................................................... $ 981.0 $ 929.8 Sales and transfers of oil and gas produced, net of production costs......................................... (417.0) (322.7) Net changes in prices and production costs, net of future production and development costs......................... 994.6 99.6 Extensions, discoveries and improved recovery, less related costs............................................ 264.3 79.5 Development costs incurred during the year that reduced future development costs................................. 142.2 140.6 Revisions of previous quantity estimates.................. 108.5 51.5 Purchase of reserves in place............................. .1 16.3 Sale of reserves in place................................. (65.6) (.1) Net change in income taxes................................ (236.7) (42.8) Accretion of discount..................................... 136.5 131.1 Changes in production rates (timing) and other............ (211.8) (101.8) -------- ------- December 31................................................. $1,696.1 $ 981.0 ======== =======
- -------- (a) The principle sources for change in the standardized measure are presented for the year-ended December 31, 1995, rather than the nine months period ended December 31, 1995, as reserve reports from which this information is derived are only prepared on an annual basis. F-69 Quarterly Data
1996 ------------------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, FOR THE YEAR --------- -------- ------------- ------------ ------------ Sales and operating revenues............... $174.0 $172.1 $174.4 $197.5 $718.0 Gross profit (a)........ 64.5 58.6 59.1 91.0 273.2 Net income (loss) before extraordinary item (0.5) (2.7) 11.3 12.5 20.6 Extraordinary item (b).. (5.6) (5.6) Net income (loss)..... (0.5) (2.7) 11.3 6.9 15.0 Market price per share: $4.00 Preferred(c) High................ 46 50 50 3/4 Low................. 42 41 1/4 49 3/4 $2.50 Preferred High................ 26 1/2 26 26 11/32 26 1/2 26 1/2 Low................. 25 1/8 25 25 1/4 25 3/4 25 1995 ------------------------------------------------------------------ NINE MONTHS ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, --------- -------- ------------- ------------ ------------ Sales and operating revenues............... $142.5 $150.7 $141.8 $171.3 $463.8 Gross profit (a)........ 35.2 34.3 24.5 48.0 106.8 Net loss................ (56.9) (23.0) (28.1) (22.6) (73.7) Per Common Share Net loss.............. (.49) Market price per share: Common High................ 5 29/32 5 1/2 Low................. 3 5 3/8 $4.00 Preferred High................ 38 1/4 41 40 1/2 44 3/4 44 3/4 Low................. 30 32 1/2 38 38 32 1/2 $2.50 Preferred High................ 21 3/4 24 1/4 25 5/8 26 1/8 26 1/8 Low................. 17 45/64 19 1/8 23 5/8 17 5/8 17 5/8
- -------- (a) Gross profit is sales and operating revenues less purchases and operating expenses, gas purchase costs and depreciation, depletion and amortization. (b) In December 1996, the Company repaid the $175.0 million Indonesian Facility due 1997-2002. Unamortized issuance costs associated with this early retirement were recorded as an extraordinary loss of $5.6 million. The tax impact of this transaction was less than $.1 million. (c) As part of the Company's reorganization, the Company redeemed on August 13, 1996, all of its outstanding shares of $4.00 Preferred Stock. F-70 EX-3.(I) 2 RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3(i) RESTATED CERTIFICATE OF INCORPORATION OF MAXUS ENERGY CORPORATION (ORIGINALLY INCORPORATED UNDER THE NAME OF NEW DIAMOND CORPORATION ON JULY 19, 1983) ---------------- FIRST. The name of the Corporation (the "Corporation") is Maxus Energy Corporation. SECOND. The registered office of the Corporation in the State of Delaware is located at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Company. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. The Corporation is authorized to issue two classes of capital stock, designated Common Stock and Preferred Stock. The amount of total authorized capital stock of the Corporation is 400,000,000 shares, divided into 300,000,000 shares of Common Stock, $1.00 par value, and 100,000,000 shares of Preferred Stock, $1.00 par value. The Preferred Stock may be issued in one or more series. The Board of Directors is hereby authorized to issue the shares of Preferred Stock in such series and to fix from time to time before issuance the number of shares to be included in any series and the designation, relative powers, preferences and rights and qualifications, limitations or restrictions of all shares of such series. The authority of the Board of Directors with respect to each series shall include, without limiting the generality of the foregoing, the determination of any or all of the following: (a) the number of shares of any series and the designation to distinguish the shares of such series from the shares of all other series; (b) the voting powers, if any, and whether such voting powers are full or limited, in such series; (c) the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid; (d) whether dividends, if any, shall be cumulative or noncumulative, the dividend rate of such series, and the dates and preferences of dividends on such series; (e) the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation; (f) the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock, or any other security, of the Corporation or any other corporation, and price or prices or the rates of exchange applicable thereto; (g) the right, if any, to subscribe for or to purchase any securities of the Corporation or any other corporation; (h) the provisions, if any, of a sinking fund applicable to such series; and (i) any other relative, participating, optional or other special powers, preferences, rights, qualifications, limitations or restrictions thereof; all as shall be determined from time to time by the Board of Directors and shall be stated in said resolution or resolutions providing for the issuance of such Preferred Stock (a "Preferred Stock Designation"). $2.50 Cumulative Preferred Stock The following is a statement of the powers, preferences, rights, qualifications, limitations and restrictions of the Series, consisting of 5,000,000 shares, $1.00 par value, of the $2.50 Cumulative Preferred Stock. SECTION 1. Designation and Amount. The shares of this Series shall be designated as the "$2.50 Cumulative Preferred Stock" and the number of shares constituting this Series shall be 5,000,000, which number, subject to the provisions of the Certificate of Incorporation, may be increased or decreased by the Board of Directors without a vote of stockholders; provided, however, that -------- ------- such number may not be decreased below the number of the then currently outstanding shares of this Series. SECTION 2. Dividends. The holders of shares of this Series, in preference to the holders of shares of the Common Stock of the Corporation and of any other capital stock of the Corporation ranking junior to this Series as to payment of dividends, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, cumulative cash dividends at the annual rate of $2.50 per share, and no more, in equal quarterly payments on the fifteenth day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing March 15, 1994. Dividends shall begin to accrue and be cumulative from the date of original issue of this Series. The amount of dividends so payable shall be determined on the basis of twelve 30-day months and a 360-day year. Accumulated but unpaid dividends shall not bear interest. Dividends paid on the shares of this Series in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of this Series entitled to receive payment of a dividend declared thereon, which record date shall be no more than sixty days prior to the date fixed for the payment thereof. 2 SECTION 3. Redemption. The shares of this Series shall not be redeemable prior to December 1, 1998. On or after that date, the Corporation shall have the right, at its sole option and election, to redeem the whole or any part of the then-outstanding shares of this Series, at any time or from time to time, upon notice duly given as hereinafter specified, at a price per share of $25.00, plus dividends accumulated but unpaid to the redemption date; provided that unless provision has been made for payment in full of dividends on all shares of outstanding Preferred Stock of the Corporation for all past dividend periods and the current period, no sum shall be set aside for the redemption of any shares of this Series nor shall any shares of this Series be purchased or otherwise acquired by the Corporation. Notice of every such redemption of shares of this Series shall be given by publication at least once a week in each of two successive weeks in a newspaper printed in the English language and customarily published on each business day and of general circulation in the city in which the Corporation maintains its principal executive offices and in the Borough of Manhattan, The City of New York, commencing at least 30 but not more than 60 days prior to the date fixed for such redemption. Notice of every such redemption shall also be mailed at least 30 but not more than 60 days prior to the date fixed for such redemption to the holders of record of the shares so to be redeemed at their respective addresses as the same shall appear on the books of the Corporation, but no failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares so to be redeemed. In case of redemption of a part only of this Series at the time outstanding, the redemption may be either pro rata or by lot. The Board of Directors shall prescribe the manner in which the drawings by lot or the pro rata redemption shall be conducted and, subject to the provisions herein and in the Certificate of Incorporation contained, the terms and conditions upon which the shares of this Series shall be redeemed from time to time. If such notice of redemption shall have been duly given by publication or if the Corporation shall have given to the bank or trust company designated by the Corporation as hereinafter specified irrevocable authorization promptly to give or to complete such notice of publication, and if on or before the redemption date specified therein the funds necessary for such redemption shall have been deposited by the Corporation, in trust for the pro rata benefit of the holders of the shares so called for redemption, with a bank or trust company in good standing, designated in such notice, organized under the laws of the United States of America or of the State of New York, doing business in the Borough of Manhattan, The City of New York, having a capital, surplus and undivided profits aggregating at least $5,000,000 according to its last published statement of condition, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit, all shares so called for redemption shall no longer be deemed to be outstanding and all rights with respect to such shares shall forthwith cease and terminate, except only the right of the holders thereof to receive from such deposit the funds so deposited, without interest. Any interest accrued on such funds shall be paid to the Corporation from time to time. Any funds so set aside or deposited, as the case may be, and unclaimed at the end of two years from such redemption date shall be released or repaid to the Corporation, after which the holders of the shares so called for redemption shall look only to the Corporation for payment thereof. SECTION 4. Liquidation. The amount which shall be paid to the holders of shares of this Series in the event of any voluntary or involuntary total liquidation, dissolution or winding up of the 3 Corporation shall be $25.00 per share on each outstanding share of this Series, plus an amount equal to all dividends accumulated but unpaid to the date of such payment. SECTION 5. Ratable Treatment. In the event that the amounts payable in accordance with Section 4 hereof are not paid in full, each share of this Series shall, together with outstanding shares of all other series of Preferred Stock of the Corporation, share ratably, without priority of one series over the other, in the payment of dividends, including accumulations, if any, in the proportion that the amount of dividends, including accumulations, if any, then payable on each share bears to the aggregate of such amounts then payable on all Preferred Stock of the Corporation and in any distribution of assets other than by way of dividends in the proportion that the sum payable on each share bears to the aggregate of the amounts so payable on all shares of Preferred Stock of the Corporation. SECTION 6. Limitation on Dividends. So long as any of the shares of this Series shall remain outstanding, no dividend whatever shall be paid or declared, and no distribution made, on any junior shares, other than a dividend payable solely in junior shares, nor shall any junior shares be acquired for a consideration by the Corporation or by any company a majority of the voting shares of which is owned by the Corporation, unless all dividends on the shares of this Series accrued for all past quarterly dividend periods shall have been paid and the full dividends thereon for the then current quarterly dividend period shall have been paid or declared and duly provided for. SECTION 7. Voting Rights. The holders of the shares of this Series shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) So long as any of the shares of this Series are outstanding, the consent of the holders of at least a majority of the then-outstanding shares of this Series, given in person or by proxy at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) Any increase in the authorized amount of Preferred Stock or the authorization, or any increase in the authorized amount, of any class of shares of the Corporation ranking on a parity with the Preferred Stock. (ii) The sale, lease or conveyance (other than by mortgage) of all or substantially all of the property or business of the Corporation or the consolidation or merger of the Corporation into any other corporation, unless the corporation resulting from such merger or consolidation shall have thereafter no class of shares, either authorized or outstanding, ranking prior to or on a parity with shares corresponding to the shares of Preferred Stock, except the same number of shares with no greater rights and preferences than the shares of Preferred Stock authorized immediately preceding such consolidation or merger and unless each holder of shares of Preferred Stock immediately preceding such consolidation or merger shall receive the same number of shares, with substantially the same rights and preferences, of the resulting corporation; provided, however, that the resulting corporation may have authorized and outstanding such additional shares having preferences or priorities over or being on a parity with the shares of Preferred Stock as the holders of Preferred Stock of the Corporation may have previously authorized 4 pursuant to the Certificate of Incorporation; and provided, further, that this requirement of consent by the holders of shares of Preferred Stock shall not be deemed to apply to or operate to prevent either the purchase by the Corporation of the assets or shares, in whole or in part, of any other corporation, or the sale by the Corporation or any subsidiary of all or part of the capital shares or assets of other corporations, including a subsidiary, or the sale of a division or divisions of the Corporation or of any subsidiary, or any other sale of property or assets which constitutes less than substantially all of the property or assets of the Corporation. (b) So long as any of the shares of this Series are outstanding, the consent of the holders of at least 66 2/3% of the then-outstanding shares of this Series given in person or by proxy, at any special or annual meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) The authorization, or any increase in the authorized amount, of any class of shares of the Corporation ranking prior to the shares of Preferred Stock. (ii) The amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation, or the amendment, alteration, repeal or adoption of any resolution contained in a certificate of designation filed pursuant to Section 151 of the General Corporation Law of the State of Delaware in the office of the Secretary of State of the State of Delaware, which would affect adversely any right, preference, privilege or voting power of the shares of this Series or shares of any other series of Preferred Stock or the holders thereof. (c) Without limiting the rights, if any, of holders of any other series of Preferred Stock, in case the Corporation shall be in arrears in the payment of six quarterly dividends, whether or not successive, on the outstanding shares of this Series or any other outstanding series of Preferred Stock, the holders of shares of this Series voting separately as a class and in addition to their other voting rights shall have the exclusive right to elect two additional directors beyond the number to be elected by all stockholders at the next annual meeting of stockholders called for the election of directors, and at every subsequent such meeting at which the terms of office of the directors so elected by the holders of shares of this Series expire, provided such arrearage exists on the date of such meeting or subsequent meetings, as the case may be. The right of the holders of shares of this Series voting separately as a class to elect two members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on all shares of Preferred Stock shall have been paid in full and provision has been made for the payment in full of the dividends for the current quarter, at which time the special right of the holders of shares of this Series so to vote separately as a class for the election of Directors shall terminate, subject to revesting at such time as the Corporation shall be in arrears in the payment of six quarterly dividends, whether or not successive, on the outstanding shares of this Series or any other outstanding series of Preferred Stock. If the annual meeting of stockholders of the Corporation is not, for any reason, held on the date fixed in the By-Laws at a time when the holders of shares of this Series, voting separately and as a class, shall be entitled to elect directors, or if vacancies shall exist in both of the two offices of directors elected by the holders of shares of this Series, the 5 Chairman of the Board of the Corporation shall, upon the written request of the holders of record of at least 10% of the shares of this Series then outstanding addressed to the Secretary of the Corporation, call a special meeting in lieu of the annual meeting of stockholders, or, in the event of such vacancies, a special meeting of the holders of shares of this Series, for the purpose of electing directors. Any such meeting shall be held at the earliest practicable date at the place for the holding of the annual meeting of stockholders or as otherwise determined pursuant to the By-Laws. If such meeting shall not be called by the Chairman of the Board of the Corporation within 20 days after personal service of said written request upon the Secretary of the Corporation, or within 20 days after mailing the same within the United States by certified mail, addressed to the Secretary of the Corporation at its principal executive offices, then the holder of record of at least 10% of the outstanding shares of this Series may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by the person so designated upon the notice required for the annual meeting of stockholders of the Corporation and shall be held at the place for holding the annual meetings of stockholders or as otherwise determined pursuant to the By- Laws. Any holder of shares of this Series so designated shall have access to the lists of stockholders to be called pursuant to the provisions hereof. At any meeting held for the purpose of electing directors at which the holders of shares of this Series shall have the right to elect directors as aforesaid, the presence in person or by proxy of the holders of at least 33 1/3% of the outstanding shares of this Series shall be required to constitute a quorum of such shares of this Series. In the event any meeting of the holders of shares of this Series shall be held for the purpose of electing directors pursuant to this subdivision (c), nothing contained herein shall preclude the Corporation from simultaneously calling and holding a meeting of any other class or series of capital stock of the Corporation which may have voting rights to elect directors. Any vacancy occurring in the office of director elected by the holders of shares of this Series may be filled by the remaining director elected by the holders of the shares of such class, unless and until such vacancy shall be filled by the holders of the shares of such class. Any director to be elected by the holders of shares of this Series shall agree, prior to his election to office, to resign upon any termination of the right of the holders of shares of this Series to vote as a class for directors as herein provided, and upon any such termination the directors then in office elected by the holders of shares of this Series shall forthwith resign. SECTION 8. No Sinking Fund. No sinking fund shall be provided for the purchase or redemption of the shares of this Series. SECTION 9. No Preemptive Rights. The holders of shares of this Series are not entitled to any preemptive or other rights to subscribe for or to purchase any shares or securities of any class which may at any time be issued, sold or offered for sale by the Corporation. SECTION 10. Rank. All shares of Preferred Stock, including this Series, shall be of equal rank with each other regardless of series, and shall be identical with each other except as provided in the Certificate 6 of Incorporation or in a certificate of designation filed pursuant to Section 151 of the General Corporation Law of the State of Delaware with the Secretary of State of the State of Delaware. Junior Preferred Stock, Series A The following is a statement of the powers, preferences, rights, qualifications, limitations and restrictions of the Series, consisting of 3,250,000 shares, $1.00 par value of the Junior Preferred Stock, Series A. SECTION 1. Designation and Amount. The shares of such series shall be designated as the "Junior Preferred Stock, Series A" (the "Junior Preferred Stock") and the number of shares constituting such series shall be 3,250,000, which number, subject to the provisions of the Certificate of Incorporation, may be increased or decreased by the Board of Directors without a vote of stockholders; provided, however, that such number may not be decreased below the number of the then currently outstanding shares of Junior Preferred Stock plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Junior Preferred Stock. SECTION 2. Dividends and Distributions. (a) Subject to the rights of the holders of any shares of the Corporation's $4.00 Cumulative Convertible Preferred Stock, $9.75 Cumulative Convertible Preferred Stock and any other series of Preferred Stock (or any similar stock) ranking senior to the Junior Preferred Stock with respect to dividends, the holders of shares of Junior Preferred Stock, in preference to the holders of Common Stock with a par value of $1.00 per share (the "Common Stock") of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, cumulative quarterly dividends payable in cash on the fifteenth day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Junior Preferred Stock, in an amount per share (rounded to the nearest cent), subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Junior Preferred Stock. In the event the Corporation shall at any time after September 12, 1988 (the "Rights Declaration Date") declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Junior Preferred Stock were entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such 7 amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Junior Preferred Stock as provided in paragraph (a) of this Section immediately before it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date, and the next subsequent Quarterly Dividend Payment Date, a dividend of $0.01 per share on the Junior Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Junior Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Junior Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Junior Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Junior Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 50 calendar days prior to the date fixed for the payment thereof. SECTION 3. Voting Rights. The holders of shares of Junior Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Junior Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Junior Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8 (b) Except as otherwise provided herein or by law, the holders of shares of Junior Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Except as set forth in Section 11 hereof, or as required by law, holders of Junior Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. SECTION 4. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Junior Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Junior Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Junior Preferred Stock, except dividends paid ratably on the Junior Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Junior Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Junior Preferred Stock, or any shares of stock ranking on a parity with the Junior Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the 9 Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. SECTION 5. No Redemption. The shares of Junior Preferred Stock shall not be redeemable. SECTION 6. Reacquired Shares. Any shares of Junior Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. SECTION 7. Liquidation, Dissolution or Winding Up. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, no distribution or payment shall be made (a) to the holders of Common Stock or any other shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Preferred Stock unless, prior thereto, the holders of shares of Junior Preferred Stock shall have received an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, plus an amount equal to all accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (b) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Junior Preferred Stock, except distributions made ratably on the Junior Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time after the Rights Declaration Date declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Junior Preferred Stock were entitled immediately prior to such event under the proviso in clause (a) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. SECTION 8. Consolidation, Merger, Etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Junior Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such 10 case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Junior Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock outstanding immediately prior to such event. SECTION 9. Fractional Shares. The Corporation may issue fractions and certificates representing fractions of a share of Junior Preferred Stock in integral multiples of one one-hundredth of a share of Junior Preferred Stock, or in lieu thereof, at the election of the Board of Directors of the Corporation at the time of the first issue of any shares of Junior Preferred Stock, evidence such fractions by depositary receipts, pursuant to an appropriate agreement between the Corporation and a depositary selected by it, provided that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences of Junior Preferred Stock. In the event that fractional shares of Junior Preferred Stock are issued, the holders thereof shall have all the rights provided herein for holders of full shares of Junior Preferred Stock in the proportion with such fraction bears to a full share. SECTION 10. Rank. The Junior Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets in liquidation, unless the terms of any such series shall provide otherwise. SECTION 11. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Junior Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least a majority of the outstanding shares of Junior Preferred Stock, voting separately as a class. FIFTH. In furtherance of, and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized and empowered: (a) To make and alter the By-Laws of the Corporation; provided, however, that the By-Laws made by the Board of Directors under the powers hereby conferred may be altered, changed, amended or repealed by the Board of Directors or by the affirmative vote of the holders of a majority of shares having voting power with respect thereto; and (b) From time to time to determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation or any of them, shall be open to inspection of stockholders; and no stockholder shall have any right to inspect any account, book or document of the Corporation, except as conferred by applicable law and subject to the rights, if any, of the holders of any series of Preferred Stock. The Corporation may in its By-Laws confer powers upon its Board of Directors in addition to the foregoing and in addition to the powers and authorities expressly conferred upon the Board of Directors by applicable law. SIXTH. The stockholders and Board of Directors of the Corporation shall have power to hold their meetings and to have one or more offices of the Corporation within or without the State of Delaware, and 11 to keep the books of the Corporation outside of the State of Delaware at such place or places as may from time to time be designated by the Board of Directors. SEVENTH. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional Directors under specific circumstances, special meetings of stockholders of the Corporation may be called only by the Chairman of the Board of Directors and shall be promptly called by the Chairman or the Secretary at the written request of a majority of the Board of Directors or the holders of a majority of the outstanding Common Stock upon not fewer than ten nor more than 60 days' written notice. EIGHTH. SECTION 1. Number, Election and Terms of Directors. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional Directors under specific circumstances, the number of the Directors of the Corporation shall be fixed from time to time by or pursuant to the By-Laws of the Corporation. Each director shall hold office for one year after the time of such director's election or until such director's successor is elected and qualified at the succeeding annual meeting of stockholders of the Corporation or until such director's earlier resignation or removal in accordance with the General Corporation Law of the State of Delaware, this Certificate of Incorporation and By-Laws. SECTION 2. Stockholder Nomination of Director Candidates and Introduction of Business. Advance notice of stockholder nominations for the election of Directors and advance notice of business to be brought by stockholders before an annual meeting shall be given in the manner provided in the By-Laws of the Corporation. SECTION 3. Newly Created Directorships and Vacancies. Except as otherwise provided for or fixed pursuant to the provisions of Article Fourth of this Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect Directors under specified circumstances, newly created directorships resulting from any increase in the number of Directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled only by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director's successor shall have been elected and qualified. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of an incumbent Director. SECTION 4. Removal. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional Directors under specified circumstances, any Director may be removed from office only by the affirmative vote of the holders of at least 50% of the combined voting power of the outstanding shares of Voting Stock, voting together as a single class. NINTH. [Deleted] 12 TENTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, including in a Preferred Stock Designation, in the manner now or hereafter prescribed by applicable law and this Certificate of Incorporation, including any applicable Preferred Stock Designation, and all rights conferred upon stockholders herein are created subject to this reservation. ELEVENTH. A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Law as the same exists or may hereafter be amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. 13 EX-4.24 3 ASSUMPTION AGREEMENT EXHIBIT 4.24 ASSUMPTION AGREEMENT THIS ASSUMPTION AGREEMENT (the "Agreement"), dated as of August 14, 1996, is made and entered into by and among CHEMICAL LAND HOLDINGS, INC., a Delaware corporation ("CLH") and MAXUS ENERGY CORPORATION, a Delaware corporation ("Maxus"). RECITALS A. Immediately prior to the execution, and delivery of this Agreement, CLH has become a wholly-owned subsidiary of CLH Holdings, Inc., a Delaware corporation. B. The parties hereto desire to transfer certain assets and liabilities related primarily to certain environmental matters, and the management thereof, to CLH. C. CLH is willing to assume such liabilities and the management thereof in consideration of, among other things, the assignment of certain assets to CLH and the agreements to make certain capital commitments to CLH by its stockholder and its parent companies pursuant to the Contribution Agreement. AGREEMENTS In consideration of the mutual undertakings and agreements contained herein and in the Contribution Agreement, the parties covenant and agree as follows: ARTICLE ONE DEFINITIONS The following terms have the meanings assigned: "Administrative Proceeding" means any action taken by any Governmental Authority pursuant to or under any Environmental Law, including, but not limited to, any clean up, removal or remediation activity, notice of violation, notice of deficiency, notice of potential liability, inspection, investigation, site characterization, or any notice or directive given by such Governmental Authority in connection with clean up, removal or remediation activity. "Assigned Assets" is defined in Section 3.1 of this Agreement. "Assumed Liabilities" is defined in Section 2.1 of this Agreement. "Contribution Agreement" shall mean that certain Contribution Agreement dated an even date herewith by and among YPF Sociedad Anonima, YPF International Ltd., YPF Holdings, Inc., CLH Holdings, Inc., Maxus and CLH. "DSRM Agreement" means that certain Distribution Agreement dated as of April 22, 1987 by and between Diamond Shamrock Corporation and Diamond Shamrock R&M, Inc., as amended as of the date hereof. "Effective Time" shall mean 12:01 a.m., Central Time, on August 1, 1996. "Environmental Claim" means any claim, demand, liability (including strict liability), loss, obligation, damage (whether for property damage, natural resource damage or bodily injury and including depreciation of property values and consequential, punitive and exemplary damages), cause of action, judgment, civil penalty, payment, fine, cost and related expense (including, but not limited to, reasonable expenses, costs and fees of attorneys, legal assistants, consultants, contractors, experts and laboratories) arising out of activities, or allegations of activities which (a) are associated with the ownership, use or operation of property at any time, including, but not limited to, those related to any compliance, investigative, enforcement, cleanup, removal, containment, remedial, response, cost recovery, contribution or other private or governmental or regulatory action at any time threatened, instituted or completed, which in any way is connected with any Hazardous Material, and (b) (i) are in violation of any Environmental Law, (ii) constitute nuisance, trespass or negligence in the creating and/or allowing to exist or remain, or threatening to move, any Hazardous Material on, in, under or over any property, (iii) result in the commencement of any Administrative Proceeding, or (iv) if reported to a Governmental Authority would likely result in the commencement of any Administrative Proceeding. "Environmental Law" means any federal, state or local law, statute, ordinance, code, rule, regulation, license, permit, authorization, decision, order, injunction, requirement, decree or restriction, which pertains to health, safety, environment, or natural resources, or any Hazardous Materials (including, without limitation, the presence, use, handling, treatment, recycling, transportation, production, disposal, release, discharge or storage thereof), whether in effect presently, or prior to, or after the date hereof. The term "Environmental Law" shall include, but not be limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. (S) 9601 et seq. ("CERCLA"), Resource Conservation and Recovery Act of -- --- 1976, as amended, 42 U.S.C. (S)6901 et seq. ("RCRA"), the Solid Waste Disposal -- --- Act of 1976, 42 U.S.C. (S) 6901 et seq., those provisions of the Occupational -- --- Safety and Health Act, 29 U.S.C. (S) 651 et seq. which pertain to environmental -- --- matters, the Clean Air Act, 42 U.S.C. (S) 7401 et seq., the Federal Water -- --- Pollution Control Act, 33 U.S.C. (S) 1251 et seq., the Toxic Substances Control -- --- Act, 15 U.S.C. (S) 2601 et seq., the Emergency Planning and Community Right to -- --- Know Act of 1986, 42 U.S.C. (S) 1101 et seq and any similar law, regulation or -- --- requirement of any Governmental Authority having jurisdiction over the subject property, as such laws, regulations and requirements have been or may be amended or supplemented. - 2 - "Governmental Authority" means any federal, state or local government or administrative or regulatory agency or commission or other such instrumentality operating under any such governmental authority and exercising competent jurisdiction. "Hazardous Materials" means any chemical, material or substance defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous waste," "restricted hazardous waste," or "toxic substances" or words of similar meaning and regulatory effect. "Indemnified Parties" is defined in Section 2.2 of this Agreement. "Independent Director" is defined in Section 4.1(b) of this Agreement. "Insurance Litigation" shall mean the action styled Diamond Shamrock Chemicals Company v. Anglo French Insurance Company, Ltd., et al, Cause No. L- 01591-86 in the Superior Court of New Jersey, Morris County, and all claims asserted or disposed of therein. "Obligations" is defined in Section 2.1 of this Agreement. "Retained Obligations" is defined in Section 2.3 of this Agreement. "Stock Purchase Agreement" means that certain Stock Purchase Agreement dated September 4, 1986 by and among Diamond Shamrock Corporation, Occidental Petroleum Corporation, Occidental Chemical Holding Corporation and Oxy-Diamond Alkali Corporation. "YPF Affiliate" means (i) YPF Sociedad Anonima and (ii) any corporation or other business entity in which YPF Sociedad Anonima owns directly, or indirectly through one or more other YPF Affiliates, 50% or more of the outstanding voting capital stock or equity capital of the entity, other than CLH. ARTICLE TWO ASSUMPTION OF CERTAIN OBLIGATIONS 2.1 Assumption of Obligations by CLH. Subject to Section 5.1 hereof and effective as of the Effective Time, CLH hereby assumes and undertakes to pay, perform and discharge the debts, liabilities, obligations and commitments, whether known or unknown, contingent or absolute or accrued or not accrued (collectively, "Obligations") set forth below to the extent that Maxus or one of its other subsidiaries (or any officer, director, employee, agent, representative or controlling person of Maxus and its subsidiaries) is or may become liable for such Obligations: (a) any and all Obligations of Maxus under (i) Sections 8.19 and 8.21 of the Stock Purchase Agreement, (ii) Section 9.03(a) of the Stock Purchase Agreement, but - 3 - only to the extent such Obligations either (A) relate to Indemnifiable Losses (as defined in Section 9.03) relating to, resulting from or arising out of the matters described in clauses (iii) or (iv) of such Section 9.03(a) or (B) arise in connection with Indemnifiable Losses that relate to, result from or arise out of an Environmental Claim, (iii) Article X of the Stock Purchase Agreement or (iv) that certain action styled Occidental Chemical Corporation and Henkel Corporation v. Maxus Energy Corporation filed in the 68th Judicial District Court of Dallas County, Texas (Cause No. 95-11776); (b) any and all Obligations of Maxus or its subsidiaries arising out of any Environmental Claim relating to or arising out of the ownership, lease, operation or use of (i) any real property owned by CLH on or prior to the date hereof, (ii) any of the Inactive Sites (as defined in the Stock Purchase Agreement), (iii) the former business and assets of Diamond Shamrock Agricultural Chemicals division, and (iv) any of the sites or matters identified, listed or described on Exhibit A hereto; and (c) any other Obligations of Maxus or its consolidated subsidiaries related to the Obligations described in clauses (a) and (b) hereof for which amounts have been accrued as a liability reserve on the consolidated balance sheet of Maxus as of July 31, 1996 prepared in accordance with generally accepted accounting principles; provided, however, that notwithstanding the foregoing, the Obligations assumed by CLH pursuant to this Section 2.1 shall not include (i) Obligations constituting Retained Obligations, (ii) Obligations to the extent of receipt by Maxus or its other subsidiaries (other than CLH) of insurance proceeds or amounts in settlement of insurance coverage in respect of the foregoing Obligations or (iii) Obligations to the extent that Maxus or any of its subsidiaries (other than CLH) receives payments in indemnification or contribution in respect of the foregoing Obligations from any party other than a YPF Affiliate. The Obligations assumed by CLH pursuant to this Section 2.1 are herein referred to as the "Assumed Liabilities." 2.2 Indemnification. Subject to Section 5.1 hereof and effective at the Effective Time, CLH shall indemnify without duplication each of Maxus, its other subsidiaries, and their respective directors, officers, employees, stockholders, partners and agents (the "Indemnified Parties") against, and hold the Indemnified Parties harmless from, any and all claims, demands, liabilities (including strict liability), losses, obligations, damages (whether for property damage, natural resource damage or bodily injury and including depreciation of property values and consequential, punitive and exemplary damages), causes of action, judgments, civil penalties, payments, fines, costs and related expenses (including reasonable attorneys fees and expenses incurred in connection with investigations and settlements) resulting from or arising out of the Assumed Liabilities. The indemnification provided by this Section 2.2 shall extend to the benefit of the Indemnified Parties to the fullest extent permitted by law, without regard to, or limitation by, the standard of conduct of any Indemnified Party or any other third party, including without limitation any act or omission by any Indemnified Party that may constitute negligence or fraud. - 4 - 2.3 Retained Liabilities. Maxus agrees to retain and remain responsible for all Obligations in respect of the following (collectively, the "Retained Obligations"): (a) all Obligations to third parties (other than parties to this Agreement and the Stock Purchase Agreement) resulting from or arising out of claims, demands, liabilities (including strict liability), losses, obligations, damages (whether for property damage or bodily injury and including depreciation of property values and consequential, punitive and exemplary damages), causes of action, judgments, civil penalties, payments, fines, costs and related expenses (including reasonable attorneys fees and expenses incurred in connection with investigations and settlements) based upon an assertion or allegation that a manufactured product was defective or unreasonably dangerous or unsafe, or that the manufacturer had failed to warn of defective, dangerous or unsafe characteristics or potential consequences of improper use, handling, transport, storage or disposal, of a product, regardless of whether such assertion or allegation includes claims of injury or damages associated with environmental contamination as a result of an alleged product defect; (b) all Obligations incurred by Maxus and its subsidiaries relating to the Insurance Litigation; (c) all Obligations incurred by Maxus and its subsidiaries under workers' compensation and other employer's liability laws; and (d) all Obligations incurred directly in connection with operating and/or plugging and abandoning the gas wells identified on Exhibit B hereto. (Exhibit B also lists certain other matters for which Maxus retains responsibility.) 2.4 Waiver of Rights of Recovery. Maxus shall waive, and shall cause its subsidiaries to waive, any and all rights of recovery, claims, actions and causes of action against CLH, its officers, directors, stockholders, agents and representatives that Maxus or its other subsidiaries may have to recover any proceeds from insurance policies or portion thereof covering the Obligations set forth in clauses (a), (b) and (c) of Section 2.1 hereof, unless giving such waiver would adversely affect the right to receive such payments from any insurance carrier. 2.5 Reimbursement of Certain Costs and Expenses. Maxus shall promptly reimburse CLH for any and all costs and expenses incurred and paid by CLH with respect to any of the Obligations set forth in clauses (a), (b) and (c) of Section 2.1 hereof in the event that such costs and expenses are determined not to constitute Assumed Liabilities by reason of the proviso of Section 2.1 or otherwise. - 5 - ARTICLE III TRANSFER OF CERTAIN ASSETS 3.1 Transfer of Certain Assets. Subject to Sections 3.5 and 5.1 hereof and effective as of the Effective Time, Maxus hereby agrees to grant, bargain, convey, contribute, transfer, assign and deliver unto CLH all of the rights, titles and interests of Maxus in and to the following (collectively, the "Assigned Assets"): (a) all benefits accruing to Maxus after the Effective Time under Section 3.03 of the DSRM Agreement, except to the extent that such benefits constitute or relate to the reimbursement of funds paid, received or advanced from settlements or other disposition of the Insurance Litigation or Rosario et al. v. Diamond Shamrock Corporation et al., Cause No. 687219-1, Superior Court, Alameda County, California and related cases; (b) all rights to insurance proceeds, and settlements of related insured matters, to the extent such payments represent reimbursement of Assumed Liabilities, excluding any payments by insurance carriers made in connection with the settlement or other disposition of the Insurance Litigation (which payments shall be retained by Maxus) but including the right to receive any future payments made from insurance carriers under the terms of settlement of the Insurance Litigation made in respect of the Cedartown, Georgia, Deer Park, Texas, Muscle Shoals, Alabama, Belle, West Virginia and Castle Hayne, North Carolina plant sites and any presently unknown sites; (c) all rights of recovery, contribution, reimbursement, claims, actions and causes of action against any party (including without limitation Diamond Shamrock, Inc., Occidental Chemical Corporation or any of their affiliates or any insurance carrier) other than Maxus or its subsidiaries in respect of the Assumed Liabilities, except for payments made to Maxus by any third party in respect of same prior to the Effective Time (which payments shall be retained by Maxus); (d) all permits or licenses issued by, or agreements with, any Governmental Authority, or any agreement with any party other than Maxus (other than those agreements relating to the matters expressly excepted in clauses (b) and (c) above), relating to the Assumed Liabilities and the assets of CLH and necessary for the management or operation thereof); and (e) all documents, studies, files, photographs, maps, charts and other records relating to the Assumed Liabilities and the assets of CLH and the management thereof or to CLH employees, provided that Maxus shall retain the right to have reasonable access to such documents. 3.2 Instruments of Transfer; Further Assurances. Maxus covenants and agrees to furnish in proper form (and if applicable, in suitable form for recording) any other bills of sale, - 6 - endorsements, assignments, certificates and other instruments of transfer and conveyance as CLH shall reasonably deem necessary to vest in CLH such title to the Assigned Assets hereof as Maxus may possess. 3.3 Transfers Requiring Consent. Maxus shall use its reasonable efforts to obtain, or cause to be obtained, as promptly as practicable all consents, if any, necessary to assign, transfer, convey or deliver the Assigned Assets to CLH. Notwithstanding any other provision of this Agreement to the contrary, this Agreement shall not constitute an agreement to transfer or assign, or a transfer or assignment of, any contract right, agreement, license or permit or document, if a transfer or assignment thereof without the consent of any other party or parties thereto (other than Maxus or its affiliates) required or necessary for such transfer or assignment would constitute a breach thereof or in any way adversely affect the rights of Maxus thereunder (any such assets are hereinafter referred to as "Non-Assignable Assets"). In order to provide CLH with the utilization of every Non-Assignable Asset, unless and until the necessary consent is obtained, Maxus shall take or cause to be taken, and shall cause each of its subsidiaries (other than CLH) to take or cause to be taken, all reasonable action in cooperation with CLH and do or cause to be done all such things as may be reasonably necessary and proper to: (a) hold in trust for the benefit of CLH all Non-Assignable Assets and any consideration received by Maxus with respect thereto, (b) preserve the material rights and obligations under the Non-Assignable Assets for the benefit of CLH, (c) facilitate the receipt of any consideration to be received by Maxus or its other subsidiaries with respect to any Non-Assignable Asset, and promptly pay or cause to be paid to CLH any such consideration received by Maxus or its other subsidiaries, and (d) make arrangements designed to provide to CLH the material benefits of each Non-Assignable Asset, including without limitation the appointment of an attorney-in-fact for CLH or subcontracting with CLH to effect a "pass-through" of the material rights and obligations of Maxus and its other subsidiaries thereunder. Notwithstanding the foregoing, Maxus shall not be obligated to take any action to ensure that CLH will be allowed the use of, or access to, any technology, whether protected by copyright, patent, license or otherwise, if such action will require the expenditure of funds by Maxus or materially adversely affect the benefits or rights required to be retained by Maxus, unless the parties agree otherwise. 3.4 Right of Collection and Endorsement. Should Maxus or any of its ----------------------------------- subsidiaries (other than CLH) receive payment of any account receivable, note receivable or other asset of CLH, it shall promptly remit or pay over, or cause its subsidiaries to remit or pay over, such payment or other asset to CLH. Should CLH receive payment of any account receivable, note receivable or other asset of Maxus or any of its subsidiaries, it shall promptly remit or pay over such payment or other asset to Maxus or the appropriate subsidiary. 3.5 Reassignment in the Event of Default by CLH. In the event that ------------------------------------------- CLH defaults in the payment of any Obligation that constitutes an Assumed Liability, then, in addition to any other remedy available under this Agreement or in law, CLH shall convey, assign and pay over to Maxus all rights and payments set forth in clauses (a), (b) and (c) of Section 3.1 to the extent that (i) such rights and payments are asserted or made after the date of default of CLH and - 7 - (ii) such rights and payments relate to the Obligation on which CLH defaulted. Any payments made to Maxus pursuant to this Section 3.5 shall reduce and mitigate the damages suffered by Maxus as a result of such default. ARTICLE FOUR CERTAIN COVENANTS 4.1 Management Responsibilities. In addition to the responsibilities and management of the Obligations associated with the Assumed Liabilities, the parties acknowledge and agree that as between them CLH shall have primary responsibility for the management and handling after the Effective Time of the business, legal and technical aspects of environmental matters associated with (a) the alleged generation, handling, transportation, storage and disposal of wastes from the former businesses, operations and properties of Diamond Shamrock Chemicals Company, including its predecessors ("DSCC") or (b) the chemical manufacturing operating practices of DSCC. 4.2 Access and Records. Each of Maxus and CLH will afford the other, its officers, employees, agents and representatives reasonable access to its documents, records, instruments and property to the extent such documents, records, instruments and property are properly required in order for each to fulfill its management or legally required duties. Each of Maxus and CLH will cause documents, records and instruments to be retained if requested by the other for legal or other proper reasons. Without limiting the foregoing, upon reasonable request, Maxus, its officers, employees, agents and representatives shall be permitted (a) to review the activities and books and records of CLH and (b) if deemed necessary or appropriate by Maxus, to inspect CLH's property or property being administered, remediated or maintained by CLH for the purpose of complying with its legal and audit disclosure requirements. CLH shall not be responsible for maintenance of records required under the Occupational Safety and Health Act or medical or other records compiled and maintained on a corporate-wide basis, and not uniquely for or related to the former business, operations or property of DSCC or CLH and to the liabilities assumed by CLH hereunder. 4.3 Mutual Covenants to Maintain Corporate Independence. It is the intent of the parties to this Agreement that each of CLH and Maxus maintain separate existence and independence and remain responsible for its own respective business, assets and liabilities, except to the extent as expressly provided in this Agreement, the Contribution Agreement and other written agreements between the companies. In furtherance of such intent, Maxus and CLH covenant and agree as follows: (a) The books of account of CLH shall be maintained separately from those of Maxus and any other YPF Affiliate and other affiliates of Maxus. The assets of CLH shall not be commingled with the assets of Maxus or any other YPF Affiliate. - 8 - (b) To the extent feasible, at least one member of the Board of Directors of CLH shall be a person who is not also a director, officer or employee of CLH, Maxus or any other YPF Affiliate (the "Independent Director"). (c) To the extent services are furnished to CLH by Maxus or any other YPF Affiliate, or to Maxus or any other YPF Affiliate by CLH, such services shall be provided under a services agreement between CLH and Maxus or such other YPF Affiliate, as the case may be, which describes the services to be provided, establishes compensation rates to be charged for such services at a rate consistent with sound business practices and which provides for, among other things, reimbursement of out-of-pocket expenses incurred in connection with rendering such services. (d) CLH shall have its own U.S. taxpayer identification number. (e) CLH shall maintain bank accounts in its own name and utilize its own letterhead for all correspondence. (f) All agreements relating to the business of CLH shall be entered into by it in its own name and executed on its behalf by one of its officers or other authorized representative. CLH shall not grant a general power of attorney to Maxus or any other YPF Affiliate or to any person who is an officer, director or employee of Maxus or any other YPF Affiliate (other than a person who is also an officer of CLH and who is granted such power of attorney by reason of his office with CLH). (g) CLH shall maintain all required corporate formalities as required under Delaware law, including the maintenance of books and records and the conduct of shareholders' and Board of Directors' meetings. (h) CLH shall obtain in its own name any government permits which are necessary or appropriate to conduct its business. (i) Except as may be provided in any services agreement referred to in Section 4.3(c), CLH shall not engage in any transaction with Maxus or any other YPF Affiliate which is not related to the business and operations of CLH. Any such transaction related to the business and operations of CLH engaged in by CLH with Maxus or any other YPF Affiliate is and will be on an arms' length basis and will be approved by a majority of CLH's directors, including, if a person is so serving at the time, the Independent Director. (j) Except to the extent set forth in this Agreement, CLH has not agreed to assume any liabilities or other obligations of Maxus or any other YPF Affiliate. (k) Any transaction that affects the fundamental organization of CLH (including, without limitation, any voluntary bankruptcy filing by CLH) shall have the prior - 9 - approval of a majority of CLH's directors, including, if one is serving on the Board of Directors at such time, the Independent Director. (l) CLH shall not hold itself out, or permit its officers, employees or agents to hold themselves out, as employees or agents of Maxus or any other YPF Affiliate, or as authorized to represent Maxus or any other YPF Affiliate absent an express agreement granting such authority. Nothing contained in this Section 4.3 shall prevent Maxus, YPF or any other YPF Affiliate from issuing guarantees or providing other financial assurances to third parties for the benefit of CLH for the purpose of ensuring the performance or payment of its obligations. ARTICLE FIVE GENERAL PROVISIONS 5.1 Conditions Precedent to Effectiveness of Assumption and Transfer. Notwithstanding anything to the contrary herein, this Agreement shall not be effective unless and until (i) the Contribution Agreement is executed and delivered by all parties thereto and (ii) all of the issued and outstanding capital stock of CLH is transferred and assigned to YPF Holdings (USA), Inc., a Delaware corporation; provided, however, that this entire Agreement shall terminate and cease to be of any force and effect if each of the events described in clauses (i) and (ii) do not occur on or prior to August 31, 1996. 5.2 Further Assurances. (a) Without further consideration, Maxus shall execute, acknowledge and deliver, or cause its subsidiaries to execute, acknowledge and deliver, all such further documents and instruments and shall do all such further acts and things as may be necessary or useful in order to fully and effectively carry out the purposes and intent of this Agreement. (b) Without further consideration, CLH shall execute, acknowledge and deliver all such further documents and instruments and shall do all such further acts and things as may be necessary or useful in order to fully and effectively carry out the purposes and intent of this Agreement. 5.3 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties signatory hereto and their respective successors and assigns. 5.4 No Third Party Rights. The provisions of this Agreement are intended to bind the parties hereto as to each other and are not intended to and do not create rights in any other person or confer upon any other person any benefits, rights or remedies and no person is - 10 - or is intended to be a third party beneficiary of any of the provisions of this Agreement, except in respect of Section 2.2 hereof, the Indemnified Parties expressly set forth therein. 5.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, excluding any conflicts-of- law rule or principle that might refer the construction or interpretation of this Agreement to the laws of another state. 5.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which shall constitute one and the same agreement. 5.7 Construction of Agreement. In construing this Agreement (i) no consideration shall be given to the captions of the articles, sections, subsections, or clauses, which are inserted for convenience in locating the provisions of this Agreement and not as an aid in its construction and (ii) no consideration shall be given to the fact, nor shall there be any presumption, that one party had a greater or lesser hand in drafting this Agreement. 5.8 Severability. If any of the provisions of this Agreement are held by any court of competent jurisdiction to contravene, or to be invalid under, the laws of any political body having jurisdiction over the subject matter hereof, such contravention or invalidity shall not invalidate the entire Agreement. Instead, this Agreement shall be construed as if it did not contain the particular provision or provisions held to be invalid, and an equitable adjustment shall be made and necessary provision added so as to give effect to the intention of the parties expressed in this Agreement at the time of execution of this Agreement. This Assumption Agreement is executed and delivered as of the date first above written but effective as of the Effective Time. CHEMICAL LAND HOLDINGS, INC. By: /s/ M. M. Skaggs, Jr. -------------------------------------------- Name: M. M. Skaggs, Jr. -------------------------------------------- Title: President -------------------------------------------- MAXUS ENERGY CORPORATION By: /s/ W. Mark Miller -------------------------------------------- Name: W. Mark Miller -------------------------------------------- Title: Executive Vice President -------------------------------------------- - 11 - REVISED 8/14/96 CERTAIN MATTERS TO EXHIBIT A --------- BE HANDLED BY CLH-SPINOFF COMPANY LIMITED PURPOSE--CLAIMS LISTING -------------------------------
ID NAME SUBJECT OUT/CNSL - -- ---- ------- -------- ENV: 101.1 Transtech v A&Z Septic, et al Kin-Buc Lndfil. M. Gordon 102 Bayou Sorrell C-L-O-S-E-D Lndfil.Cleanup 105 Lone Pine C-L-O-S-E-D Lndfil.Cleanup 106 SCP/Carlstadt Lndfil.Cleanup 107 Kingsville Twnship. Dump I-N-A-C-T-I-V-E Lndfil.Cleanup 108 Duane Marine Salvage Corp. I-N-A-C-T-I-V-E Lndfil.Cleanup 109 MOTCO C-L-O-S-E-D Lndfil.Cleanup 109.1 Crofton v. Amoco, et al. BI & PD J. McNerney 110 Ashtabula Plant Env.Contam. 111 Carlstadt Plant Env.Contam. 111.1 Velsicol v. Am Cy, et al.(re:Berry'sCreek) Env.Contam. 111.2 Morton Int. v. Am Cy, et al.( " ) Env.Contam. 112 Cedartown, Ga. Plant Env.Contam. 112.1 Cedartown Municipal Landfill Lndfil.Cleanup J. Sasine 113 Deer Park Plant Env.Contam. 114 Delaware City Plant Env.Contam. 115 Harrison Plant Env.Contam. 116 Jersey City Plant Env.Contam. 117 Muscle Shoals Plant Env.Contam. 118 Painesville Chrome Site ("100 acres") Env.Contam. A&K 119 Mobile Plant Env.Contam. 120 Sheridan Disposal Svcs. C-L-O-S-E-D Lndfil.Cleanup 121 Princeton Plant C-L-O-S-E-D Env.Contam. 122 Greens Bayou Plant Env.Contam. 123 Painesville One-Acre Site Env.Contam. A&K 124 Bristol, PA I-N-A-C-T-I-V-E Env.Contam. 128 Belle, W.Va. Plant Env.Contam. 129 Strasburg Landfill Lndfil.Cleanup M. Gordon 130 Tybouts Corner Site (USA v ICI, et al.) C-L-O-S-E-D Lndfil.Cleanup 132 Galloway Pits/Arlngton Blnding C-L-O-S-E-D Lndfil.Cleanup 133 Blosenski Landfill (USA v Blosenski, et al.) C-L-O-S-E-D Lndfil.Cleanup M. Gordon 134 Castle Hayne Plant Env.Contam. 135 Chem. & Minerals Reclam. C-L-O-S-E-D Lndfil.Cleanup
136 & 136.1 Cortese Landfill (NY v SCA, et al.) Lndfil.Cleanup M. Gordon C-L-O-S-E-D 137 Fields Brook Site Env.Contam. 137.1 Gen-Corp. Inc. v DSCC, et al Env.Contam. 137.2 Cabot Corp. v DSCC, et al. Env.Contam. 137.3 OEPA Nat. Resource Damages Env.Contam. 138 Flemington Landfill C-L-O-S-E-D Lndfil.Cleanup 139 French Limited Site Lndfil.Cleanup 139.1-139.6 Various BI/PD claims C-L-O-S-E-D BI & PD 140 Jadco-Hughes Site Lndfil.Cleanup 141 Kearny (Hudson Co. Cr) Env.Contam. Various 141.12 NJ Turnpike case Env.Contam. J. Bolger 141.13 Kitsos case Env.Contam. J. Kosch 141.14 PPG v Lawrence, et al Env.Contam. J. Kosch 141.16 Metal Powder v Burnham v Oxy Env.Contam. M. Judge 196 Bentey case Env.Contam. J. Kosch 196.1 Settle case Env.Contam. J. Kosch 142 SCP/Newark Site C-L-O-S-E-D Lndfil.Cleanup 143 Tuscaloosa Plant Env.Contam. 147 Newark (80 Lister) Plant Env.Contam. C. Dinkins 147.1-147.13 (various claims/IHRAC case) BI & PD W. McCarter C-L-O-S-E-D Maxus v USA (Newark contribution claim) Contrib. M. Gordon 147.14 Passaic River Env.Contam. C. Dinkins A&K Local 148 Sikes Pit C-L-O-S-E-D Lndfil.Cleanup 150 Atlanta, Ill. C-L-O-S-E-D Env.Contam. 151 Maxey Flats Site Lndfil.Cleanup 152 Nat'l. Presto (Eau Claire, Wis.) C-L-O-S-E-D Env.Contam. 153 Summit Nat'l. Site C-L-O-S-E-D Lndfil.Cleanup 154 Amer. Chem. Svcs. Site C-L-O-S-E-D Lndfil.Cleanup 155 Painesville Works & Settling Ponds Env.Contam. A&K 156 Old Mill Site C-L-O-S-E-D Lndfil.Cleanup 157 Chemical Control Site Lndfil.Cleanup 158 Cross Bros. Site C-L-O-S-E-D Lndfil.Cleanup 159 Conservation Chemical Site C-L-O-S-E-D Lndfil.Cleanup 160 Liberty Waste Site (BI/PD Claims: BI & PD W. Conrad Barras v Exxon C-L-O-S-E-D Hollisv Exxon C-L-O-S-E-D Lowrey v Exxon C-L-O-S-E-D Sanders v Exxon C-L-O-S-E-D Chaplin C-L-O-S-E-D 160.1 Fred Adams v Exxon BI & PD W. Conrad
160.2 Baptiste v Exxon C-L-O-S-E-D BI & PD W. Conrad 160.3 Dartez v Exxon BI & PD W. Conrad 161 Dixie Caverns Landfill Lndfil.Cleanup 162 Pulverizing Services Site Lndfil.Cleanup 162.1 325 New Albany Assoc. v PPG, et al PD & Env.Contam 163,163.1 Metcoa Site (USA v Pesses, et al.) Env.Contam. M. Gordon 164 GBF/Pittsburg Landfill (Ca) Lndfil.Cleanup B. Stauffer 165-169 Five NY Landfills C-L-O-S-E-D Lndfil.Cleanup 170 Delaware Sand & Gravel Site C-L-O-S-E-D Lndfil.Cleanup R. Whetzel 170.1 New Castle County C-L-O-S-E-D Cost recovery " 170.2 USA v Hercules, et al. C-L-O-S-E-D Cost recovery " 170.3 Crossan claim C-L-O-S-E-D BI (EPA worker) " 171 Army Creek Landfill Lndfil.Cleanup 171.1 New Castle County demand Cost Recovery 172 Syncon Resin Site C-L-O-S-E-D Env.Contam. 175 PJP Landfill (NJ v PJP, et al.) Lndfil.Cleanup J. Lynch 176 USA v Lord (New Lyme Landfill) Lndfil.Cleanup K. Kammer 176.1 State of Ohio v Aardvark " K. Kammer 177 Fisher-Calo Site (In.) C-L-O-S-E-D Lndfil.Cleanup 178 Metamora Site (Mich.) Lndfil.Cleanup 179 Powder River Crude C-L-O-S-E-D Lndfil.Cleanup 181 IWC Site (Ark)[DeSoto case] C-L-O-S-E-D Lndfil.Cleanup 182 Redwood City Plant Env.Contam. R. Tarr 180 Beeger v Rohm and Haas, et al PD&Env.Contam J.Darrell 183 Bay Area Drum Site (Ca) Lndfil.Cleanup J. Armao 184 Paddock Rd. (Cinn., Oh) Env.Contam. 186 Davis Liquid Waste Site (USA v Davis) Lndfil.Cleanup M. Gordon 188 Fiber Chem Site Env.Contam L. Mills 189 Des Moines Barrell & Drum Site Lndfil.Cleanup 190 Cammarata case (White Chem. Co.) BI D. Apy 190.1 Rhone-Poulenc case C-L-O-S-E-D Env.Contam. D. Apy 191 Rife v Agway, et al. (Sweden-3 site) BI & PD (Oxy) 191.1 Sheg v Agway, et al. ( " ) " (Oxy) 192 Reserve Env. v Detrex v DSCC, et al. Env.Contam. (Oxy) 193 Huth Oil Site C-L-O-S-E-D Env.Contam. 195 Fuels and Chemicals Site C-L-O-S-E-D Env.Contam. 197 Marzone Site (Ga.) Lndfil.Cleanup 198 Bay Drum Site (Fla.) Lndfil.Cleanup 199 Bohaty Drum Site C-L-O-S-E-D Lndfil.Cleanup 200 Chem-Trol Site Lndfil.Cleanup M. Gordon 201 Organic Chemical Site Env.Contam. 202 Picillo Pig Farm (AmCy v 3M) Lndfil.Cleanup M. Gordon Rohm and Haas case " "
203 Uniroyal Site (Mag Plant) Env.Contam. 204 Geothermal, Inc. Site (Middletown) Lndfil.Cleanup State of NJ v Ace, et al Cost Recovery L. Kurzweil Recluse Gas Plant Env.Contam. Oxy vs Maxus Contract (Art.X) L. Schreve Oxy v Maxus (Fields Brook Indemnity) Contract Neidenberg Claim (Cr./Lung Cancer) Wrong/Death Marco of Iota Site (Midgard) Env. Contam. Martin's Oil Country Tubulars Site (Midgard?) Env. Contam. Patterson Tubular (Patterson Trucking) Site (Midgard?) Env. Contam.
REVISED 8/14/96 CERTAIN MATTERS TO BE EXHIBIT B --------- RETAINED BY MAXUS FOLLOWING SPIN-OFF LIMITED PURPOSE--CLAIMS LISTING -------------------------------
ID NAME SUBJECT OUT/CNSL RESP.CO. - -- ---- ------- -------- -------- ENV: 103 McKee Refinery Env.Contam. R&M 104 Three Rivers Refinery Env.Contam. R&M 126(incl. 126.1-126.10) Sigmor Stations C-L-O-S-E-D PD or Env.Contam. R&M 127 Freddie Harris Site Lndfil.Cleanup R&M 173 Sacramento Savings v Natomas Env.Contam. J. Darrell Natomas/MXS C-L-O-S-E-D 174 NY v SDS (Suffolk County Dacthal) Prod.Liab/Env. ISK Sharing DSCC/ISK Shorewood Water v SDS 185, 185.1 Schwartzman/Barber v Chevron Env.Contam R&M 187 McGinnis Waste Site (Whalen case) BI & PD R&M 194 American Zinc Site (Tx) Env.Contam. MXS-E&P
NON-ENV-NO.: Borough of Park Ridge case Prod.Liab. DSCC/OXY Florida v Southern Solvents Prod.Liab. DSCC/OXY(?) W. P. Ballard Co. claims Prod.Liab. C. Tisdale DSCC/MXS Pilgrim Enterprises claims Prod.Liab. N. Batey DSCC/OXY Hayhurst v Gateway PD R. Gladstone GATEWAY/MXS Gateway v Cyprus Contract Indemn. R. Gladstone GATEWAY/MXS Gateway Mine Reclamation/Bond Reclamation R. Gladstone GATEWAY/MXS Old O&G Property (Wyo., Mont., etc.) Plug/Abandon/Contam. MXS-E&P (Except as expressly assumed by CLH) Hansford County Env.Contam. MXS-E&P O & G wells Maint./Plug/Abandon MXS-E&P
The following wells are located in Lake County, Ohio: Midgard Energy Company Well Nos.: Fee -- C-1 in Perry Township C-6 in Painesville Township C-9 in Painesville Township Lease-- C-4 in Painesville Township C-5 in Painesville Township C-12 in Painesville Township C-13 in Painesville Township C-2 in Painesville Township CL-2A in Painesville Township PROD.LIAB. BI CLAIMS: Agent Orange Claims Prod.Liab. M. Gordon DSCC/MXS Abarca v Adco, et al " R. Faulk DSCC/MXS Fuller v DOW, et al " " Hickman v Mobil Oil, et al C-L-O-S-E-D " " Kapetan v L-N-S, et al " " Labombardo v Maxwell House, et al " J. Rasnek DSCC/MXS Larson v PPG, et al " " Mathena v DSCC, et al " " Overstreet v Exxon, et al " " Mattie Lee Powell claim " " Ross v Conoco, et al (VCM) " DSCC/OXY Sabb v Hayward Pool, et al " J. Kosch DSCC/MXS Turner v Firestone, et al " DSCC/MXS Vassar, Jr. v Air Products, et al (VCM) " DSCC/OXY Woodward claim " B. Olsson DSCC/MXS BCME CLAIMS (from Redwood City Plant) Employer's Liab. R. Burgess DSCC/MXS Rosario, et al. PREMISES - ASBESTOS/OTHER Allen/Hicks C-L-O-S-E-D Cleo Abbott v Appalachian Power J. Beeson Stanley Abbott Charles Abrams v AC&S Ronnie Abrams v Appalachian Power J. Beeson Lester Adams v Appalachian Power J. Beeson Frank Adams v Amoco C-L-O-S-E-D Allcorn v Amoco K. Wall Armstead v AC&S Bagley, et al D. Ledyard Bently v Shell " Borel v Texaco " Forrestier v AC&S " Jones v Clemtex " Doug King v DuPont K. Wall Russ King v DuPont R. Faulk Conrad Korff B. Worthington Taylor v AC&S Wolfe v Monsanto
OTHER: Alvarez v. ISK DSCC/ISK Insurance coverage case - DSCC v Anglo French M. Tierney SDS Pension Plan dispute Squire, Sanders Worker's Comp claims Charles Koch v Shell Oil, et al. J. Jones DSCC/OXY
EX-10.23 4 STOCK APPRECIATION RIGHTS PLAN EXHIBIT 10.23 AUGUST 30, 1996 MAXUS ENERGY CORPORATION STOCK APPRECIATION RIGHTS PLAN "PROBAC" 1. ESTABLISHMENT AND PURPOSE 1.1 Establishment of the PLAN: ------------------------- Maxus Energy Corporation ("Maxus" or the "Company") has established this Stock Appreciation Rights Plan for selected officers and EMPLOYEES of the Company ("PROBAC"). The terms and provisions applicable thereto are listed hereinbelow. 1.2 Purpose: ------- The PROBAC is intended to promote the interests of Maxus and its shareholders, by giving its top executive officers and other key EMPLOYEES, an incentive in the long term to work toward the continued growth and success of Maxus though the grants of stock appreciation rights ("SARs") with respect to YPF Sociedad Anonima's, the owner of all or substantially all of Maxus' common stock ("YPF"), common shares of stock. The Maxus Board of Directors also contemplates that the grants of SARs under the PROBAC will enhance Maxus' ability to attract and retain the highly skilled individuals necessary for its continued growth and success. 2. DEFINITIONS Whenever used fully capitalized herein, the following terms shall have the specific meanings set forth below. The singular shall include the plural and vice versa whenever the context shall so require, and references to the masculine gender are for convenience and shall include the feminine gender. BOARD shall mean Maxus' Board of Directors. BONUS GUIDELINES shall mean the rules and figures included in the COMMUNICATION LETTER that enable the calculation of the AWARD granted to the PARTICIPANT under the PROBAC in the referenced PLAN YEAR and include the GRANT DATE, the number of SARs granted and the INITIAL VALUE. CAUSE shall mean the PARTICIPANT's willful misconduct or gross negligence which is materially and demonstrably injurious to Maxus. COMMITTEE shall mean the Compensation Committee of the BOARD. COMMUNICATION LETTER shall mean the letter whereby the PARTICIPANT is informed about his participation in the PLAN in a given PLAN YEAR and wherein the BONUS GUIDELINES applicable thereto are set. DISABILITY shall mean a mental or physical disability of a PARTICIPANT, which is (i) permanent, and (ii) total or serious enough so as to prevent the PARTICIPANT from performing his material duties (with or without reasonable accommodation) as determined by a physician designated by Maxus. EMPLOYEE shall mean any person working full time for Maxus not on an independent contractor basis. EXERCISE DATE shall mean the occasion on which, according to this PLAN, the economic worth of a SAR previously granted to a PARTICIPANT is defined and the said SAR is extinguished. EXERCISE VALUE shall mean, with respect to a specific SAR, one SHARE's average closing price for the last ten business days prior to the EXERCISE DATE of such SAR during which the SHARE was listed. GRANT shall mean the occasion upon which a SAR is granted to a PARTICIPANT. GRANT DATE shall mean the grant date specified in the COMMUNICATION LETTER. INITIAL VALUE shall mean, with respect to a specific SAR, one SHARE's average closing price for the last ten business days prior to the GRANT DATE of such SAR during which the SHARE was listed. In cases of the EXERCISE VALUE and the INITIAL VALUE the value shall be made with reference to the closing prices published in the New York Stock Exchange Composite Report, failing which, it shall be made according to the same data published in another specialized publication. PARTICIPANT shall mean upon his participation in the PROBAC in a given PLAN YEAR, those officers and EMPLOYEES of Maxus selected by the President to receive GRANTS of SARs under the PLAN. PLAN shall mean this PROBAC, including any amendments thereto. PLAN YEAR shall mean a calendar year under the PROBAC beginning on or after January 1, 1996. (It is understood that the first PLAN YEAR will be a partial calendar year which begins on the date this PLAN is established and ends on December 31, 1996.) PRESIDENT shall mean the President and Chief Executive Officer of Maxus. RETIREMENT shall mean the TERMINATION OF EMPLOYMENT (when no CAUSE exists) decided by the PARTICIPANT (i) on or after reaching the age of 62, or (ii) between the age of 55 and 62, with the consent of the BOARD. SAR shall mean each of the stock appreciation rights granted to a PARTICIPANT under the PROBAC. SHARES shall mean YPF's Class "D" shares, par value of $10 pesos each. SPREAD shall mean any excess, if any of (i) the EXERCISE VALUE corresponding to the exercised SAR over (ii) the INITIAL VALUE corresponding to said SAR, except when the SPREAD on any EXERCISE DATE shall exceed 100% of the INITIAL VALUE corresponding to the relevant SAR, in which case the SPREAD shall be deemed to equal 100% of the said INITIAL VALUE. TERMINATION FOR CAUSE shall mean the decision made by the competent corporate management authority, on the basis of the existence of CAUSE, to terminate the PARTICIPANT's employment at Maxus or its affiliates. TERMINATION OF EMPLOYMENT shall mean the PARTICIPANT's departure from his employment at Maxus, including its affiliates. 3. PARTICIPATION Only the PRESIDENT, if approved by the BOARD or COMMITTEE, and such EMPLOYEES as are appointed by the PRESIDENT will be PARTICIPANTS under the PROBAC for that PLAN YEAR. An EMPLOYEE's participation in the PROBAC in a given PLAN YEAR shall not entitle the EMPLOYEE to participate in the PROBAC in future PLAN YEARS nor to claim any other compensation whatsoever or other consequence for his exclusion. 4. AWARD GRANTS 4.1 Procedure: --------- As soon as reasonably practicable before or after the beginning of each PLAN YEAR, the BOARD or COMMITTEE, in the case of the PRESIDENT, and the PRESIDENT, in the case of all other PARTICIPANTS, shall consider the SARs to be granted to PARTICIPANTS. Should the GRANTS be decided, the PARTICIPANTS shall be informed of their respective GRANTS in a written communication signed by the PRESIDENT or other appropriate person. The said COMMUNICATION LETTER shall embody the BONUS GUIDELINES corresponding to the PARTICIPANT and will be accompanied or preceded by a copy of the PLAN and/or a prospectus relating thereto. In order to perfect the GRANT, the PARTICIPANT shall return an executed copy of the COMMUNICATION LETTER. To the extent as may be required by Maxus' By-Laws, GRANTS shall be subject to the approval of the BOARD or COMMITTEE. Further, no PARTICIPANT shall be entitled to any SARs that are required to be registered under U.S. or Argentine securities laws (or payments in respect of any such SARs) unless such SARs have been so registered. Nothing in this PLAN shall require Maxus to register such SARs. 4.2 Description of the Benefit: -------------------------- The benefit conferred under PROBAC is the right of a PARTICIPANT to receive from Maxus on each EXERCISE DATE an amount in cash equivalent to the SPREAD, if any, multiplied by the number of SARs granted to that PARTICIPANT deemed exercised on such occasion. 4.3 Terms and Conditions of the SARs: -------------------------------- Subject to the provisions of Section 5 below, the SARs granted on a specific GRANT DATE shall be automatically exercised as follows: (i) on the third anniversary of that GRANT DATE, one-third of the SARs granted on said GRANT DATE shall be deemed automatically exercised and will be immediately paid in cash by Maxus to the PARTICIPANT, such one-third portion to be thereafter terminated, (ii) on the fourth anniversary of that GRANT DATE, one-third of the SARs granted on said GRANT DATE will be deemed automatically exercised and will be immediately paid in cash by Maxus to the PARTICIPANT, such one-third portion to be thereafter terminated, and (iii) on the fifth anniversary of that GRANT DATE, the remaining SARs granted on said GRANT DATE will be deemed automatically exercised and will be immediately paid in cash by Maxus to the PARTICIPANT, such remaining portion to be thereafter terminated. Nothing in the PLAN is intended to or shall be construed to entitle any PARTICIPANT to any SHARES. If the SPREAD as to any such SARs is not positive on such an anniversary, no payment shall be due with respect to the SARs deemed exercised on the applicable anniversary. 4.4 Forfeiture of SARs: ------------------ If, at the date of automatic exercise of a SAR, according to Subsection 4.3, 5.2 or 6.1, the applicable SPREAD is not positive, the applicable portion of said SAR shall be deemed to have been canceled and to have expired immediately prior to said date, there being no entitlement to nor payment in favor of the PARTICIPANT, nor any liability on the part of Maxus or any other party as concerns said PARTICIPANT, with respect to such canceled portion of said SARs. 5. TERMINATION OF EMPLOYMENT 5.1 TERMINATION OF EMPLOYMENT due to DISABILITY, Death, RETIREMENT or ----------------------------------------------------------------- Involuntary Termination: ----------------------- In case of TERMINATION OF EMPLOYMENT (i) due to the PARTICIPANT's RETIREMENT, DISABILITY or death or (ii) by a decision made by Maxus' competent management authority, grounded on any reason other than CAUSE, all SARs granted to the PARTICIPANT and not exercised at the date of such TERMINATION OF EMPLOYMENT shall be deemed automatically exercised and canceled in full and if the SPREAD is positive, will be immediately paid by Maxus to the PARTICIPANT. If the SPREAD as to such SAR is not positive on said date, no payment shall be due with respect to such SAR. 5.2 Other Reasons for TERMINATION: ----------------------------- Should the TERMINATION OF EMPLOYMENT occur as a consequence of TERMINATION FOR CAUSE or of a voluntary decision made by the PARTICIPANT, other than his RETIREMENT, DISABILITY or death and should the provisions of Subsection 5.1 not apply, all SARs granted to the PARTICIPANT not yet exercised at the date of such TERMINATION OF EMPLOYMENT shall be forfeited as concerns the PARTICIPANT and will be rendered fully void upon such TERMINATION OF EMPLOYMENT, without payment to the PARTICIPANT. 6. OTHER PROVISIONS 6.1 Plan Termination: ---------------- The PROBAC shall continue in force until terminated by the BOARD. All SARs granted but not exercised at the date of such termination shall be deemed automatically and fully exercised and canceled as of said date and if the SPREAD is positive, will be immediately paid by Maxus to the PARTICIPANT, and as to any such SAR for which the SPREAD is not positive on such date, no payment shall be due. 6.2 Plan Amendment: -------------- The BOARD may, in its sole discretion, amend the PLAN in whole or in part at any time, except that no amendment may adversely alter the rights of the PARTICIPANTS with respect to the SARs granted but not yet exercised as of the date of such amendment. 6.3 Governing Law: ------------- The PROBAC shall be construed in accordance with and governed by the laws of Texas. 6.4 Withholding Taxes: ----------------- Maxus shall deduct from all payments under the PROBAC any withholding taxes and/or any other tax (including FICA) required by law to be withheld with respect to any such payments. 6.5 Removal: ------- No provision of this PROBAC shall interfere with, or limit in any way the right of Maxus to terminate with or without CAUSE the work relationship it has with any PARTICIPANT, or be construed to constitute a contract of employment with any PARTICIPANT or to employ a PARTICIPANT in any particular position or for any particular period. 6.6 Nontransferability : ------------------ No right or interest of any PARTICIPANT under a SAR or this PROBAC may be assigned or transferred, pledged or encumbered in any manner. Any attempt to assign, transfer, pledge or encumber any such right or interest shall not be effective as to, enforceable against or recognized by Maxus. 6.7 Adjustment to SARs: ------------------ In the event that at any time after the effective date of the PROBAC, the SHARES then outstanding are changed into or exchanged for a different number or kind of shares or other securities of YPF by reason of merger, consolidation, recapitalization, reorganization, reclassification, stock split, stock dividends, combination of shares, capital increase or reduction, change in the par value of the SHARES or the like, or if the market value per SHARE is subject to a technical adjustment as a result of such event or as a result of a dividend distribution or other distribution made with respect to the SHARES, the BOARD may make an appropriate and equitable adjustment in the number and/or INITIAL VALUE of all SARs outstanding in order to prevent the reduction or enlargement of a PARTICIPANT's benefits under a SAR as in effect immediately prior to such event. All decisions of the BOARD concerning such adjustments, or the lack of them, shall be final and binding for all PARTICIPANTS, Maxus and all other interested parties. 7. ADMINISTRATION OF THE PLAN 7.1 Administration and Interpretation: --------------------------------- The PROBAC shall be administered by the BOARD. Subject to the provisions of the PROBAC, the BOARD shall construe the PLAN and all GRANTS thereunder, shall draft any rules it may deem necesary for the proper administration thereof, shall make other determinations necessary or advisable for the administration of the PLAN and shall correct any defect or supply any omission and reconcile any inconsistency in the PLAN or in any right granted thereunder, in the manner and to the extent that the BOARD deems desirable to effectuate the PROBAC. Any action taken or determination made pursuant to the PROBAC shall be final and conclusive on all parties. A PARTICIPANT's acceptance of a grant of SARs and participation under the PROBAC shall imply his full acceptance of the PLAN and BONUS GUIDELINES, as well as his acknowledgment of the binding and conclusive nature of the determinations made by the BOARD. 7.2 Acceptance of Corporate Action: ------------------------------ A PARTICIPANT shall have no right, by the mere fact of this participation in the PROBAC, to object to YPF's or Maxus' balance sheet, nor to question or oppose any corporate action by YPF or Maxus, notwithstanding its effect, if any, on the EXERCISE VALUE or market value of the SHARES or other ensuing consequences. 7.3 No Claims: --------- Without limiting Maxus' rights under Subjections 6.1 and 6.2 the termination or amendment of the PLAN shall give no right to any claim or compensaiton whatsoever on the part of any PARTICIPANT other than as specifically set forth herein or in a grant of a SAR. 7.4 References ---------- All references to Sections or Subsections shall be deemed as references to Sections or Subsections here in unless otherwise expressly provided for. 7.5 Captions: -------- All captions in this PLAN are used merely for illustrative purposes and shall not be taken into account in the construction thereof. EX-21.1 5 LIST OF SUBSIDIARIES EXHIBIT 21.1 ORGANIZATIONAL LIST OF SUBSIDIARIES, MAXUS ENERGY CORPORATION MAXUS ENERGY CORPORATION Diamond Shamrock Europe Limited Maxus Gas Marketing Company Maxus Indonesia, Inc. Maxus Northwest Java, Inc. YPF Java Baratlaut B.V. Maxus Southeast Sumatra Inc. YPF Sumatera Tenggara B.V. Maxus Offshore Exploration Company Maxus (U.S.) Exploration Company Wheeling Gateway Coal Company (Partner of Gateway Coal Company) MAXUS INTERNATIONAL ENERGY COMPANY Diamond Shamrock China Petroleum Limited Maxus Aru Inc. Maxus Bulgaria, Inc. Maxus China (C.I.) Ltd. Maxus Colombia, Inc. Maxus Energy Global B.V. Maxus Energy Trading Company Maxus Fifi Zaitun, Inc. Maxus International Services Company Maxus Southeast Asia New Ventures, Inc. Maxus Spain, Inc. Maxus Tunisia Inc. YPF Ecuador, Inc. MIDGARD ENERGY COMPANY MAXUS CORPORATE COMPANY Diamond Gateway Coal Company (Partner of Gateway Coal Company) Diamond Shamrock Venezolana, S.A. Greenstone Assurance Ltd. Leon Properties, Inc. (d/b/a Riverside Farms) Maxus Realty Company V.E.P. Corporation PARTNERSHIP Gateway Coal Company EX-23.1 6 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8 (No. 33-55938), as amended. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Dallas, Texas March 20, 1997 EX-23.2 7 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-55938) of Maxus Energy Corporation of our report dated February 28, 1995 appearing on page F-26 of this Annual Report on Form 10-K. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Dallas, Texas March 20, 1997 EX-24.1 8 POWERS OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS That the undersigned hereby constitutes and appoints Lynne P. Ciuba, H. R. Smith and David A. Wadsworth, and each of them, her true and lawful attorney or attorneys-in-fact with full power of substitution and resubstitution, for her and in her name, place and stead, to sign on her behalf as a director or officer, or both, as the case may be, of Maxus Energy Corporation (the "Corporation"), the Corporation's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for fiscal year ended December 31, 1996, and to sign any or all amendments to such Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and to each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. January 7 , 1997 -------- /s/ Charles L. Blackburn ---------------------------------------- Charles L. Blackburn EXHIBIT 24.1 POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS That the undersigned hereby constitutes and appoints Lynne P. Ciuba, H. R. Smith and David A. Wadsworth, and each of them, his true and lawful attorney or attorneys-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as a director or officer, or both, as the case may be, of Maxus Energy Corporation (the "Corporation"), the Corporation's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for fiscal year ended December 31, 1996, and to sign any or all amendments to such Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and to each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. January 13 , 1997 -------- /s/ Cedric Bridger ----------------------------------------- Cedric Bridger EXHIBIT 24.1 POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS That the undersigned hereby constitutes and appoints Lynne P. Ciuba, H. R. Smith and David A. Wadsworth, and each of them, his true and lawful attorney or attorneys-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as a director or officer, or both, as the case may be, of Maxus Energy Corporation (the "Corporation"), the Corporation's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for fiscal year ended December 31, 1996, and to sign any or all amendments to such Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and to each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. January 2 , 1997 ------- /s/ Linda R. Engelbrecht ---------------------------------------- Linda R. Engelbrecht EXHIBIT 24.1 POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS That the undersigned hereby constitutes and appoints Lynne P. Ciuba, H. R. Smith and David A. Wadsworth, and each of them, his true and lawful attorney or attorneys-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as a director or officer, or both, as the case may be, of Maxus Energy Corporation (the "Corporation"), the Corporation's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for fiscal year ended December 31, 1996, and to sign any or all amendments to such Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and to each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. January 1, 1997 /s/ George L. Jackson ---------------------------------------- George L. Jackson EXHIBIT 24.1 POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS That the undersigned hereby constitutes and appoints Lynne P. Ciuba, H. R. Smith and David A. Wadsworth, and each of them, his true and lawful attorney or attorneys-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as a director or officer, or both, as the case may be, of Maxus Energy Corporation (the "Corporation"), the Corporation's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for fiscal year ended December 31, 1996, and to sign any or all amendments to such Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and to each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. January 13 , 1997 -------- /s/ Nells Leon ---------------------------------------- Nells Leon EXHIBIT 24.1 POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS That each undersigned hereby constitutes and appoints Lynne P. Ciuba, H. R. Smith and David A. Wadsworth, and each of them, his true and lawful attorney or attorneys-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as a director or officer, or both, as the case may be, of Maxus Energy Corporation (the "Corporation"), the Corporation's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for fiscal year ended December 31, 1996, and to sign any or all amendments to such Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and to each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. January 15 , 1997 -------- /s/ James R. Lesch ---------------------------------------- James R. Lesch EXHIBIT 24.1 POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS That the undersigned hereby constitutes and appoints Lynne P. Ciuba, H. R. Smith and David A. Wadsworth, and each of them, his true and lawful attorney or attorneys-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as a director or officer, or both, as the case may be, of Maxus Energy Corporation (the "Corporation"), the Corporation's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for fiscal year ended December 31, 1996, and to sign any or all amendments to such Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and to each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. January 27 , 1997 ------ /s/ W. Mark Miller ---------------------------------------- W. Mark Miller EXHIBIT 24.1 POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS That the undersigned hereby constitutes and appoints Lynne P. Ciuba, H. R. Smith and David A. Wadsworth, and each of them, his true and lawful attorney or attorneys-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as a director or officer, or both, as the case may be, of Maxus Energy Corporation (the "Corporation"), the Corporation's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for fiscal year ended December 31, 1996, and to sign any or all amendments to such Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and to each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. January 2 , 1997 ------- /s/ Roberto Monti ---------------------------------------- Roberto Monti EXHIBIT 24.1 POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS That the undersigned hereby constitutes and appoints Lynne P. Ciuba, H. R. Smith and David A. Wadsworth, and each of them, his true and lawful attorney or attorneys-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as a director or officer, or both, as the case may be, of Maxus Energy Corporation (the "Corporation"), the Corporation's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for fiscal year ended December 31, 1996, and to sign any or all amendments to such Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and to each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. January 7 , 1997 ------- /s/ P. Dexter Peacock ---------------------------------------- P. Dexter Peacock EXHIBIT 24.1 POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS That the undersigned hereby constitutes and appoints Lynne P. Ciuba, H. R. Smith and David A. Wadsworth, and each of them, his true and lawful attorney or attorneys-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as a director or officer, or both, as the case may be, of Maxus Energy Corporation (the "Corporation"), the Corporation's Form 10-K Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for fiscal year ended December 31, 1996, and to sign any or all amendments to such Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and to each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. January 11 , 1997 -------- /s/ R. A. Walker ---------------------------------------- R. A. Walker EX-24.2 9 POWER OF ATTORNEY EXHIBIT 24.2 POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS That the undersigned, Maxus Energy Corporation, hereby constitutes and appoints Lynne P. Ciuba, H. R. Smith and David A. Wadsworth, and each of them the true and lawful attorney or attorneys-in-fact with full power of substitution and resubstitution, to sign on the Corporation's behalf the Form 10-K Annual Report of the Corporation, pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, for fiscal year ended December 31, 1996, and to sign any or all amendments to such Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in- fact, and to each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in- fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. MAXUS ENERGY CORPORATION /s/Roberto Monti ---------------------------------------- Roberto Monti President and Chief Executive Officer January 2 , 1997 --- EX-27.1 10 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 29 0 199 1 26 315 2,022 299 2,457 355 1,217 63 58 147 (56) 2,457 718 738 276 494 11 0 135 98 78 20 0 (5) 0 15 0.00 0
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