-----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, JrYJH8BXSSlcYVfZwwUcOJzl+dqCg85LNvwq2PopKjlY1bRr9hedz6NUHqCU5N85 ob0qHaDlszp5IxajVWVKDA== 0000930661-97-001248.txt : 19970514 0000930661-97-001248.hdr.sgml : 19970514 ACCESSION NUMBER: 0000930661-97-001248 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-55857 FILM NUMBER: 97602501 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ending March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-8567-2 MAXUS ENERGY CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-1891531 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 717 NORTH HARWOOD STREET, DALLAS, TEXAS 75201-6594 (Address of principal executive offices) (Zip Code) (214) 953-2000 (Registrant's telephone number, including area code) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQURIED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO THE FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] Shares of Common Stock outstanding at May 12, 1997: 147, 246,135 PART 1. FINANCIAL INFORMATION In the opinion of the management of Maxus Energy Corporation (together with its subsidiaries, "Maxus" or the "Company"), all adjustments (consisting only of normal accruals) necessary for a fair presentation of the consolidated results of operations, consolidated balance sheet and consolidated cash flows at the date and for the periods indicated have been included in the accompanying consolidated financial statements. 2 MAXUS ENERGY CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (in millions)
Three Months Three Months Ended March 31, Ended March 31, 1997 1996 ---------- ---------- (Unaudited) (Unaudited) REVENUES Sales and operating revenues $ 179.6 $ 174.0 Other revenues, net 4.2 6.2 --------- --------- 183.8 180.2 COSTS AND EXPENSES Operating expenses 52.0 50.8 Gas purchase costs 21.8 18.0 Exploration, including exploratory dry holes 10.8 7.9 Depreciation, depletion and amortization 38.4 40.7 General and administrative expenses 2.4 2.8 Taxes other than income taxes 4.5 3.4 Interest and debt expenses 33.2 34.1 --------- --------- 163.1 157.7 --------- --------- INCOME BEFORE INCOME TAXES 20.7 22.5 INCOME TAXES 17.3 23.0 --------- --------- NET INCOME (LOSS) $ 3.4 $ (0.5) ========= =========
See Notes to Consolidated Financial Statements. 3 MAXUS ENERGY CORPORATION CONSOLIDATED BALANCE SHEET (in millions, except shares)
March 31, December 31, 1997 1996 ----------- ----------- ASSETS (Unaudited) Current Assets Cash and cash equivalents $ 19.2 $ 28.9 Receivables, less allowance for doubtful accounts 140.9 199.0 Funding guarantee from parent 27.4 27.4 Inventories 26.4 26.3 Restricted cash 7.3 7.3 Deferred income taxes 15.3 15.3 Prepaid expenses 10.2 10.5 --------- --------- TOTAL CURRENT ASSETS 246.7 314.7 Properties and Equipment, less accumulated depreciation, depletion and amortization 2,020.3 2,022.2 Investments and Long-Term Receivables 0.6 0.4 Restricted Cash 27.0 26.5 Funding Guarantee from Parent 77.7 75.2 Deferred Charges 19.1 17.5 --------- --------- $ 2,391.4 $ 2,456.5 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt $ 54.1 $ 54.1 Accounts payable 46.6 98.1 Taxes payable 25.4 44.6 Accrued liabilities 154.1 158.0 --------- --------- TOTAL CURRENT LIABILITIES 280.2 354.8 Long-Term Debt 1,026.8 1,034.4 Advances from Parent 261.8 182.2 Deferred Income Taxes 501.9 502.7 Other Liabilities and Deferred Credits 171.3 171.0 $9.75 Redeemable Preferred Stock, $1.00 par value Authorized and issued shares 0 and 625,000 - 62.5 Stockholders' Equity $2.50 Preferred Stock, $1.00 par value Authorized shares--5,000,000 Issued shares--3,500,000 55.6 57.8 Common Stock, $1.00 par value Authorized shares--300,000,000 Issued Shares--147,246,135 and 147,246,364 147.2 147.2 Paid-in capital 215.6 216.4 Accumulated deficit (268.8) (272.3) Minimum pension liability (0.2) (0.2) TOTAL STOCKHOLDERS' EQUITY --------- --------- 149.4 148.9 --------- --------- $ 2,391.4 $ 2,456.5 ========= =========
See "Commitments and Contingencies." See Notes to Consolidated Financial Statements. The Company uses the successful efforts method to account for its oil and gas producing activities. 4 MAXUS ENERGY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (in millions)
--------------- --------------- Three Months Three Months Ended March 31, Ended March 31, 1997 1996 --------------- --------------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 3.4 $ (0.5) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization 38.4 40.7 Dry hole costs 6.1 0.5 Income taxes (4.5) (5.1) Net gain on sale of assets and sale/maturity of investments (0.2) - Postretirement benefits 0.7 0.8 Accretion of discount 2.4 2.1 Other (0.4) (1.3) Changes in components of working capital: Receivables 58.2 (6.3) Inventories, prepaids and other current assets (1.6) 4.4 Accounts payable (51.5) (2.1) Accrued liabilities 0.1 (4.0) Taxes payable/receivable (15.5) (3.4) ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 35.6 25.8 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for properties and equipment--including dry hole costs (39.8) (40.9) Proceeds from sale of assets 0.4 0.2 Restricted cash (0.5) 15.3 Other (6.0) (4.6) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (45.9) (30.0) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of short-term debt (10.0) (0.1) Advances from parent 76.4 (1.5) Capital contribution from parent - 64.0 Redemption of Preferred Stock (62.5) (62.5) Dividends paid (3.0) (9.1) Other (0.3) (2.2) ---------- ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 0.6 (11.4) ---------- ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS (9.7) (15.6) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28.9 38.3 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19.2 $ 22.7 ========== ==========
See Notes to Consolidated Financial Statements. 5 MAXUS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE ONE SIGNIFICANT ACCOUNTING POLICIES The Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles, the most significant of which are described below. In June 1996, YPF Sociedad Anonima ("YPF"), the parent company of Maxus, and Maxus announced an internal reorganization of Maxus which included the transfer of the Common Stock of Maxus to a YPF indirect wholly owned subsidiary, YPF Holdings, Inc. ("Holdings"), and the sale of common stock of certain subsidiaries of Maxus to a wholly owned subsidiary of YPF (See Note Two). CONSOLIDATION ACCOUNTING The Consolidated Financial Statements include the accounts of the Company and all domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated. MANAGEMENT'S ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. STATEMENT OF CASH FLOWS Investments with original maturities of three months or less at the time of original purchase are considered cash equivalents for purposes of the accompanying Consolidated Statement of Cash Flows. Short-term investments include investments with maturities over three months but less than one year. INVENTORY VALUATION Inventories are valued at the lower of historical cost or market value and are primarily comprised of well equipment and supplies. Historical cost is determined primarily by using the weighted average cost method. PROPERTIES AND EQUIPMENT Properties and equipment are carried at cost. Major additions are capitalized; expenditures for repairs and maintenance are charged against earnings. The Company follows the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires a review of long-lived assets for impairment whenever events or changes in circumstance indicate that the carrying amount of the asset may not be recoverable. Under SFAS 121, if the expected future cash flow of a long-lived asset is less than the carrying 6 amount of the asset, an impairment loss shall be recognized to value the asset at its fair value. The Company uses the successful efforts method to account for costs incurred in the acquisition, exploration, development and production of oil and gas reserves. Under this method, all geological and geophysical costs are expensed; all development costs, whether or not successful, are capitalized as costs of proved properties; exploratory drilling costs are initially capitalized, but if the effort is determined to be unsuccessful, the costs are then charged against earnings; and, depletion is computed based on an aggregation of properties with common geologic structural features or stratigraphic conditions, such as reservoirs or fields. For investment in unproved properties in the United States, a valuation allowance (included as an element of depletion) is provided by a charge against earnings to reflect the impairment of unproven acreage. Investment in international non-producing leasehold costs are reviewed periodically by management to insure the carrying value is recoverable based upon the geological and engineering estimates prepared by independent petroleum engineers of total possible and probable reserves expected to be added over the remaining life of each concession. Based upon increases to proved reserves determined by reserve reports, a portion of the investment in international non-producing leasehold costs will be periodically transferred to investment in proved properties. Depreciation and depletion related to the costs of all development drilling, successful exploratory drilling and related production equipment is calculated using the unit of production ("UOP") method based upon estimated proved developed reserves. Leasehold costs are amortized using the UOP method based on estimated proved reserves. Other properties and equipment, which include gas gathering and processing equipment and plants, are depreciated generally on the straight-line method over their estimated useful lives. Estimated future dismantlement, restoration and abandonment costs for major facilities, net of salvage value, are taken into account in determining depreciation, depletion and amortization. The Company capitalizes the interest cost associated with major property additions and mineral development projects while in progress. Such amounts are amortized applying the same depreciation method over the same useful lives as that used for the related assets. When complete units of depreciable property are retired or sold, the asset cost and related accumulated depreciation are eliminated with any gain or loss reflected in other revenues, net. When less than complete units of depreciable property are disposed of or retired, the difference between asset cost and salvage or sales value is charged or credited to accumulated depreciation and depletion. DEFERRED CHARGES Deferred charges are primarily comprised of debt issuance costs and are amortized over the terms of the related debt agreements. REVENUE RECOGNITION Oil and gas sales are recorded on the entitlements method. Differences between the Company's actual production and entitlements result in a receivable when underproduction occurs and a payable when overproduction occurs. These underproduced or overproduced volumes are valued based on the weighted average sales price for each respective property. PENSIONS The Company has a number of trusteed noncontributory pension plans covering substantially all 7 full-time employees. The Company's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements under governmental regulations, plus such additional amounts as management may determine to be appropriate. The benefits related to the plans are based on years of service and compensation earned during years of employment. The Company also has a noncontributory supplemental retirement plan for executive officers and selected key employees. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS The Company provides certain health care and life insurance benefits for eligible retired employees and certain insurance and other postemployment benefits for eligible individuals whose employment is terminated by the Company prior to their normal retirement. The Company accrues the estimated cost of retiree benefit payments, other than pensions, during employees' active service periods. Employees become eligible for these benefits if they meet minimum age and service requirements. The Company accounts for benefits provided after employment but before retirement by accruing the estimated cost of postemployment benefits when the minimum service period is met, payment of the benefit is probable and the amount of the benefit can be reasonably estimated. The Company's policy is to fund other postretirement and postemployment benefits as claims are incurred. ENVIRONMENTAL EXPENDITURES Environmental liabilities are recorded when environmental assessments and/or remediation are probable and material and such costs to the Company can be reasonably estimated. The Company's estimate of environmental assessment and/or remediation costs to be incurred are based on either 1) detailed feasibility studies of remediation approach and cost for individual sites or 2) the Company's estimate of costs to be incurred based on historical experience and publicly available information based on the stage of assessment and/or remediation of each site. As additional information becomes available regarding each site or as environmental remediation standards change, the Company revises its estimate of costs to be incurred in environmental assessment and/or remediation. During the third quarter 1996, the Company, as part of its general reorganization, transferred certain liabilities related to environmental matters to Chemical Land Holdings, Inc. ("CLH"), an indirect subsidiary of YPF, effective as of August 1, 1996 (See Note Two). LITIGATION CONTINGENCIES The Company records liabilities for litigation when such amounts are probable, material and can be reasonably estimated. INCOME TAXES Effective August 13, 1996, YPF transferred ownership of its shares of the Company's Common Stock to Holdings, a Delaware corporation. The Company subsequently transferred its ownership of the common stock of CLH to a subsidiary of Holdings (See Note Two). As a result of these transactions both the Company and CLH are now included as members of an affiliated group of companies qualifying, within the meaning of the Unites States Internal Revenue Code, to file a consolidated federal income tax return having Holdings as their common U.S. parent. The Company's financial statements reflect an allocation of income tax expense or benefit from the Holdings consolidated income tax group. This method of allocation is consistent with the principles established by Statement of Financial Accounting Standards, No. 109 ("SFAS 109"), "Accounting for Income Taxes." It is based on a calculation of income tax for the Company as a separate entity, adjusted to reflect certain attributes of Holding's consolidated income tax return. 8 The attributes include, but are not limited, to the consolidated loss apportionment, tax credits, and the alternative minimum tax. Effective August 1, 1996, CLH assumed certain liabilities of the Company relating to environmental matters (See Note Two); thus, current taxes and deferred taxes associated with the assumption of these liabilities have been transferred to the accounts of CLH. INVESTMENTS IN MARKETABLE SECURITIES Investments in debt and equity securities are reported at fair value except for those investments in debt securities which management has the intent and the ability to hold to maturity. Investments in debt securities which are held-for-sale are classified based on the stated maturity and management's intent to sell the securities. Unrealized gains and losses on investments in marketable securities, except for debt securities classified as "held-to- maturity" are reported as a separate component of stockholders' equity. DERIVATIVES The Company periodically hedges the effects of fluctuations in the price of crude oil, natural gas and natural gas liquids ("NGL") through price swap agreements and futures contacts. Gains and losses on these hedges are deferred until the related sales are recognized and are recorded as a component of sales and operating revenues. NOTE TWO GENERAL REORGANIZATION On June 18, 1996, the Company announced a reorganization which included the sale of three of its subsidiaries holding certain Bolivian and Venezuelan assets to YPF, the redemption of the outstanding shares of $4.00 Cumulative Convertible Preferred Stock (the "$4.00 Preferred Stock") and the transfer to a YPF subsidiary of a Maxus subsidiary that had assumed certain liabilities related to environmental matters. On July 1, 1996, Maxus International Energy Company ("Seller"), a wholly owned subsidiary of Maxus, sold all of the issued and outstanding shares of capital stock of its wholly owned subsidiary, YPF International Ltd. ("International"), to YPF, pursuant to a Stock Purchase and Sale Agreement by and between YPF and Seller. The sole assets of International at the time of the transaction were all of the issued and outstanding shares of capital stock of Maxus Bolivia, Inc. ("Maxus Bolivia"), Maxus Venezuela (C.I.) Ltd. ("Venezuela C.I.") and Maxus Venezuela S.A. ("Venezuela S.A."). The assets of Maxus Bolivia consisted of all of the former assets and operations of Maxus in Bolivia, including the interests of Maxus in the Surubi Field and Secure and Caipipendi Blocks. The assets of Venezuela C.I. and Venezuela S.A. consisted of all of the former assets and operations of Maxus in Venezuela, except those held through Maxus Guarapiche Ltd. ("Maxus Guarapiche"), including the interests of Maxus in Quiriquire Unit. The purchase price for the outstanding shares of capital stock of International was $266.2 million which represented the carrying amount of International on the financial reporting books of Seller as of June 30, 1996. Maxus used the proceeds from this transaction for general corporate purposes, including the redemption of its $4.00 Preferred Stock, which is discussed below. While not a part of the above-described sale transactions, effective September 1, 1996, Seller sold all of the capital stock of Maxus Guarapiche to International for $26.4 million which represented the carrying amount of Maxus Guarapiche on the financial reporting books of Seller as of August 31, 1996. Maxus Guarapiche held a 25% interest in the Guarapiche Block, an exploration block in Venezuela. 9 Also, as part of the general reorganization, on August 13, 1996 Maxus redeemed all of its outstanding shares of $4.00 Preferred Stock at a price of $50 per share plus accrued and unpaid dividends (approximately $220.8 million in the aggregate). The excess of the redemption price over the carrying value of the $4.00 Preferred Stock resulted in an increase in the Company's accumulated deficit of $213.6 million. The Company used a portion of the proceeds from the sale of all of the issued and outstanding shares of capital stock of International as well as an advance from Holdings of approximately $55.6 million to redeem the $4.00 Preferred Stock. As further part of the reorganization, the Company transferred certain liabilities related to environmental matters to CLH, an indirect subsidiary of YPF, effective as of August 1, 1996. In connection with this transfer, CLH assumed (the "Assumption") the liabilities so transferred and YPF committed to contribute capital (the "Contribution Agreement") to CLH up to an amount of $106.9 million that will enable CLH to satisfy its obligations under the Assumption based on the Company's reserves established in respect of the assumed liabilities as of July 31, 1996 plus certain operating expenses budgeted by CLH from time to time. YPF will not be obligated to contribute capital to CLH beyond the amount of its initial undertaking. The Company will remain responsible for any obligations assumed by CLH in the event CLH does not perform or fulfill such obligations. CLH has assumed responsibility for, among other things, the Company's environmental contingencies and a declaratory judgment action filed by Occidental Chemical Corporation and Henkel Corporation. The contribution obligation of YPF related to the Assumption was reflected on the Company's financial statements as a long-term and short-term funding guarantee from parent totaling $106.9 million, an increase to deferred income taxes of $37.4 million and an increase to paid-in capital of $69.5 million. In the first quarter 1997, it was determined that an additional $3.1 million in environmental reserves were necessary due to an increased level of work at certain sites. YPF agreed to assume this additional liability. Therefore, the Company's environmental reserves and funding guarantee were increased by $3.1 million to reflect the transaction. At March 31, 1997, the outstanding funding guarantee totaled $105.1 million. Insofar as CLH has assumed the Company's environmental liabilities and YPF has committed to pay for the liabilities, such liabilities are not expected to have an adverse impact on the financial reporting books of the Company. Under the terms of the Contribution Agreement, Maxus agreed that any contributions to the equity capital of CLH by YPF shall reduce the obligation of YPF to capitalize Maxus pursuant to the Merger Agreement. Capital contributions of $9.5 million have been made to CLH since the effective date of the Assumption. NOTE THREE ASSET ACQUISITION AND DIVESTITURE In January 1996, the Company and its partners were successful in acquiring the highly prospective Guarapiche Block in Venezuela's first auction awards for equity production in over 20 years. Guarapiche is located on the same trend as the five billion barrel El Furrial field in northeastern Venezuela. In July 1996, the Company, together with its partners, paid $109 million ($27 million net to Maxus) to the Venezuelan government for rights to explore the Guarapiche Block. BP Exploration Orinoco Limited is the operator with a 37.5% working interest, while Amoco Production Company and the Company hold the remaining 37.5% and 25%, respectively. Effective September 1, 1996, Maxus sold all of the capital stock of Maxus Guarapiche, which owns a 25% interest in the Guarapiche Block, to International (See Note Two). 10 NOTE FOUR PREFERRED STOCK On January 31, 1997, Maxus redeemed the remaining 625,000 shares of its $9.75 Cumulative Convertible Preferred Stock, which was subject to mandatory redemption provisions, for $62.5 million plus accrued dividends. YPF provided the funding for the redemption which was recorded as an Advance from Parent on the Consolidated Balance Sheet. NOTE FIVE LONG TERM DEBT AND CREDIT ARRANGEMENTS During the first quarter of 1997, the Company paid its first quarterly principal installment of $10 million to Chase Manhattan Bank as required under the terms of the Midgard credit facility. NOTE SIX COMMITMENTS AND CONTINGENCIES Laws and regulations relating to health and environmental quality in the United States, as well as environmental laws and regulations of other countries in which the Company operates, affect nearly all of the operations of the Company. These laws and regulations set various standards regulating certain aspects of health and environmental quality, provide for penalties and other liabilities for the violation of such standards and establish in certain circumstances remedial obligations. In addition, especially stringent measures and special provisions may be appropriate or required in environmentally sensitive foreign areas of operation, such as those in Ecuador. The Company believes that its policies and procedures in the area of pollution control, product safety and occupational health are adequate to prevent unreasonable risk of environmental and other damage, and of resulting financial liability, in connection with its business. Some risk of environmental and other damage is, however, inherent in particular operations of the Company and, as discussed below, Maxus has certain potential liabilities associated with former operations. The Company cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or enforced. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could in the future require material expenditures by the Company for the installation and operation of systems and equipment for remedial measures and in certain other respects. Also, certain laws allow for recovery of natural resource damages from potentially responsible parties and ordering the implementation of interim remedies to abate an imminent and substantial endangerment to the environment. Potential expenditures for any such actions cannot be reasonably estimated. In connection with the sale of Maxus' former chemical subsidiary, Diamond Shamrock Chemicals Company ("Chemicals"), to Occidental Petroleum Corporation ("Occidental") in 1986, Maxus agreed to indemnify Chemicals and Occidental from and against certain liabilities relating to the business or activities of Chemicals prior to the September 4, 1986 closing date (the "Closing Date"), including certain environmental liabilities relating to certain chemical plants and waste disposal sites used by Chemicals prior to the Closing Date. 11 In addition, Maxus agreed to indemnify Chemicals and Occidental for 50% of certain environmental costs incurred by Chemicals for which notice is given to Maxus within 10 years after the Closing Date on projects involving remedial activities relating to chemical plant sites or other property used in the conduct of the business of Chemicals as of the Closing Date and for any period of time following the Closing Date, with Maxus' aggregate exposure for this cost sharing being limited to $75 million. Occidental Chemical Corporation ("OxyChem"), a subsidiary of Occidental, and Henkel Corporation ("Henkel"), an assignee of certain of Occidental's rights and obligations, filed a declaratory judgment action in Texas state court with respect to the Company's agreement in this regard. The lower court found in favor of OxyChem and Henkel and the Company has appealed the judgment. The Company has established reserves based on its 50% share of remaining costs expected to be paid or incurred by OxyChem and Henkel prior to September 4, 1996, the tenth anniversary of the Closing Date. As of March 31, 1997, the Company and CLH on its behalf had paid OxyChem and Henkel a total of approximately $42 million against the $75 million cap and, based on OxyChem's and Henkel's historical annual expenditures, the Company had previously reserved $4 million for costs it anticipated through August 1996. The Company cannot predict with any certainty what portion of the approximately $29 million unreserved portion of the $33 million amount remaining at March 31, 1997, OxyChem and Henkel may incur; however, OxyChem and Henkel have asserted in court that the entire amount will be spent. In the event that the Company does not prevail in its appeal, it could be required to pay up to approximately $29 million in additional costs which have not been reserved related to this indemnification. CLH has assumed, pursuant to the Assumption, responsibility for this litigation. At March 31, 1997, reserves for the environmental contingencies discussed herein totaled $104 million. Management believes it has adequately reserved for all environmental contingencies which are probable and can be reasonably estimated; however, changes in circumstances could result in changes, including additions, to such reserves in the future. Maxus is conducting litigation against the insurance companies that wrote Chemicals' and Maxus' primary and excess insurance during the relevant periods who have refused to provide coverage for Chemicals' or Maxus' cost of the personal injury and property damage claims related to certain environmental claims, including remedial activities at chemical plant sites and disposal sites. Maxus has entered into settlement agreements with certain of the insurers, the terms of which are required to be held confidential. Maxus also is engaged in settlement discussions with other defendant insurers; however, there can be no assurance that such discussions will result in settlements with such other insurers. In the following discussion concerning specific plant sites, other plant sites generally and third party sites, references to the Company include, as appropriate, references to CLH acting under the Assumption. Newark, New Jersey. A consent decree, previously agreed upon by the U.S. Environmental Protection Agency (the "EPA"), the New Jersey Department of Environmental Protection and Energy (the "DEP") and Occidental, as successor to Chemicals, was entered in 1990 by the United States District Court of New Jersey and requires implementation of a remedial action plan at Chemicals' former Newark, New Jersey agricultural chemicals plant. Engineering for such plan, which will include an engineering estimate of the cost of construction, is progressing. Construction is expected to begin in 1998, cost approximately $23 million and take three to four years to complete. The work is being supervised and paid for by the Company pursuant to the above described indemnification obligation to Occidental. The Company has fully reserved the estimated costs of performing the remedial action plan and required ongoing maintenance costs. Studies have indicated that sediments of the Newark Bay watershed, including the Passaic River adjacent to the plant, are contaminated with hazardous chemicals from many sources. These studies suggest that the older and more contaminated sediments located adjacent to the Newark plant 12 generally are buried under more recent sediment deposits. The Company, on behalf of Occidental, negotiated an agreement with the EPA under which the Company is conducting further testing and studies to characterize contaminated sediment and biota in a six-mile portion of the Passaic River near the plant site. The stability of the sediments in the entire six-mile portion of the Passaic River study area is also being examined as a part of the Company's studies. The Company currently expects the testing and studies to be completed in 1999 and cost from $4 million to $6 million after March 31, 1997. The Company has reserved for the amount of its estimate of the remaining costs to be incurred in performing these studies. The Company has been conducting similar studies under its own auspices for several years. Until these studies are completed and evaluated, the Company cannot reasonably forecast what regulatory program, if any, will be proposed for the Passaic River or the Newark Bay watershed and, therefore, cannot estimate what additional costs, if any, will be required to be incurred. However, it is possible that additional work, including interim remedial measures, may be ordered with respect to the Passaic River. Hudson County, New Jersey. Until 1972, Chemicals operated a chromium ore processing plant at Kearny, New Jersey. According to the DEP, wastes from these ore processing operations were used as fill material at a number of sites in and near Hudson County. As a result of negotiations between the Company (on behalf of Occidental) and the DEP, Occidental signed an administrative consent order with the DEP in 1990 for investigation and remediation work at certain chromite ore residue sites in Kearny and Secaucus, New Jersey. The work is presently being performed by the Company and Occidental, and the Company is funding Occidental's share of the cost of investigation and remediation of these sites. The Company is currently providing financial assurance for performance of the work in the form of a self-guarantee in the amount of $20 million subject to the Company's continuing ability to satisfy certain financial tests specified by the State. This financial assurance may be reduced with the approval of the DEP following any annual cost review. While the Company has participated in the cost of studies and is implementing interim remedial actions and conducting remedial investigations and feasibility studies, the ultimate cost of remediation is uncertain. The Company anticipates it will submit its remedial investigation and feasibility study report to the DEP in 1997. The results of the DEP's review of this report could increase the cost of any further remediation that may be required. The Company has reserved its best estimate of the remaining cost to perform the investigations and remedial work as being approximately $47 million. In addition, the DEP has indicated that it expects Occidental and the Company to participate with the other chromium manufacturers in the funding of certain remedial activities with respect to a number of so-called "orphan" chrome sites located in Hudson County, New Jersey. Occidental and the Company have declined participation as to those sites for which there is no evidence of the presence of residue generated by Chemicals. The Governor of New Jersey issued an Executive Order requiring state agencies to provide specific justification for any state requirements more stringent than federal requirements. The DEP has indicated that it may be revising its soil action level upwards towards the higher soil screening levels proposed by the EPA in 1994. Painesville, Ohio. From about 1912 through 1976, Chemicals operated manufacturing facilities in Painesville, Ohio. The operations over the years involved several discrete but contiguous plant sites over an area of about 1,300 acres. The primary area of concern historically has been Chemicals' former chromite ore processing plant (the "Chrome Plant"). For many years, the site of the Chrome Plant has been under the administrative control of the EPA pursuant to an administrative consent order under which Chemicals is required to maintain a clay cap over the site and to conduct certain ground water and surface water monitoring. Many other sites have previously been clay-capped and one specific site, which was a waste disposal site from the mid-1960s until the 1970s, has been encapsulated and is being controlled and monitored. In 1995, the Ohio Environmental Protection Agency (the "OEPA") issued its Directors' Final Findings and Order (the "Director's Order") by consent ordering that a remedial investigation and feasibility study (the "RIFS") be conducted at the former Painesville plant area. The Company has agreed to participate in the RIFS as required 13 by the Director's Order. It is estimated that the total cost of performing the RIFS will be $5 million to $8 million during the years 1997 through 1999. In spite of the many remedial, maintenance and monitoring activities performed, the former Painesville plant site has been proposed for listing on the National Priority List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"); however, the EPA has stated that the site will not be listed so long as it is satisfactorily addressed pursuant to the Director's Order and OEPA's programs. The Company has reserved for the amount of its estimate of its share of the cost to perform the RIFS. The scope and nature of any further investigation or remediation that may be required cannot be determined at this time; however, as the RIFS progresses, the Company will continuously assess the condition of the Painesville plant site and make any changes, including additions, to its reserve as may be required. Third Party Sites. Chemicals has also been designated as a potentially responsible party ("PRP") by the EPA under CERCLA with respect to a number of third party sites, primarily off of Chemicals' properties, where hazardous substances from Chemicals' plant operations allegedly were disposed of or have come to be located. Numerous PRPs have been named at substantially all of these sites. At several of these, Chemicals has no known exposure. Although PRPs are typically jointly and severally liable for the cost of investigations, cleanups and other response costs, each has the right of contribution from other PRPs and, as a practical matter, cost sharing by PRPs is usually effected by agreement among them. At a number of these sites, the ultimate cost of these sites and Chemicals' share of the costs thereof cannot be estimated at this time. The Company has reserved for its estimated costs related to these sites, where such costs are both probable and reasonably estimatable. 14 MAXUS ENERGY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER 1997 RESULTS OF OPERATIONS - FIRST QUARTER 1997 VS. FIRST QUARTER 1996 Maxus Energy Corporation (the "Company" or "Maxus") reported net income of $3 million for the first quarter of 1997 compared to a net loss of $1 million for the first quarter of 1996. Performance improved as a result of higher sales and operating revenues coupled with lower income taxes being partially offset by higher costs and expenses. Performance also improved despite the sale of three of the Company's subsidiaries holding certain Bolivian and Venezuelan assets to YPF Sociedad Anonima ("YPF") effective July 1, 1996. Sales and Operating Revenues. Sales and operating revenues for the first quarter of 1997 increased $6 million to $180 million, compared to $174 million for the same 1996 period. The increase in sales and operating revenues was due primarily to higher average prices for crude oil, natural gas and natural gas liquids ("NGL") and higher crude oil sales volumes in Ecuador partially offset by lower crude oil sales volumes in Northwest Java and the absence of sales and operating revenues from Maxus' former operations in Bolivia and Venezuela. Net worldwide crude oil sales volumes averaged 53 thousand barrels per day ("mbpd") in the first quarter of 1997, a decline of 12 mbpd compared to 65 mbpd in the same quarter in 1996. The decline was due primarily to the absence of 13 mbpd in average crude oil sales volumes from the Company's former Bolivian and Venezuelan operations during the first quarter of 1996. Ecuador's first quarter 1997 average net crude oil sales volumes of 13 mbpd were five mbpd higher than the same period last year; however, this increase was offset by a decrease in average crude oil sales volumes of four mbpd in Northwest Java as a result of lower crude oil entitlements driven by higher crude oil prices, lower cost recovery and new contract terms. Effective January 19, 1997, Maxus' share of crude oil and natural gas production in Northwest Java decreased due to the renegotiation in 1990 of the production sharing contract with Indonesia's state oil company, Pertamina. Maxus' average net worldwide crude oil sales price rose significantly, from $17.75 per barrel ("bbl") in the first quarter of 1996 to $20.50 per bbl in the first quarter of 1997. Average net U.S. natural gas sales volumes for the first quarter of 1997 were 175 million cubic feet per day ("mmcfpd"), a decrease of four mmcfpd as compared to the first quarter of 1996. The average gas price received in the U.S. rose significantly, from $1.82 per thousand cubic feet ("mcf") in the first quarter of 1996 to $2.44 per mcf in the first quarter of 1997. Average net Northwest Java natural gas sales volumes of 63 mmcfpd in the first quarter of 1997 were flat compared to the same period in 1996. Natural gas sales prices averaged $2.67 per mcf during the first quarter of 1997 compared to $2.64 per mcf during the first quarter of 1996. Average net NGL sales in the U.S. for the first quarter of 1997 of 19 mbpd were flat compared to the first quarter of 1996. The average sales price for U.S. NGL in the first quarter of 1997 was $13.66 per bbl, an increase of $1.19 per bbl from the same period in 1996. Costs and Expenses. Costs and expenses of $163 million for the first quarter of 1997 were $5 million higher than such period in 1996 due primarily to higher gas purchase costs and higher exploration expenses partially offset by lower depreciation, depletion and amortization ("DD&A"). Gas purchase costs of $22 million were $4 million higher in the first quarter of 1997 as compared to the first quarter of 1996 due to higher gas purchase prices; however, these costs were recovered through higher gas sales prices. 15 Exploration expenses during the first quarter of 1997 were $11 million, an increase of $3 million compared to the first quarter of 1996. During the first quarter of 1997, the Company recognized $4 million of dry hole expense in Tunisia. DD&A of $38 million in the first quarter of 1997 was $3 million lower than the same period in 1996. The absence of DD&A in Bolivia during the first quarter of 1997 resulted in a favorable impact of $2 million. Income tax expense was $17 million and $23 million in the first quarters of 1997 and 1996, respectively. The $6 million decrease in income tax expense was primarily due to the absence of income taxes in Bolivia and Venezuela in the first quarter of 1997 and the new contract terms in Northwest Java. FINANCIAL CONDITION The Company's net cash provided by operating activities was $36 million in the first quarter of 1997 compared to $26 million in the first quarter of 1996. Net cash from operating activities before working capital changes increased $9 million during 1997 due primarily to higher sales and operating revenues, lower cash interest expense and lower cash income taxes. Overall, first quarter 1997 net working capital requirements remained relatively flat compared to the first quarter of 1996. The Company began the year with $29 million of cash and cash equivalents. During the first three months of 1997, Maxus received $76 million in advances from parent and generated $36 million from operating activities. The Company used $40 million of cash to fund capital expenditures, $63 million to fund the redemption of the remaining 625,000 shares of $9.75 Cumulative Convertible Preferred Stock (the "9.75 Preferred Stock") as required in January 1997, $3 million to pay preferred dividends and $10 million to repay the first quarterly principal installment due under the Midgard credit facility. At March 31, 1997, the Company's cash and cash equivalents balance was $19 million. In the first three months of 1996, 1995 year-end cash balances of $38 million, $26 million of cash provided by operations, a capital contribution from parent of $64 million and the release of $15 million in restricted cash were used to redeem a portion of the Company's $9.75 Preferred Stock, fund expenditures for properties and equipment and pay preferred dividends. In management's opinion, cash on hand and cash from operations will be inadequate to fund the 1997 program spending budget, service debt and pay preferred stock dividends and trade obligations. It is anticipated that YPF could be required to make cash advances to Maxus in 1997 totaling approximately $150 million to $200 million to help fund the Company's obligations. Actual cash advances made by YPF could vary significantly depending on, among other circumstances, oil and gas prices and program spending commitments. The Company's exposure to foreign currency fluctuations is minimal as substantially all of the Company's material foreign contracts are denominated in U.S. dollars. The Company's only derivative financial instruments are natural gas, NGL and crude oil price swap agreements and crude oil and natural gas futures contracts, which are not used for trading purposes. FUTURE OUTLOOK Maxus currently projects total program spending (capital expenditures plus exploration expenses) for 1997 to be approximately $212 million, compared to $233 million in 1996. The planned allocation is Indonesia $108 million, Midgard (U.S.) $66 million, Ecuador $23 million and domestic and overseas new ventures $15 million. Funding for the 1997 spending program is expected to be provided by cash from operations and cash advances from YPF as necessary. In addition to the 1997 program, Maxus has financial and/or performance commitments for exploration and development activities in 1998 and beyond, none of which are material. 16 Midgard has signed a letter of intent with Amoco Production Company ("Amoco") concerning the establishment of a partnership with regard to Midgard's business and assets. It is anticipated that Midgard and Amoco will each contribute to the partnership oil and gas properties in the Texas Panhandle and western Oklahoma and that Amoco will contribute certain other assets. Midgard and Amoco have commenced negotiations of definitive agreements covering the partnership. However, no definitive agreements have been entered into, and consequently no assurances can be given that the attempts to establish the partnership will be successful. Maxus is continuing to consider a number of possible capital and business restructuring alternatives; however, no decisions have been made to take any additional specific action nor can there be any assurance that any specific action will be taken. The Company's foreign petroleum exploration, development and production activities are subject to political and economic uncertainties, expropriation of property and cancellation or modification of contract rights, foreign exchange restrictions and other risks arising out of foreign governmental sovereignty over the areas in which the Company's operations are conducted, as well as risks of loss in some countries due to changes in governments, civil strife, guerrilla activities and insurrection. Areas in which the Company has significant operations include the United States, Indonesia and Ecuador. On August 10, 1996, a new government was inaugurated in Ecuador and on August 20, 1996, the new Energy Minister announced his intention to cancel the Company's risk service contract unless the Company and the other members of its consortium for the Block 16 project ("Block 16") agreed to convert such contract into a production sharing contract. Effective January 1, 1997, the Company and the government entered into a new contract governing Block 16. The principal difference between the two contracts is the manner in which the consortium's costs in Block 16 are recovered. Under the former contract, the Company had the right to recover its investment before the government began to share in significant proceeds from the sale of production; under the new contract, the government receives a royalty, and the Company's recovery of its investment is out of the proceeds after deducting such royalty. Previous governments had signaled their dissatisfaction with the former arrangement and in recent years a series of auditing, contract administration and certification of new field disputes had arisen that made it increasingly difficult to develop Block 16. Partly in response to these difficulties, the Company reduced its 1996 program spending on Block 16 to $17 million from $32 million in 1995. The new contract also resolves certain outstanding disputes and amends the prior agreement in various other ways, some of which are expected to significantly improve the Company's current and future operating costs. The Company believes that the new contract permits the Company to go forward with the development of Block 16 and permits it to do so on a more cost-effective basis, subject to the planned enhancement of pipeline capacity discussed below. Based on the terms of the newly approved contract and events which have transpired since such approval, no write down of carrying value of Block 16 is required. During 1996, pipeline capacity available to the Company was sufficient to transport only about 60 to 80% of the oil which the Company was capable of producing daily in Ecuador. Due to the decreased usage by PetroEcuador, however, pipeline capacity has presently been available to transport close to 100% of the oil which the Company is capable of producing daily. It is not known whether this availability is temporary and, if permanent, whether it will be adequate to accommodate expected increased production in mid-1997. Additionally, the Ecuadorian Government has announced it intends to enhance the capacity of the existing pipeline rather than solicit bids for the construction of a new pipeline system as previously announced. It is uncertain if this planned pipeline enhancement will occur or what impact it might have on the Company's transportation needs. 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The information required by this Item is disclosed in Note 9. "Commitments and Contingencies" contained in the financial information provided in Part I of this report, and such informatin is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 27 -- Financial Data Schedule SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MAXUS ENERGY CORPORATION By: W. Mark Miller ----------------------------- W. Mark Miller, Executive Vice President, on behalf of the registrant and as its principal financial officer May 13, 1997 18 Exhibit Index Exhibit Title Exhbit No. - ------------- ---------- Financial Data Schedule 27 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000,000 3-MOS DEC-31-1997 MAR-31-1997 19 0 141 1 26 247 2,020 337 2,391 280 1,289 0 56 147 (53) 2,391 180 184 74 128 3 0 33 20 17 3 0 0 0 3 0.00 0
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