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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 001-07791
McMoRan Exploration Co.
(Exact name of registrant as specified in its charter)
Delaware 72-1424200
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1615 Poydras Street
New Orleans, Louisiana 70112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (504) 582-4000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock
Preferred Stock Purchase Rights
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
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $130,440,000 on
March 9, 1999.
On March 9, 1999, there were issued and outstanding
14,107,341 shares of the registrant's Common Stock, par value
$0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement submitted to
the registrant's stockholders in connection with the registrant's
1999 Annual Meeting of Stockholders to be held on May 6, 1999 are
incorporated by reference into Part III of this report.
McMoRan Exploration Co.
Annual Report on Form 10-K for
the Fiscal Year ended December 31, 1998
TABLE OF CONTENTS
Page
Part I
Items 1. and 2. Business and Properties...................... 1
Item 3. Legal Proceedings.................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.. 18
Executive Officers of the Registrant.................... 18
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 19
Item 6. Selected Financial Data.............................. 20
Items 7. and 7A. Management's Discussion and Analysis of
Financial Condition and Results
of Operations and Disclosures about Market Risks.. 21
Item 8. Financial Statements and Supplementary Data.......... 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 43
Part III
Item 10. Directors and Executive Officers of the Registrant.. 43
Item 11. Executive Compensation.............................. 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 43
Item 13. Certain Relationships and Related Transactions...... 43
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ...................................... 43
Signatures................................................... S-1
Exhibit Index................................................ E-1
i
PART I
Items 1 and 2. Business and Properties
OVERVIEW
McMoRan Exploration Co. (MMR), a Delaware corporation, became a
publicly traded entity on November 17, 1998 when McMoRan Oil &
Gas Co. (MOXY) and Freeport-McMoRan Sulphur Inc. (FSC) combined
their respective operations (the Merger). As a result of the
Merger, MOXY and FSC became wholly owned subsidiaries of MMR. In
the Merger, MOXY's shareholders received 0.20 MMR common shares
for each outstanding share of MOXY, or a total of 8.6 million MMR
shares, while FSC's shareholders received 0.625 MMR common shares
for each outstanding share of FSC, or a total of 5.5 million MMR
shares. The Merger was accounted for as a purchase with MOXY as
the acquiring entity. Accordingly, the financial information in
this annual report on Form 10-K includes the historical
information of the oil and natural gas operations of MOXY, as
well as the sulphur business and oil operations of FSC following
the Merger. Hereafter, the terms "natural gas" and "gas" are to
be considered synonymous.
Through its MOXY and FSC subsidiaries, MMR engages in the
exploration, development and production of oil and natural gas
offshore in the Gulf of Mexico (Gulf) and onshore in the Gulf;
and the mining, purchasing, transporting, terminaling and
marketing of sulphur in the Gulf region.
MMR and its predecessors have conducted oil and natural gas
exploration, development and production operations offshore in
the Gulf and onshore in the Gulf Coast region and other areas for
more than 25 years, which have provided it with an extensive
geological and geophysical database and significant technical and
operational expertise. MMR expects to continue to concentrate its
efforts in this geographic area where its management team has
significant exploration experience. MMR believes the
opportunities to discover meaningful oil and natural gas reserves
are significant and that these opportunities can best be achieved
through the use of advanced 3-D seismic technology in selecting
exploration prospects. MMR's oil and gas business segment is
discussed in detail below.
MMR's sulphur business includes two operating sulphur mines:
Main Pass 299, in which FSC owns an 83.3 percent interest,
located offshore Louisiana; and wholly owned Culberson, located
in west Texas, which is expected to cease production by the end
of the second quarter of 1999. Other sulphur assets include five
sulphur terminals located across the Gulf Coast and various
marine and rail transportation assets. MMR also owns an 83.3
percent interest in the Main Pass oil operations. MMR's sulphur
business segment is discussed in detail below.
OIL AND GAS SEGMENT
Strategy. MMR's oil and gas strategy is to increase its
reserves, production, cash flow and earnings through
implementation of selective exploration activities and
acquisition of certain producing properties having significant
exploration potential primarily in the Gulf and Gulf region. The
current low market prices for both oil and natural gas have
created an environment in which numerous farm-in, acquisition and
other opportunities are becoming available for exploration
prospects and producing properties. MMR intends to pursue
opportunities vigorously, utilizing the additional capital
resources available to it as a result of the Merger, as well as
the funds available under the McMoRan Exploration Program (the
Exploration Program). See "Exploration Program" below.
Exploration Program. In 1997, MMR, through its predecessors,
established an aggregate $210 million, multi-year oil and natural
gas exploration program with Phosphate Resource Partners Limited
Partnership (PLP) and an individual investor, who is now a
director of MMR, to explore and develop prospects primarily
offshore in the Gulf and onshore in the Gulf Coast region. MMR
manages the program, selects all prospects and drilling
opportunities, and serves as operator. Under this program most
exploration expenditures are shared 56.4 percent by PLP, 37.6
percent by MMR and 6 percent by the individual investor, with all
other costs and revenues shared 47 percent by PLP, 48 percent by
MMR and 5 percent by the individual investor. Exploration costs
consist of all costs associated with leasehold acquisition and
maintenance, geological and geophysical studies, seismic surveys,
drilling exploratory wells, overhead reimbursements, and all
other aspects of identifying prospects and drilling exploratory
wells. The Exploration Program will terminate after initial
exploration program expenditures of $210 million have been
committed or on March 31, 2002, whichever is earlier. At
December 31, 1998 approximately $105.2 million had been spent
under the Exploration Program.
Oil and Gas Properties. As of March 9, 1999, MMR owned interests
in 92 oil and gas leases in the Gulf and onshore Louisiana and
Texas covering approximately 138,200 gross acres (approximately
45,300 net acres to MMR). MMR's estimated proved reserves at
December 31, 1998 were approximately 82.4 billion cubic feet
(BCF) equivalent consisting of 58.5 BCF of gas and 4.0 million
barrels of crude oil and condensate, which includes 3.5 million
barrels from Main Pass
1
299, based on a reserve report prepared by
Ryder Scott Company (Ryder Scott), an independent petroleum
engineering firm. By comparison, estimated reserves at December
31, 1997 were approximately 40 BCF of gas and 0.4 million barrels
of crude oil and condensate or 42.4 BCF equivalent.
The table below sets forth certain approximate information
with respect to MMR's most significant properties as of December
31, 1998, followed by a description of significant operational
activities which occurred in 1998 and early 1999.
Net
Working Revenue Water Location Gross
Field, Lease or Well Interest Interest Operator Depth Offshore Acreage
- ---------------------- -------- -------- -------- ------- ----------- -------
Proved Properties (%) (%) (in feet) (miles)
Brazos Block A-19 16.8 13.3 Shell 135 35 Texas 5,760
Main Pass 299 83.3 69.5a MMR 210 32 Louisiana 1,125
Vermilion Block 159 #3 48.0 39.8 MMR 90 42 Louisiana 3,438
Vermilion Block 160
Field Unit 41.8 37.1a MMR 100 42 Louisiana 5,625
Vermilion Block 160 #4 73.0 58.4a MMR 100 42 Louisiana -
Vermilion Block 410 37.5 28.0b ATP 360 115 Louisiana 11,015
West Cameron Block 492 25.0 19.4 MMR 150 110 Louisiana 5,000
West Cameron Block 616 50.0 38.0 MMR 300 130 Louisiana 5,000
Exploration Properties
Brazos Block A-9 16.8 13.5 Shell 135 35 Texas 5,760
Brazos Block A-26 24.0 19.3 MMR 135 35 Texas 5,760
Vermilion Block 144 48.0 35.0 MMR 90 39 Louisiana 4,688
a.Subject to an approximate net profits interest of 50 percent
at Main Pass 299, 2.6 percent of the Vermilion Block 160 field
unit and 12.7 percent at the Vermilion Block 160 #4 well.
b.The Vermilion Block 410 field was sold in early March 1999.
Proved Properties
. Vermilion Block 160 Field Unit. MMR's net daily production
averaged 10 million cubic feet (MMCF) of gas and 275 barrels
of condensate during 1998. During the fourth quarter of 1998
MMR re-completed two wells. MMR purchased additional net
revenue interests in this field unit and in Vermilion Block
159 (see below), together with lease rights and certain
assumed abandonment obligations associated with Vermilion
Block 144, in December 1998 and January 1999. During the
first quarter of 1999, MMR offered some of its joint interest
partners the opportunity to purchase a share of these
additional interests, which they accepted (see "Recent
Developments" included in Items 7 and 7A below). Accordingly,
MMR currently has an approximate 35.8 percent net revenue
interest in the Vermilion Block 160 field unit.
. Vermilion Block 410. MMR's net daily production averaged 13
MMCF of gas during 1998. In March 1999, MMR sold its interest
in the Vermilion Block 410 field resulting in an approximate
$3 million gain (see "Recent Developments" included in Items 7
and 7A below).
. Main Pass 299. As a result of the Merger, MMR acquired the
Main Pass 299 oil operations. For the period after the Merger
through December 31, 1998, Main Pass' net daily production
averaged approximately 4,500 barrels of oil.
. Vermilion Block 160 #4. In 1997, MMR drilled a successful
well at a location remote from the existing platform and
outside the Vermilion Block 160 field unit. MMR installed a
substructure in June 1998 and a deck with processing
facilities in November 1998. These facilities are capable of
handling up to 60 MMCF per day and will accommodate production
from both the Vermilion Block 160 #4 sidetrack well and the
Vermilion Block 159 #3 well (discussed below). Production
from both wells commenced during January 1999 at a combined
gross rate of approximately 53 MMCF of gas and 1,760 barrels
of condensate per day.
. Vermilion Block 159. MMR drilled the Vermilion Block 159 # 3
exploratory well, which resulted in the discovery of a total
of 173 true vertical feet of net hydrocarbon pay in five
sands. MMR installed a substructure and deck in October 1998
and the pipelines connecting the Vermilion Block 159 #3 and
Vermilion Block 160 #4 facilities were completed during the
fourth quarter of 1998. Completion work was finalized during
the fourth quarter on both wells and production commenced in
January 1999, as noted above. MMR purchased additional net
revenue interests in this field in December 1998 and January
1999. During the first quarter of 1999, MMR offered its joint
interest
2
partners the opportunity to purchase their share of
these additional interests which they accepted. Accordingly,
MMR currently has an approximate 38.6 percent net revenue
interest in the Vermilion Block 159 #3 well.
. West Cameron Block 616. In March 1998, MMR completed drilling
the West Cameron Block 616 #5 development well to develop
reserves discovered by the West Cameron Block 616 #2 well
drilled in 1996. The #5 well encountered three sands not seen
in the #2 well resulting in a total of 324 feet of net gas pay
in eight sands. In August 1998, MMR installed an offshore
production platform with facilities designed to process
approximately 75 MMCF per day. During the first quarter of
1999, production commenced from five completions at a combined
rate of approximately 75 MMCF.
. Brazos Block A-19. In April 1998 MMR announced that the
Brazos Block A-19 #2 exploratory well, which had commenced
drilling in the fourth quarter of 1997, had encountered
hydrocarbons in a separate reservoir compartment within the
larger Picaroon Field area. Seismic surveys defined the field
extension. Platform and facility design work has begun, with
production expected to commence during the second half of
1999. The operator continues to evaluate the field to
determine the need for additional drilling. Additionally, MMR
has a working interest in the Brazos Block A-26 lease, which
is located adjacent to Brazos Block A-19.
. West Cameron Block 492. During the 1997 fourth quarter MMR's
West Cameron 492 #1 exploratory well discovered 93 feet of
net hydrocarbon pay in five sands. Additionally, the West
Cameron 492 #3 well, which was successfully drilled as a
delineation well, encountered 83 feet of net hydrocarbon pay
in two sands, 57 feet of which was in a new sand. MMR saved
both wells for future production, with further drilling in
1999 contemplated on this block.
. West Cameron Block 617. In April 1998, the West Cameron Block
617 #1 exploratory well encountered 306 net feet of gas pay in
eight sands. MMR, as operator, set protective pipe and the
well was temporarily abandoned. MMR then commenced a second
exploratory well that was unsuccessful and plugged and
abandoned. MMR has farmed-out this discovery and retained a
net profits interest that will escalate from approximately 2.4
percent to 7.2 percent depending upon certain costs and
production volumes.
Exploration Properties
MMR is continually evaluating its current exploration
prospects, as well as others offered by third parties, and will
drill those considered to have the highest potential. MMR's
significant unevaluated properties and unsuccessful exploratory
activities during 1998 and early 1999 are summarized below.
. Brazos Block A-9. MMR and its partners were high bidder on
the Brazos Block A-9 lease at the Western Gulf of Mexico lease
sale held in August 1998 and were awarded the lease in
November 1998. This block is adjacent to and directly
northwest of MMR's Brazos Block A-19 property discussed above.
The Exploration Program paid approximately $550,000 for its
share of this lease, with MMR's share totaling $206,000.
. Vermilion Block 162. MMR farmed-in this prospect in January
1999. Exploratory drilling to a proposed vertical depth of
12,800 feet commenced in January 1999. In February 1999, the
well reached a total depth of 12,700 feet and was subsequently
plugged and abandoned resulting in an approximate $1.5 million
charge to earnings during the first quarter of 1999. MMR is
evaluating the geological data collected from the #5
exploratory well, which will determine future exploratory
activities. Vermilion Block 162, which is adjacent to MMR's
Vermilion Block 160 field unit, encompasses 4,924 acres and is
located in approximately 90 feet of water, 42 miles offshore
Louisiana.
. Other. MMR sold its interest in West Cameron Block 519 in July
1998 for $450,000, recognizing a gain of approximately the
same amount. During 1998 exploratory drilling on the
Atchafalaya Bay, Grand Isle Block 54 #1, West Cameron Block
617 #2 and West Cameron Block 157 #1 wells were completed
without the discovery of commercial hydrocarbons, resulting in
$9.1 million of the related costs being charged against
earnings.
Oil and Gas Reserves. Estimates of MMR's proved developed and
proved undeveloped reserves of oil and gas as of December 31,
1998 by Ryder Scott were as follows:
Gas(Mmcf) Oil(Barrels)
------------------------- ------------------------
Proved Proved Proved Proved
Developed Undeveloped Developed Undeveloped
--------- ----------- --------- -----------
39,428 19,033 3,984,317 11,491
MMR's oil and gas reserves, other than those associated with
the Vermilion Block 160 field unit, Vermilion Block 410 and Main
Pass 299, are based on wells that had no production history as of
December 31, 1998. Estimates of
3
proved undeveloped reserves that
may be developed and produced in the future are based on
volumetric calculations and on analogy to similar types of
reserves rather than on actual production history. Estimates
based on these methods are generally less reliable than those
based on actual production history. Subsequent evaluation of the
same reserves based upon production history will result in
variations, which may be substantial, in the estimated reserves.
Further, MMR's proved undeveloped reserves will require
additional capital to develop and produce. See "Cautionary
Statements" and Items 7 and 7A below.
The following table sets forth as of December 31, 1998, the
estimated future net cash flows before income taxes and the
present value of estimated future net cash flows before income
taxes, discounted at 10 percent per annum as required by the
Securities and Exchange Commission (SEC), from the production and
sale of the proved developed and undeveloped reserves
attributable to MMR's interest in oil and gas properties as of
such date, as determined by Ryder Scott (amounts in thousands).
Proved Proved Total
Developed Undeveloped Proved
--------- ----------- -------
Estimated future net cash
flows before income taxes (1) $63,166 $17,297 $80,463
Present value of estimated
future net cash flows before
income taxes (1) 56,128 11,323 67,451
(1) In preparing such estimates, Ryder Scott used prices of
$9.04 per barrel of oil and condensate and $2.21 per Mcf of
gas as of December 31, 1998, the weighted average prices
that MMR estimates it would have received, assuming
production from all of its properties with proved reserves.
The oil price reflects the lower oil market value associated
with "sour" crude oil reserves produced at Main Pass 299.
In accordance with applicable requirements of the SEC, the
estimated discounted future net revenues from estimated proved
reserves are based on prices and costs at year end. Actual
future prices and costs may be materially higher or lower. See
"Cautionary Statements" below.
In accordance with methodology specified by the SEC, certain
assumptions were applied in the computation of the reserve
evaluation estimates. Under this methodology, future net cash
flows are determined by reducing estimated future gross cash
inflows to MMR for oil and gas sales by the estimated costs to
develop and produce the underlying reserves, including future
capital and abandonment expenditures, operating costs,
transportation costs, net profits interests, royalty and
overriding royalty burdens on certain of MMR's properties.
Future net cash flows were discounted at 10 percent per annum to
arrive at discounted future net cash flows. The present value of
future net cash flows shown above should not be construed as the
current market value as of December 31, 1998, or any prior date,
of the estimated oil and gas reserves attributable to MMR's
properties. See "Cautionary Statements" below.
MMR is periodically required to file estimates of its oil
and gas reserve data with various governmental regulatory
authorities and agencies. In addition, estimates are from time
to time furnished to governmental agencies in connection with
specific matters pending before such agencies. The basis for
reporting estimates of reserves to these agencies, in some cases,
is not comparable to that furnished above because of the nature
of the various reports required. The major variations include
differences in when the estimates are made, in the definition of
reserves, in the requirements to report in some instances on a
gross, net or total operator basis and in the requirements to
report in terms of smaller geographical units.
Production, Unit Prices and Costs. The following table sets
forth certain information regarding the production volumes of,
average sales prices received for and average production costs
for MMR's sales of oil and gas for each of the years ended
December 31, 1998, 1997 and 1996:
1998 1997 1996
--------- --------- -------
Net gas production (Mcf) ........ 8,634,100 4,061,000 631,000
Net crude oil and condensate
production (Bbls)(1)........... 304,100 34,000 29,000
Sales prices:
Natural gas (per Mcf)............. $ 2.14 $ 2.62 $ 2.72
Crude oil and condensate(per Bbl). $10.33 $19.19 $22.22
Production (lifting) costs per
Mcf equivalent(2 ............... $ 0.44 $ 0.28 $ 0.94
4
(1) Includes production from the Main Pass oil operations for
the period November 17, 1998 through December 31, 1998,
which totaled approximately 202,700 barrels.
(2) Production costs were converted to an Mcf equivalent on the
basis of one barrel of oil being equivalent to six Mcf of
natural gas. Production costs exclude all depreciation and
amortization associated with property and equipment. The
components of production costs may vary substantially among
wells depending on the production characteristics of the
particular producing formation and method of recovery
employed and other factors, but include charges under
transportation agreements and all lease operating expenses.
____________________
The relationship between MMR's sales prices and its
production (lifting) costs depicted by the table above is not
necessarily indicative of future results of operations expected
by MMR. See "Cautionary Statements" below.
Acreage. The following table sets forth the oil and gas acreage
in which the Company held an interest as of December 31, 1998:
Developed(1) Undeveloped
---------------- -----------------
Gross Net Gross Net
Acres(2) Acres(3) Acres(2) Acres(3)
------ ------ ------- ------
Offshore (federal waters) . 48,214 17,132 98,973 30,787
Onshore Louisiana and Texas 115 29 2,157 634
------ ------ ------- ------
Total................. 48,329 17,161 101,130 31,421
====== ====== ======= ======
(1) "Developed" acreage includes acreage by lease, unit or
offshore block in which there are one or more producing wells
or shut-in wells capable of commercial production and/or
acreage with established reserves in quantities deemed
sufficient to develop.
(2) The term "Gross Acre" refers to acres in which the Company
owns a working interest and/or operating rights.
(3) The term "Net Acre" refers to gross acres multiplied by the
percentage of the working interest and/or operating rights
owned therein.
Oil and Gas Drilling Activity. The following table sets forth
the gross and net number of productive, dry and total exploratory
and development wells that the Company drilled in each of the
years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
------------ ------------- -------------
Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- -----
Exploratory
Productive 3 0.888 4 1.251 4 0.910
Dry 4 1.440 3 0.737 4 0.948
----- ----- ----- ----- ----- -----
Total 7 2.328 7 1.988 8 1.858
===== ===== ===== ===== ===== =====
Development
Productive 1 0.500 5 2.484 - -
Dry - - - - - -
----- ----- ----- ----- ----- -----
Total 1 0.500 5 2.484 - -
===== ===== ===== ===== ===== =====
Marketing. MMR's gas sales are currently made in the "spot
market" at prevailing prices. Prices on the spot market
fluctuate with demand and for other reasons. Crude oil and
condensate production are generally sold one month at a time at
prevailing prices. However, the sour crude oil produced at Main
Pass 299 is currently sold exclusively to Amoco Production
Company pursuant to terms of a contract that is scheduled to
expire June 30, 1999.
SULPHUR SEGMENT
As a result of the Merger, MMR is the successor to a line of
business that has been conducted by its predecessors since
1912, making it the longest continuously operating sulphur
company in the United States. MMR conducts all of its sulphur
operations through its FSC operating subsidiary. Sulphur, both
in its elemental form and in the form of sulphuric acid, is
essential to agriculture and industry. Sulphur is a base element
primarily used in the production of sulphuric acid, which is used
in the manufacture of phosphate fertilizers and other
agricultural chemicals, and numerous industrial applications,
including ore and metal leaching, petroleum and mineral refining
and chemical manufacturing. While sulphur is essential in almost
every segment of the economy, it is generally used as a
processing agent and is seldom apparent in the final product.
Sulphur can be obtained through mining operations or recovered
from the refining of sour natural gas and sour crude oil. See
"Competition" below.
5
Strategy. MMR's sulphur strategy is to utilize its sulphur
production facilities and its transportation and logistical
assets and capabilities to maintain its leadership position in
the U.S. sulphur market and to capitalize on potential new
marketing opportunities. MMR expects to evaluate opportunities
for growth by expanding its third party sulphur transportation
and terminaling services business and increasing its recovered
sulphur marketing activities.
MMR's sulphur sales volumes and realizations will continue
to depend on the level of demand from the phosphate fertilizer
industry and the availability of competing supplies from
recovered sulphur producers, as well as possible imports from
Canada (see "Antidumping Finding" below). Accordingly, MMR will
continue to evaluate its sulphur business strategy in light of
competitive factors and the dynamics of the sulphur market,
including the possibility of adjusting overall production levels
to match changes in market fundamentals.
Sulphur Mine Operations. Although sulphur is one of the most
common elements in the earth's crust, discoveries of elemental
sulphur in quantities that can be mined economically are rare.
MMR is currently mining one such deposit, the Main Pass mine
located offshore Louisiana, in which MMR owns an 83.3 percent
interest. MMR's discovery at Main Pass in 1988 was the first
major sulphur discovery in North America in over 25 years. MMR
also produces sulphur at its wholly owned Culberson mine but
expects to permanently discontinue production at this mine by the
end of the second quarter of 1999.
The Frasch Process. The Main Pass mine utilizes the Frasch
mining process, which involves drilling wells and injecting
superheated water into the underground sulphur deposit to melt
solid sulphur, which is then recovered in liquid form. MMR and
its predecessors have used the Frasch process for more than 80
years, and have developed technology using superheated seawater
in the Frasch process, thereby enhancing offshore mining. The
sulphur deposit at MMR's Main Pass mine is located approximately
2,000 feet underground. Sulphur production wells are drilled
into sulphur bearing formations by rotary drilling rigs employing
a directional drilling technique that permits drilling from the
well platform at angles of up to 90 degrees from vertical,
allowing sulphur within a radius of more than 3,800 feet to be
mined from a single platform. In addition to production wells,
pressure control wells must also be drilled to recover excess
water from the underground formation and to facilitate water
flow. In the Frasch process, superheated water and compressed air
are forced separately through concentric pipes towards the
sulphur deposit, where the heated water liquefies the sulphur and
the compressed air helps lift the molten sulphur to the surface.
MMR has also developed proprietary technology that enables it to
use seawater in the Frasch process without experiencing the
corrosion and scaling that otherwise would affect the heat
exchangers and pipelines. Frasch mining of sulphur deposits at
locations where large quantities of fresh water are unavailable,
such as Main Pass, would not be commercially viable without these
techniques.
Natural gas and water are the two resources essential to the
Frasch process. Natural gas fired boilers are used to produce
steam to heat the water in heat exchangers to the superheated
state necessary for sulphur liquefaction. MMR's Main Pass
operations currently consume approximately eight billion cubic
feet of natural gas annually. MMR is dependent on others for the
supply of natural gas, but has never experienced difficulty in
obtaining the required supply of natural gas because it has long-
term supply agreements in place with prices tied to market
indices. Natural gas is supplied to the Main Pass operation by a
single supplier, but MMR has access to a large multiple-supplier
pipeline should its primary supplier have difficulties in
delivering its requirements. MMR also supplements its natural
gas needs at Main Pass with the gas that is produced in
conjunction with its Main Pass oil operations which is provided
to the sulphur mining operations in exchange for electricity used
by the oil operations. In the event of a national shortage of
natural gas, curtailment may be imposed by federal authorities
and may interfere with the mining process, but MMR believes that
the risk of such curtailment during the anticipated life of the
mine is remote. Moreover, if necessary, the boilers can be
converted to operate on fuel oil. The availability of water for
the Main Pass mine is not a factor because of MMR's ability to
use seawater in its mining operations.
The Mines. The Main Pass mine currently has the highest
production rate of any sulphur mine in the world and contains the
largest known Frasch sulphur reserve in North America. The free
sulphur in the Main Pass deposit exists in the porous limestone
that is part of the caprock covering a salt dome. The Main Pass
offshore complex, which is more than a mile in length, is one of
the largest structures of its type in the world and is the
largest in the Gulf. The Main Pass mine was designed to produce
an average of 5,500 long tons of sulphur per day over its life
and has two sulphur storage tanks with a combined capacity of
24,000 long tons. The facility, which has housing capacity for
240 persons, is located in 210 feet of water and is designed to
withstand hurricane force conditions. All Main Pass sulphur is
transported to MMR's terminal in Port Sulphur, Louisiana in
7,500-ton self-propelled tankers. MMR receives a fee from
Homestake Sulphur Company (Homestake), which owns the remaining
16.7 percent interest in Main Pass, for operating the Main Pass
mine and for processing, transporting and marketing Homestake's
share of the Main Pass sulphur. Production from
6
the Main Pass mine is subject to a royalty of 12.5 percent of net
mine revenues that is payable to Mineral Management Service (MMS).
FSC began operating the Culberson mine, which is located in
west Texas south of the New Mexico border, in January 1995 after
acquiring the mine from Pennzoil Company, which subsequently
became PennzEnergy Company (Pennzoil). As previously discussed,
FSC has decided to permanently cease production at the Culberson
mine, with final production expected by the end of the second
quarter of 1999.
As part of FSC's original acquisition of the Culberson mine,
FSC is required to make quarterly payments to Pennzoil. The
amount of these payments vary based upon the average market price
of sulphur during a given quarter, which determines the assumed
volumes of sulphur that would be produced. FSC is obligated to
make these payments whether or not the Culberson mine is
operational. The payments terminate upon the earlier of January
2015 or the quarter in which the cumulative assumed volume of
production exceeds 18.6 million long tons. Under this
arrangement, MMR paid Pennzoil $0.4 million in 1998 after the
Merger. FSC estimates that the annual royalty will be
approximately $1.0 million, based on a long-term average sulphur
price of $62.50 per long ton. These payments could vary
materially from this estimate depending on actual market prices
for sulphur. FSC has a right, which first became exercisable on
January 1, 1999 and is again exercisable on each subsequent third
anniversary of that date, to terminate its obligation to make
further quarterly installment payments in exchange for a lump sum
payment of $65 million less a cumulative inflation adjustment on
the date the right is exercised, but in no event less than $10
million. If FSC does not exercise its right on any option date,
Pennzoil may, within a defined time period after each option
date, require FSC to make a single payment of $10 million in
exchange for relinquishing its rights to receive any further
payments under the agreement.
MMR also has rights to sulphur deposits at its Caminada Mine,
located eight miles from Grand Isle in the Gulf, which MMR is not
currently mining. MMR is maintaining its lease rights to the
remaining sulphur resource under a "suspension of production"
issued by the MMS. MMR estimates that the Caminada mine has
approximately 1.8 million long tons of recoverable proved sulphur
remaining.
Sulphur Reserves. The table below sets forth MMR's portion of
the proved developed reserves for MMR's Main Pass sulphur mine.
Long Tons at
Proved Developed Reserves(1) December 31,
1998(2)
-------------
Main Pass ...................................... 52.4 million
Culberson (3) ................................. 0.2 million
(1) The above sulphur reserves are considered proved developed
because of MMR's extensive drilling and production experience
and current assessment of future market prices and costs.
(2) Reserves represent long tons (2,240 lbs.) of sulphur that
are expected to be recovered from the host formation. Long
tons of sulphur are calculated in place and a recovery factor,
based on the percentage of residual sulphur expected to be
left behind, is applied to calculate the total estimated
recoverable tons.
(3) Represents the expected 1999 production from the Culberson
mine, which is expected to permanently cease operations by the
end of the second quarter of 1999.
Recovered Sulphur Purchases. MMR is a major purchaser of
recovered sulphur in the United States. Management expects its
sulphur purchasing program, which is currently averaging over one
million long tons per year, to increase and become a more
significant component of MMR's sulphur business. MMR purchases
recovered sulphur principally from oil refineries located along
the lower Mississippi River and in the Louisiana and Texas Gulf
Coast regions, and from gas processing plants in Mississippi and
Texas.
MMR's recovered sulphur purchase program provides it with a
source of sulphur that enables MMR to meet its sales contract
commitments. Approximately 54 percent of MMR's 1998 sulphur sales
volumes were supplied through recovered sulphur purchases for the
period November 17, 1998 through December 31, 1998. MMR believes
that its position as a leading sulphur supplier in the domestic
market, coupled with its extensive sulphur handling capabilities,
would allow it to competitively replace any curtailed mine
production with purchased recovered sulphur; however, there can
be no assurance that it will be able to do so.
Sulphur Handling Operations. MMR operates the largest molten
sulphur handling system in North America and has the capacity to
transport and terminal over five million long tons of molten
sulphur annually. MMR uses this system both to support the
movement of its own mined and purchased sulphur, and as a service
that it markets to recovered sulphur producers and industrial
consumers. MMR believes that the integration of the sulphur
handling business with its
7
production, purchasing and marketing
operations gives it a synergistic competitive advantage over
other suppliers of similar services.
Marine Transportation. MMR operates two molten sulphur
tankers, each having a capacity of approximately 25,000 tons. The
two tankers, which are loaded at MMR's Galveston, Texas and Port
Sulphur, Louisiana terminals and travel to its Tampa, Florida
terminals, have the combined capacity to transport 3.5 million
long tons of sulphur per year across the Gulf. MMR's inland
barge system is capable of transporting over one million tons
annually. Each of MMR's barges has a capacity of approximately
2,500 long tons and serves the Texas, Louisiana and Mississippi
Gulf Coast regions and the lower Mississippi River. Two 7,500-ton
self-propelled barges are used to transport sulphur from the Main
Pass mine's offshore production platform and can also be used in
Gulf Coast service to transport sulphur from MMR's terminals to
its customers.
Land Transportation. MMR owns a rail car fleet that
transports sulphur from the Culberson mine, which will be used to
transport recovered sulphur following the closure of the
Culberson mine. MMR also makes other rail movements in
connection with transporting sulphur directly to customers'
plants. MMR is currently negotiating a sale and leaseback
transaction involving all of its railcars. The transaction,
expected to be completed during the first half of 1999, would
provide MMR with approximately $10 million and require subsequent
annual rental payments of $1.1 million over a 12 year period,
with a buyout provision included after 10 years. MMR also
transports approximately 700,000 tons of molten sulphur per year
through a third party trucking service used primarily to serve
the Galveston, Texas, lower Mississippi River and Pensacola,
Florida areas.
Terminals. MMR operates five sulphur terminals in the United
States, the largest of which is located at Port Sulphur,
Louisiana. The Port Sulphur facility is a combined liquid storage
tank farm and stockpile area for solid sulphur. Liquid sulphur is
stored in steam-heated, insulated tanks having an aggregate
capacity of approximately 110,000 long tons. The solid storage
area can hold approximately 1.3 million long tons of solid
sulphur. Because substantially all of MMR's domestic customers
consume sulphur in liquid form, MMR delivers all of its
production in liquid form. This reduces the need to remelt the
sulphur, conserves energy and reduces costs, and is an
environmentally superior handling method. Sulphur can be
solidified for long-term storage to maintain inventory reserves.
MMR owns a high capacity sulphur melter that permits the
conversion of solid sulphur into liquid sulphur to supplement
mine production during periods of high demand and to cover
shortfalls in mine production or in recovered sulphur purchases.
Sulphur is transported from Port Sulphur by barge to customers'
plants in Louisiana on the lower Mississippi River or along the
Gulf Coast of Texas and Mississippi, or by tanker to MMR's
terminals in Tampa.
MMR's other terminals are located in Tampa and Pensacola,
Florida and Galveston, Texas. Each of MMR's two Tampa terminals
has a liquid storage capacity of 90,000 long tons and is supplied
with sulphur from Port Sulphur and Galveston by tanker. Each of
the Tampa facilities ships molten sulphur to phosphate fertilizer
producers in central Florida by tank truck. The Pensacola
terminal has a storage capacity of 10,000 long tons and is used
for the storage, handling and shipping of recovered sulphur
purchases or transporting recovered sulphur for third parties.
Molten sulphur is shipped by barge from the Pensacola terminal to
either the Port Sulphur terminal or directly to lower Mississippi
River customers.
MMR acquired the Galveston terminal from Pennzoil in 1995; it
has 75,000 long tons of liquid storage tanks and solid storage
capacity of one million long tons. This terminal receives sulphur
from MMR's Culberson mine by rail car, and recovered sulphur
purchases by truck, barge or rail, and then ships sulphur to
local customers by truck or barge or to the Tampa terminals by
tanker. The Galveston terminal also has the ability to load solid
sulphur aboard large oceangoing vessels, giving MMR access to
international markets should market conditions favor sulphur
exports.
Sulphur Sales. Substantially all of MMR's sulphur is sold to the
phosphate fertilizer industry for the manufacture of sulphuric
acid, which is used to produce phosphoric acid, a base chemical
used in the production of phosphate fertilizers. Typically, the
phosphate fertilizer industry accounts for approximately 90
percent of the MMR's total sulphur sales. The majority of MMR's
sulphur supply contracts, with the exception of its contract with
IMC-Agrico Company (IMC-Agrico) discussed below, are for a term
of one year or longer and generally call for the repricing of
sulphur on a quarterly or six-month basis. MMR also processes,
transports, and markets Homestake's share, which represents 16.7
percent of production at the Main Pass mine, for a fee.
Sales to IMC-Agrico, MMR's largest customer, a manufacturer of
phosphate fertilizers and the largest purchaser of elemental
sulphur in the world, represented 68.4 percent of MMR's sulphur
sales and 35.9 percent of its total revenues during 1998.
Pursuant to a Sulphur Supply Agreement, MMR has agreed to supply
and IMC-Agrico has agreed to purchase approximately 75 percent of
IMC-Agrico's annual sulphur consumption for as long as IMC-Agrico has an
8
operational need for sulphur. The price per ton for all
sulphur delivered under the agreement is based upon the weighted
average market price for sulphur delivered by other sources to
IMC-Agrico's New Wales production plant in central Florida,
except that MMR is entitled to a premium with respect to
approximately 40 percent of the sulphur that it delivers under
the agreement. IMC-Agrico also pays a portion of the freight
costs associated with the delivery of sulphur under the
agreement. Although this contract was entered into at a time when
IMC-Agrico was an affiliate of MMR and its predecessors,
management believes that the terms of the Sulphur Supply
Agreement are no less favorable to MMR than those that could have
been negotiated with an unaffiliated party. In the fourth
quarter of 1998, IMC-Agrico requested that MMR engage in good
faith negotiations with respect to the pricing terms of the
Sulphur Supply Agreement. The Sulphur Supply Agreement requires
renegotiation if a party's performance under the agreement has
been rendered "commercially impracticable" or "grossly
inequitable" as a result of fundamental changes in the party's
operations or the sulphur and sulphur transportation markets.
Representatives of MMR and IMC-Agrico have met to discuss the
pricing terms of the agreement, and MMR has advised IMC-Agrico
that it does not believe that the conditions warranting
renegotiation have occurred.
Revenues from MMR's sulphur sales depend significantly on
production levels of phosphate fertilizer, the availability of
sulphur that is recovered from high-sulphur oil and natural gas
refining and the rate at which stored surpluses of recovered
sulphur, particularly in Canada, are released into the market and
depleted. Current prices are substantially weaker than the high
levels of the early 1990's, primarily because of economic and
political changes in Eastern Europe and the former Soviet Union,
which led to the closure of plants consuming in excess of seven
million tons of sulphur per year. Improved phosphate consumption
rates, coupled with reduced imports and curtailed mine
production, stabilized sulphur prices beginning mid-year 1996 and
continued into 1997. To the extent that current United States
phosphate fertilizer production remains strong, sustained sulphur
demand is expected to continue; however, the current level of
Canadian sulphur inventories limits the potential for significant
price increases. See "Competition" below.
Antidumping Finding. In 1973, the U. S. government found that
certain Canadian producers of elemental sulphur were dumping
sulphur into the U. S. sulphur market in violation of the U. S.
Antidumping Act of 1921 (the Antidumping Act) and the U. S.
government imposed certain limitations on those producers. In
the intervening period, many of the Canadian producers that were
originally subject to this finding established that they were no
longer selling sulphur in violation of the Antidumping Act and
had the application of the finding revoked as to them. Under a
recent change in law, all antidumping findings (including the
1973 finding) are subject to a regular five-year "sunset review."
On December 22, 1998, the U. S. International Trade Commission
(ITC) determined that revoking the antidumping finding covering
imports of elemental sulphur from Canada would not likely lead to
material injury to the domestic sulphur industry. As a result,
the U. S. Department of Commerce (DOC) will revoke the
antidumping finding effective January 1, 2000. MMR and other U.
S. sulphur producers have the right to petition the DOC and ITC
for a new antidumping order if the circumstances confronting the
domestic industry warrant that action.
MMR believes that the revocation will have no immediate impact
on MMR's business because of the delayed effective date of the
revocation of the finding. Approximately 90 percent of the
Western Hemisphere's sulphur inventories currently consist of
sulphur recovered from natural gas in the province of Alberta in
western Canada. The costs of handling and transporting the
sulphur from Canadian producers to customers in the U.S. is a
major component of the ultimate cost to the customers. At
certain price levels in the U. S. sulphur markets, and depending
on prices in foreign markets they supply, Canadian producers can
be expected to increase sulphur sales to U. S. buyers in
competition with MMR. Over the long term, MMR will take steps
necessary to protect itself against unfairly traded imports,
including, if appropriate, petitioning the DOC and ITC. No
assurance can be given, however, as to the outcome of any future
proceeding.
Reclamation Obligations. MMR's operating subsidiary FSC assumed
responsibility for environmental liabilities associated with
the prior conduct of its predecessors, including reclamation
responsibilities at three previously producing sulphur mines.
Sulphur production was suspended at the Caminada offshore sulphur
mine in 1994, and FSC will be required to salvage the mining
facilities once the remaining reserves are produced or it becomes
certain that the reserves will not be economically recoverable.
FSC's salvage expense will be shared on a 50/50 basis with Exxon
Corporation, and the estimated expense has been accrued.
FSC's Grande Ecaille mine, which was depleted in 1978, was
reclaimed in accordance with applicable regulations at the time
of closure. Although FSC has no legal obligation to do so, it has
undertaken to reclaim wellheads and other materials, none of
which are classified as hazardous, that are being exposed through
coastal erosion, and it is anticipated that these reclamation
activities will continue for several more years. Additional
expenditures may be required from time to time if erosion
continues.
9
In September 1997, FSC completed the salvage of its Grand Isle
mine in the Gulf of Mexico, which was depleted in 1991, by
converting it into an artificial reef for the enhancement of
marine life. The reef was constructed at the request of the State
of Louisiana as part of its "Rigs-to-Reefs" program through which
the State and private industry are cooperating to provide useful
marine habitats using offshore structures that are no longer
needed for commercial activities. The Grand Isle reef is the
first in shallow water and is the largest in the Gulf. The reef
has been donated to the State of Louisiana, which now assumes all
responsibility for its upkeep, although FSC will retain
responsibility for any environmental liabilities that may arise
from previous mining activities with respect to this site.
FSC plans to permanently discontinue sulphur production at its
Culberson sulphur mine by the end of the second quarter of 1999.
Reclamation costs for the Culberson mine are fully accrued, with
approximately $13 million of these costs expected to be incurred
within the next year. FSC has also closed nine other sulphur
mines, all of which have been reclaimed in accordance with
applicable regulations and customary industry practices.
Reclamation of FSC's Main Pass sulphur mine will be required upon
the closure of that facility, and the related future costs are
being accrued (see "Environmental" included in Items 7 and 7A
below).
Although MMR believes that FSC's prior reclamation activities
were carried out in compliance with then applicable laws and
regulations and that it is accruing adequate reserves to cover
future reclamation costs, no assurance can be given that FSC will
not incur materially greater reclamation costs than those
anticipated or that the timing of such cost will occur as
presently estimated by MMR.
REGULATION
General. MMR's mining, production and exploration activities
are subject to various federal, state and local laws governing
exploration, development, production, exports, taxes, labor
standards, occupational health and safety, toxic substances and
other matters. Regulations pertaining to the environment mandate,
among other things, the maintenance of air and water quality
standards, solid and hazardous waste standards, protection of
underground sources of drinking water, and protection and
regulation of wetland areas. All material licenses, permits and
other authorizations currently required of each existing
operation have been obtained or timely applied for.
To comply with these federal, state and local laws, material
capital and operating expenditures on environmental projects,
both with respect to maintaining current operations and
initiating new operations, may be required in the future. The
amount of such expenditures cannot be estimated at this time, but
such costs could have an adverse effect on MMR's financial
condition and results of operations. There is also a risk that
more stringent laws affecting the operations of natural resources
companies could be enacted, and although such regulations would
affect the industry as a whole, compliance with such new
regulations could be costly.
Domestic oil operations are subject to extensive state and
federal regulation. Compliance is often burdensome, and failure
to comply carries substantial penalties. The heavy and increasing
regulatory burden on the oil industry increases the cost of doing
business and consequently affects profitability.
Exploration, Production and Development. The exploration,
production and development operations of both the oil and gas and
sulphur segments of MMR are subject to regulation at both the
federal and state levels. Regulation requires operators to
obtain permits to drill wells and to meet certain bonding and
insurance requirements in order to drill or operate wells.
Regulation also controls the location of wells, the method of
drilling and casing wells, the surface use and restoration of
properties upon which wells are drilled and the plugging and
abandoning of wells. MMR's exploration, production and
development operations are also subject to various conservation
laws and regulations. These include the regulation of the size
of drilling and spacing units or proration units, the density of
wells that may be drilled, the levels of production, and the
unitization or pooling of oil and gas properties.
MMR presently has interests in or rights to 31 offshore
leases located in federal waters on the outer continental shelf
(OCS). Federal leases are administered by the MMS. Individuals
and entities must qualify with the MMS prior to owning and
operating any leasehold or right-of-way interest in federal
waters. Such qualification with the MMS generally involves
filing certain documents with the MMS and obtaining performance
bonds. For offshore operations, lessees must obtain MMS approval
for exploration plans and development and production plans prior
to the commencement of such operations. In addition to permits
required from other agencies (such as the Coast Guard, the Army
Corp of Engineers and the Environmental Protection Agency (EPA)),
lessees must obtain a permit from the MMS prior to the
commencement of drilling. The MMS has promulgated regulations
requiring offshore production facilities located on the OCS to
meet stringent engineering and construction specifications, and
has proposed and/or promulgated additional safety-related
regulations concerning the design and operating procedures of OCS
production platforms and pipelines. The MMS also has regulations
restricting the flaring or venting of natural gas, and has
proposed amendments to such
10
regulations that would prohibit the
flaring of liquid hydrocarbons and oil without prior
authorization. Similarly, the MMS has issued other regulations
governing the plugging and abandonment of offshore wells and the
removal of all production facilities. To cover the various
obligations of an OCS lease, the MMS generally requires that
lessees post substantial bonds or other acceptable assurances
that such obligations will be met. The cost of such bonds or
other security can be substantial and there is no assurance that
bonds or other surety can be obtained in all cases. Under
certain circumstances, the MMS may require all MMR operations on
federal leases to be suspended or terminated. Any such
suspension or termination would materially adversely affect MMR's
financial condition and operations.
Environmental Matters
General. MMR's operations are subject to extensive federal,
state and local regulatory requirements relating to environmental
affairs, health, safety, waste management and chemical products.
These laws and regulations require the acquisition of permits
before construction or drilling commences, limit or prohibit
construction and drilling activities on certain lands lying
within wilderness or wetlands and other protected areas and
impose substantial liabilities for potential pollution resulting
from the MMR's operations.
Moreover, the recent trend toward stricter standards in
environmental legislation and regulations is likely to continue.
For instance, legislation has been proposed in Congress from time
to time to reclassify oil and gas production wastes as "hazardous
waste." If such legislation were to be enacted, it could have a
significant impact on the operating costs of MMR, as well as the
oil and gas industry in general. State initiatives to further
regulate the disposal of oil and gas wastes are also pending in
certain states and could have a similar impact on MMR. Management
believes that compliance with current applicable environmental
laws and regulations will not have a material adverse impact on
MMR. MMR believes that its operations are and will continue to
be in material compliance with applicable environmental laws,
regulations and ordinances.
It is possible, however, that future developments such as
stricter environmental laws or regulations could adversely affect
MMR's operations. Moreover, some risk of environmental costs and
liabilities is inherent in MMR's operations as it is with other
companies engaged in similar or related businesses, and there can
be no assurance that material costs and liabilities will not be
incurred by MMR in the future.
Solid Waste. MMR's operations may generate or involve the
transport of both hazardous and nonhazardous solid wastes that
are subject to the requirements of the Federal Resource
Conservation and Recovery Act and comparable state statutes. In
addition, the EPA is presently in the process of developing
stricter disposal standards for nonhazardous waste. Changes in
these regulations may result in additional expenditures or
operating expenses by MMR.
Hazardous Substances. The Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) and comparable
state statutes, also known as "Superfund" laws, impose liability
on certain classes of persons that contribute to the release of a
"hazardous substance" into the environment. These persons
include the owner or operator of a site, and companies that
transport, dispose of or arrange for the disposal of the
hazardous substances found at the site. CERCLA also authorizes
the EPA, and in some cases third parties to take actions in
response to threats to the public health or the environment and
to recover their costs from the responsible classes of persons.
Despite the "petroleum exclusion" of CERCLA that encompasses
wastes directly associated with crude oil and gas production, MMR
may generate or transport "hazardous substances" within the
meaning of CERCLA or comparable state statutes in the course of
its ordinary operations. Thus, MMR may be responsible under
CERCLA or the state equivalents for all or part of the costs
required to clean up sites where a release has occurred.
Air. MMR's operations are subject to the Clean Air Act
(CAA) and comparable state statutes. Amendments to the CAA were
adopted in 1990 and contain provisions may result in the gradual
imposition of certain pollution control requirements with respect
to air emissions from MMR's operations. The EPA has been
developing regulations to implement these requirements. MMR may
be required to incur certain capital expenditures in the next
several years for air pollution control equipment in connection
with maintaining or obtaining operating permits and approvals
addressing other air emission-related issues.
Water. The Clean Water Act (CWA) strictly regulates the
unauthorized discharge of pollutants into navigable waters. The
CWA provides for civil and criminal penalties for any
unauthorized discharges of oil and other hazardous substances in
reportable quantities and imposes substantial potential liability
for the costs of removal, remediation and damages. Similarly,
the Oil Pollution Act of 1990 (the OPA) imposes liability for the
discharge of oil into or upon navigable waters or adjoining
shorelines. Among other things, the OPA raises liability limits,
narrows defenses to liability
11
and provides more instances in
which a responsible party is subject to unlimited liability.
State laws for the control of water pollution also provide
varying civil and criminal penalties and liabilities in the case
of an unauthorized discharges into state waters. Further, the
Coastal Zone Management Act authorizes state implementation and
development of programs or management measures for nonpoint
source pollution to restore and protect coastal waters.
Endangered Species. Several federal laws impose regulations
designed to ensure that endangered or threatened plant and animal
species are not jeopardized and their critical habitats are
neither destroyed nor modified. These laws may restrict MMR's
exploration, development and production operations and impose
civil or criminal penalties for non-compliance.
Safety and Health Regulations
MMR is also subject to laws and regulations concerning
occupational safety and health. It is not anticipated that MMR
will be required in the near future to expend amounts that are
material in the aggregate to MMR's overall operations by reason
of occupational safety and health laws and regulations, but
inasmuch as such laws and regulations are frequently changed, MMR
is unable to predict the ultimate cost of compliance.
EMPLOYEES
At March 9, 1999, MMR had 317 employees, 286 at the sulphur
mine sites and terminals, and 31 employees located at MMR's New
Orleans headquarters primarily devoted to managerial, land and
geological functions. A total of 93 employees are expected to be
terminated subsequent to the closure and reclamation of the
Culberson mine site. None of MMR's employees are represented by
any union or covered by any collective bargaining agreement. MMR
believes its employee relations are satisfactory.
Since January 1, 1996 numerous services necessary for the
business and operations of MMR, including certain executive,
technical, administrative, accounting, financial, tax and other
services, have been performed by FM Services Company (FMS),
currently owned 45 percent by MMR, pursuant to a services
agreement between FMS and MMR (the Services Agreement). Prior to
January 1, 1998 these services were provided for a fixed annual
fee of $1.0 million, subject to annual cost of living increases
beginning in the first quarter of 1997. As of January 1, 1998,
FMS provides services to MMR on a cost reimbursement basis. The
Services Agreement is terminable by MMR at any time upon 90 days
notice. For the year ended December 31, 1998 MMR incurred $4.3
million of expenses under its agreement with FMS.
MMR also uses contract personnel to perform various
professional and technical services including but not limited to
construction, well site surveillance, environment assessment, as
well as field and on-site production operating services such as
pumping maintenance, dispatching, inspection and testing. These
services, which are intended to minimize MMR's development costs,
allow MMR's management staff to focus on directing all of its
sulphur and oil and gas operations. Currently MMR has two
predominant suppliers of services under these third-party
services arrangements: CLK Company L.L.C. (CLK) and Crescent
Technology, Inc. (Crescent). MMR has a contract with CLK, a
company independently owned by its employees, to provide
geological and geophysical services to MMR on an exclusive basis.
MMR pays an annual retainer fee of $2.2 million, with $0.5
million of these fees paid in MMR common stock, plus certain
expenses and an overriding royalty interest of up to 3 percent in
prospects accepted by MMR. For the year ended December 31, 1998
fees and expenses to CLK totaled $2.6 million. Crescent, whose
employees include many former employees of FSC and its former
affiliates, furnishes certain engineering consulting, research
and development, environmental and safety services primarily to
MMR's sulphur operations.
CAUTIONARY STATEMENTS
This report includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Forward-looking
statements are all statements other than statements of historical
fact included in this report, including, without limitation, the
statements under the headings "Business and Properties," "Market
for Registrant's Common Equity and Related Stockholder Matters,"
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations and Disclosures about Market Risks"
regarding MMR's financial position and liquidity, payment of
dividends, MMR's strategic alternatives, future capital needs,
development and capital expenditures (including the amount and
nature thereof), the drilling of wells, reserve estimates and
future net revenues attributable thereto, business strategies,
and other plans and objectives of management of MMR for future
operations and activities.
Forward-looking statements are based on certain assumptions
and analyses made by MMR in light of its experience and its
perception of historical trends, current conditions, expected
future developments and other factors it believes are appropriate
under the circumstances. These statements are subject to a
number of assumptions, risks and
12
uncertainties, including the
risk factors discussed below and in MMR's other filings with the
SEC, general economic and business conditions, the business
opportunities that may be presented to and pursued by MMR,
changes in law or regulations and other factors, many of which
are beyond the control of MMR. Readers are cautioned that any
such statements are not guarantees of future performance and the
actual results or developments may differ materially from those
projected in the forward-looking statements. All subsequent
written and oral forward-looking statements attributable to MMR
or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. Important factors that
could cause actual results to differ materially from MMR's
expectations include, among others, the following:
Significant Historical Operating Losses. Until recently, MMR had
only two significant producing gas fields. The fields that
commenced production during the first quarter of 1999 had no
production history at year-end 1998, thus making proved reserves
and levels of future production and cash flow attributable to
these fields less susceptible to estimation. Also, as a result
of the expensing of non-productive exploratory drilling and
related costs from MMR's exploratory program, MMR has incurred
significant operating losses. The Merger has given MMR a more
stable source of operating cash flows and may improve its
operating results. However, MMR's viability must be considered
in light of the risks and difficulties frequently encountered by
companies engaged in the early stages of their oil and gas
exploration, development and production activities.
Substantial Capital Requirements. The development of MMR's oil
and gas division will continue to require substantial
expenditures. MMR's future financial results depend on its
ability to locate hydrocarbons in commercial quantities and on
the market prices for oil, natural gas and sulphur. There can be
no assurance that MMR will achieve or sustain profitability or
positive cash flows from operating activities in the future.
MMR makes, and will continue to make, substantial capital
expenditures for the exploration, development and production of
oil and natural gas reserves and related projects. If MMR fails
to discover significant reserves, experiences operating
difficulties or if oil, natural gas and sulphur prices decline
and reduce cash generated from operations, MMR may be required to
borrow funds currently available under its existing credit
facility agreements. However, there is no assurance that the
current credit facility could meet all of MMR's financing needs
because the amount of the credit facility proceeds available at
any time is directly influenced by MMR's operating cash flows.
Seasonality of Oil, Natural Gas and Sulphur Markets. There is
only a limited effect on oil prices from seasonal changes in
demand. Gas prices normally increase during the winter months as
the demand for heating fuel increases and decrease during the
summer months when demand for natural gas is reduced.
Because the principal use of sulphur is in the manufacture
of phosphate fertilizers, MMR's ability to successfully market
its sulphur is materially dependent on prevailing agricultural
conditions and the worldwide demand for fertilizers. Although
phosphate fertilizer sales are fairly constant month-to-month,
seasonal increases occur in the domestic market prior to the fall
and spring planting seasons. Generally, domestic phosphate
fertilizer sales are at reduced levels after the spring planting
season, although the decline in domestic sales generally
coincides with the time when major commercial and governmental
buyers in China, India and Pakistan purchase product for mid-year
delivery. Sales are also influenced by current and projected
grain inventories and prices, quantities of fertilizers imported
to and exported from North America, domestic fertilizer
consumption and the agricultural policies of certain foreign
governments.
Volatility of Oil, Natural Gas and Sulphur Prices. In recent
years, oil and natural gas prices and, therefore, the level of
industrywide drilling, exploration, development and production,
have been extremely volatile. Prices are affected by market
supply and demand factors as well as actions of state and local
agencies, U.S. and foreign governments and international cartels.
All of these factors are beyond the control of MMR. Any
significant or extended decline in natural gas and oil prices
will have a material adverse effect on MMR's financial condition
and operations and could impair access to additional capital.
Although current sulphur prices have recently increased,
allowing MMR to increase its cash flows from its Main Pass mining
operations, forecasted long-term sulphur prices compared with
production cost levels at its Culberson mine led to the decision
to permanently discontinue sulphur production at the Culberson
mine, which is anticipated to occur by the end of the second
quarter of 1999. Because of the costs associated with closing
and re-opening mine sites, as well as the potential loss of
mining or mineral development rights if mining operations were
suspended, MMR could decide to operate its Main Pass operation
for some period even if it did not generate positive cash flow,
and, if Main Pass operations were suspended, it could be
difficult and expensive for MMR subsequently to re-open the mine.
Like other commodities, the market and prices for sulphur have
been and will likely continue to be volatile. MMR's operating
margins and cash
13
flow are subject to substantial fluctuations in
response to changes in supply and demand for sulphur, conditions
in the domestic and foreign agriculture industry, market
uncertainties and other factors beyond its control.
Reliance on IMC-Agrico as a Continuing Customer. Approximately
68 percent of MMR's 1998 sulphur sales were made to IMC-Agrico,
and IMC-Agrico will continue to account for a substantial
percentage of MMR's sulphur sales. Sales of sulphur to IMC-
Agrico are generally made at market prices, with a portion of
sales receiving additional price consideration. Although MMR has
a long-term supply contract with IMC-Agrico that requires IMC-
Agrico to purchase sulphur from MMR as long as IMC-Agrico's
phosphate fertilizer operations require the use of sulphur, the
loss of or a significant decline in its sales of sulphur to IMC-
Agrico could have a material adverse effect on MMR's business and
operating results. See "Sulphur Sales" above. For litigation
involving IMC Global Inc., which is IMC-Agrico's parent company,
see "Item 3. Legal Proceedings" below.
Exploration and Development Risks. Exploration and development
of oil and natural gas involve a high degree of risk that no
commercial production will be obtained or that the production
will be insufficient to recover drilling and completion costs.
The cost of drilling, completing and operating wells is often
uncertain, and cost overruns in offshore operations can adversely
affect the economics of a project. MMR's drilling operations may
be curtailed, delayed or canceled as a result of numerous
factors, including title problems, weather conditions, compliance
with governmental requirements and shortages or delays in the
delivery of equipment. Furthermore, completion of a well does
not ensure a profit on the investment or a recovery of drilling,
completion and operating costs.
Replacement of Reserves. MMR's future performance depends in
part upon its ability to acquire, find and develop oil and gas
reserves that are economically recoverable. Without successful
exploration or development activities, MMR's reserves will be
depleted. MMR's Main Pass oil reserves, which represents
approximately 87 percent of total oil proved reserves at December
31, 1998, are expected to be depleted by the year 2002. No
assurances can be given that MMR will be able to find and develop
additional reserves on an economic basis.
MMR's oil and natural gas operations are capital intensive
and significant operating cash flow must be reinvested in
exploration and development activities in order for MMR to
maintain its asset base of proved oil and natural gas reserves.
To the extent cash flow from operations is reduced and external
sources of capital become limited or unavailable, MMR's ability
to make the necessary capital investments to maintain or expand
its asset base will be impaired. Without such investment, MMR's
oil and natural gas reserves will be depleted.
Although MMR has historically and will continue to emphasize
reserve growth through exploratory drilling, it may make
acquisitions of producing properties and properties with proved
undeveloped reserves from time to time. Evaluation of recoverable
reserves of oil and natural gas, which is an integral part of the
property selection process, depends on evaluation of geological,
engineering and production data, some or all of which may prove
to be unreliable or not indicative of future performance.
Reserves and Future Net Cash Flow. Information relating to
proved oil and natural gas reserves owned by MMR is based upon
engineering estimates. Reserve engineering is a subjective
process of estimating the recovery from underground accumulations
of 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. Estimates of economically
recoverable oil and gas reserves and of future net cash flows
necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area compared
with production from other producing areas, the assumed effects
of governmental regulations and assumptions concerning future
oil and natural gas prices, future operating costs, severance and
excise taxes, development costs and workover and remedial costs,
all of which may in fact vary considerably from actual results.
Because all reserve estimates are to some degree speculative, the
quantities of oil and natural gas that are ultimately recovered,
production and operation costs, the amount and timing of future
development expenditures and future oil and natural gas sales
prices may all vary from those assumed in these estimates and
such variances may be material. In addition, different reserve
engineers may make different estimates of reserve quantities and
cash flows based upon the same available data. See "Oil and Gas
Reserves" above.
The present values of estimated future net cash flows
referred to in this report should not be construed as the current
market value of the estimated proved oil and natural gas reserves
attributable to MMR's properties. In accordance with applicable
requirements of the SEC, the estimated discounted future net cash
flows from proved reserves are generally based on prices and
costs as of the date of the estimate, while actual future prices
and costs may be materially higher or lower. Actual future net
cash flows also will be affected by factors such as the amount
and timing of actual production, supply and demand for oil and
natural gas, curtailments or increases in consumption by gas
purchasers and changes in governmental regulations or taxation.
The timing of actual future net cash flows from proved reserves,
and
14
thus their actual present value, will be affected by the
timing of the production and the incurrence of expenses in
connection with development and production of oil and gas
properties. In addition, the 10 percent discount factor, which
is required by the SEC to be used to calculate discounted future
net cash flows for reporting purposes, is not necessarily the
most appropriate discount factor based on interest rates in
effect from time to time and risks associated with the oil and
natural gas properties owned by MMR or the oil and natural gas
industry in general.
Shortages of Supplies and Equipment. MMR's ability to conduct
its operations in a timely and cost effective manner is subject
to the availability of oil and gas field supplies, equipment and
service crews. The oil and natural gas industry is cyclical and
in times of high demand shortages of certain type of drilling
rigs, work boats and related services could occur in the Gulf.
This type of shortage could result in delays in MMR's operations
as well as higher operating and capital costs. Shortages of
other drilling equipment, tubular goods, drilling service crews
and seismic crews could occur from time to time, further
hindering MMR's ability to conduct its operations as planned.
Currently, certain supplies and services are abundantly available
at more economically favorable terms then in recent years. At
this time MMR can not reasonably estimate how long this current
environment will exist.
Operating Hazards; Limited Insurance Coverage. MMR's offshore
sulphur mining, oil and natural gas production and marine
transportation operations are subject to marine perils, including
collisions, hurricanes and other adverse weather conditions.
MMR's oil, natural gas and sulphur production activities are
subject to blowouts, cratering, fires, pipeline ruptures, spills
and other risks, any of which could result in serious personal
injury or death and substantial damage to property and the
environment. MMR's operations may be subject to significant
interruption, and MMR may be subject to significant liability,
due to industrial accidents, severe weather or other natural
disasters occurring at one or more of its mining operations or
production sites.
MMR has in place, certain liability, property damage, business
interruption and other insurance coverages in types and amounts
that it considers reasonable and believes to be customary in
MMR's business. This insurance provides protection against loss
from some, but not all, potential liabilities incident to the
ordinary conduct of MMR's business, including coverage for
certain types of damages associated with environmental and other
liabilities that arise from sudden, unexpected and unforeseen
events, with such coverage limits, retentions, deductibles and
other features as management deems appropriate. The occurrence of
an event that is not fully covered by insurance could have a
material adverse effect on MMR's financial condition and results
of operations.
Governmental Regulation. MMR's operations are affected by
political developments and federal and state laws and
regulations. In particular, oil and natural gas production,
operations and economics are or have been affected by price
controls, taxes and other laws relating to the oil and natural
gas industry, by changes in such laws and by changes in
administrative regulations. MMR cannot predict how existing laws
and regulations may be interpreted by enforcement agencies or
court rulings, whether additional laws and regulations will be
adopted, or the effect such changes may have on its business or
financial condition.
MMR's operations are subject to numerous laws and
regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection.
These laws and regulations require the acquisition of a permit
before drilling commences, restrict the types, quantities and
concentration of various substances that can be released into the
environment in connection with drilling and production, limit or
prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas, and impose
substantial liabilities for pollution which might result from
MMR's operations. Moreover, the recent trend toward stricter
standards in environmental legislation and regulation is likely
to continue. Initiatives to further regulate the disposal of
crude oil and natural gas wastes are also pending in certain
states and could have a similar impact. MMR could incur
substantial costs to comply with environmental laws and
regulations. In addition to compliance costs, government
entities and other third parties may assert substantial
liabilities against owners and operators of industrial operations
for oil spills, discharges of hazardous materials, remediation
and cleanup costs and other environmental damages, including
damages caused by previous property owners. The imposition of
any such liabilities on MMR could have a material adverse effect
on MMR's financial condition and results of operations.
Environmental Matters and Reclamation Liabilities. MMR's
operations include exploration, development and production of
natural resources, and the extraction, handling, production,
storage, transportation and disposal of materials and waste
products that may be toxic or hazardous. Consequently, MMR is
subject to numerous environmental laws and regulations. MMR has
incurred, and expects to continue to incur, significant capital
expenditures and operating expenses based on these laws and
regulations. Continued governmental and public emphasis on
environmental issues may
15
result in increased capital and
operating costs in the future, although the impact of future laws
and regulations or future changes to existing laws and
regulations cannot be predicted or quantified.
Federal legislation (sometimes referred to as "Superfund"
legislation) imposes liability, without regard to fault, for
clean-up of certain waste sites, even though waste management
activities at the site may have been performed in compliance with
regulations applicable at the time. Under the Superfund
legislation, one responsible party may be required to bear more
than its proportional share of clean-up costs if payments cannot
be obtained from other responsible parties. In addition, federal
and state regulatory programs and legislation mandate clean-up of
certain wastes at operating sites. Governmental authorities have
the power to enforce compliance with these regulations and
permits, and violators are subject to civil and criminal
penalties, including fines, injunctions or both. Third parties
also have the right to pursue legal actions to enforce
compliance. Liability under these laws can be significant and
unpredictable.
MMR may receive in the future notices from governmental
agencies that it is one of many potentially responsible parties
at certain sites under relevant federal and state environmental
laws. Some of these sites may involve significant clean-up costs.
The ultimate settlement of liability for the clean-up of such
sites usually occurs many years after the receipt of notices
identifying potentially responsible parties because of the many
complex, technical and financial issues associated with site
clean-up. MMR cannot predict its potential liability for clean-up
costs that it may incur in the future.
The recent trend toward stricter standards in environmental
legislation and regulation is likely to continue. For instance,
legislation has been proposed in Congress from time to time that
would reclassify certain crude oil and natural gas exploration
and production wastes as "hazardous wastes," which would make the
wastes subject to significantly more stringent handling, disposal
and clean-up requirements. If such legislation were to be
enacted, it could have a significant impact on MMR's operating
costs, as well as oil and natural gas industries in general.
Initiatives to further regulate the disposal of crude oil and
natural gas wastes are also pending in certain states and could
have a similar impact. In addition to compliance costs,
government entities and other third parties may assert
substantial liabilities against owners and operators of sulphur
mining and oil and natural gas properties for oil spills,
discharges of hazardous materials, remediation and clean-up costs
and other environmental damages, including damages caused by
previous property owners. The imposition of any such liabilities
on MMR could have a material adverse effect on MMR's financial
condition and results of operations.
OPA imposes a variety of regulations on "responsible parties"
related to the prevention of oil spills. The implementation of
new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the
OPA, could have a material adverse effect on MMR.
FSC has responsibility for potential liabilities, including
environmental liabilities, associated with the prior conduct of
its predecessors. Among these are potential liabilities arising
from sulphur mines that were depleted and closed in the past in
accordance with reclamation and environmental laws in effect at
the time, particularly in coastal or marshland areas that have
experienced subsidence or erosion. MMR believes that it is in
compliance with existing laws regarding such closed operations,
and has implemented controls in some areas that it believes
exceed its legal responsibilities. Nevertheless, it is possible
that new laws or actions by governmental agencies could result in
significant unanticipated additional reclamation costs. For
additional information regarding certain reclamation obligations
see "Environmental" included in Items 7 and 7A below.
MMR could also be subject to potential liability for
personal injury or property damage relating to wellheads and
other materials at closed mines in coastal areas that have become
exposed through coastal erosion. Although MMR has insurance in
place to protect it against certain of these liabilities, there
can be no assurance that such insurance coverage would be
sufficient. There can also be no assurance that MMR's current or
future accruals for reclamation costs will be sufficient to fully
cover such costs.
Competition. MMR operates in the highly competitive areas of oil
and natural gas production, development and exploration with many
other companies, many of which have significantly greater
financial and other resources than MMR. Factors affecting MMR's
ability to compete in the marketplace include the availability of
capital, access to information relating to a property and the
standards established by MMR for the minimum projected return on
investment. MMR's competitors include major integrated oil
companies and a substantial number of independent energy
companies, many of which may have substantially larger financial
resources, staffs and facilities than MMR.
There are two principal sources of elemental sulphur: (1)
mined sulphur and (2) recovered sulphur produced as a by-product
by oil refineries and gas processing plants. Recovered sulphur
from domestic and foreign sources is the major source for most
sulphur customers and is the major source of competition for MMR.
As a by-product of the producer's
16
refining or gas processing
operations, recovered sulphur can be produced at significantly
lower costs than mined sulphur, but the costs to customers depend
largely upon the costs of handling and transporting the recovered
sulphur.
Production of recovered sulphur from high-sulphur gas
processing plants and oil refineries in the United States has
increased at an average rate of approximately 200,000 tons per
year for the last three years. Because U.S. recovered sulphur
producers do not have the ability to store large inventories of
sulphur, they must move it to market and, depending on the
proximity of their plants to the principal sulphur market of
central Florida, such producers may enjoy a significant cost
advantage over MMR.
Because the supply of U.S. recovered sulphur alone cannot meet
total domestic demand, mined sulphur, along with imported
recovered sulphur obtained principally from Canada and Mexico, is
required to supply the balance. Canadian recovered sulphur
producers have facilities for storing excess sulphur production
in solid form, and approximately 90 percent of the Western
Hemisphere's sulphur inventories currently consist of sulphur
recovered from natural gas in the province of Alberta in western
Canada. At certain price levels in the U.S. sulphur markets, and
depending on prices in the foreign markets they supply, Canadian
producers can be expected to increase sulphur sales to U.S.
buyers in competition with MMR.
The principal competitive risk to MMR's ability to mine
sulphur profitably is the potential for decreased domestic demand
for sulphur, increased production from domestic recovered sulphur
producers, increases in imported recovered sulphur and the rate
at which stored sulphur, particularly in Canada, is released into
the market (see Anti-Dumping Finding, above). In addition, the
current level of Canadian sulphur inventories limits the
potential of MMR to realize significant price increases for its
sulphur.
Risks Associated with "Year 2000" (Y2K) Issue. The Y2K issue is
the result of computerized systems being written to store and
process the year portion of dates using two digits rather than
four. Date-aware systems, i.e., any system or component that
performs calculations, comparisons, sequencing, or other
operations involving dates, may fail or produce erroneous results
on or before January 1, 2000 because the year 2000 will be
interpreted as the year 1900.
MMR has prepared and is in the process of executing a plan to
ensure all its significant computer systems and computer
controlled plant and equipment will be Y2K compliant. MMR also
has initiated an assessment of Y2K external risk that may arise
from the failure of critical suppliers and customers to become
Y2K compliant. MMR believes all critical components of the plan
are on schedule for completion by the end of the second quarter
of 1999. There can be no assurance that this plan will be
achieved, and actual results could differ materially from the
plan.
MMR believes that the incremental cost of Y2K compliance not
covered by routine software and hardware maintenance fees will
total approximately $0.3 million, most of which is expected to be
incurred in 1999. However, there can be no assurance that the
Y2K issue will not have a material adverse effect on its
financial condition or results of operations if required software
modifications and conversions are not made, or are delayed, or if
systems of other companies are not converted on a timely basis or
fail to convert. Although MMR is developing specific contingency
plans if any or all of the above risks occur, there can be no
assurance that these contingency plans will be adequate to
address these risks. In summary, while there can be no assurance
that MMR will not be materially adversely affected by Y2K
problems, it is committed to ensuring that it is fully Y2K ready
and believes its plans adequately address the above-mentioned
risks. For further discussion of the Y2K issue, see "Impact of
Year 2000 Compliance" included in Items 7 and 7A elsewhere in
this Form 10-K.
Item 3. Legal Proceedings
IMC Global Inc. and Phosphate Resource Partners Limited
Partnership vs. James R. Moffett, Richard C. Adkerson, B. M.
Rankin, Henry A. Kissinger and McMoRan Oil & Gas Co., Civ. Act.
No. 16387-NC (Del. Ch. filed May 18, 1998). On May 18, 1998, IMC
Global Inc. (IGL) and Phosphate Resource Partners Limited
Partnership (PLP) filed a lawsuit against MOXY and four former
directors of Freeport-McMoRan Inc. (FTX). The plaintiffs allege
that the individual defendants breached fiduciary duties in the
approval by FTX, as managing partner of PLP, of the exploration
program between MOXY and PLP. The suit also alleges that MOXY
conspired with the individual defendants and aided and abetted
their alleged breach of fiduciary duty. The plaintiffs seek
unspecified monetary damages and recision or equitable
reformation of the program agreement. MMR believes that this
suit is without merit, and intends to vigorously defend itself
and enforce its contract rights. Currently PLP continues to
participate in the exploration program pursuant to its
contractual agreements and is current on payments due on its
joint interest billings.
17
Jacob Gottlieb vs. James R. Moffett, Richard C. Adkerson, B. M.
Rankin, Henry A. Kissinger, Phosphate Resource Partners Limited
Partnership, McMoRan Oil & Gas Co. and IMC Global Inc., Civ. Act.
No. 16393 (Del. Ch. Filed May 19, 1998). On May 19, 1998,
plaintiff filed an action on behalf of a purported class of
plaintiffs who own depository units of PLP. The plaintiff makes
substantially similar allegations to those set forth in the IGL
complaint described above. The plaintiff also alleges that IGL
and FTX breached fiduciary duties to PLP and PLP's public
unitholders. The plaintiff seeks unspecified monetary damages
and other relief. MMR believes that this suit is without merit
and intends to vigorously defend itself and enforce its contract
rights.
Daniel W. Krasner vs. James R. Moffett; Rene L. Latiolais; J.
Terrell Brown; Thomas D. Clark, Jr.; B.M. Rankin, Jr.; Richard C.
Adkerson; Robert M. Wohleber; Freeport-McMoRan Sulphur Inc. and
McMoRan Oil & Gas Co., Civ. Act. No. 16729-NC (Del. Ch. Filed
Oct. 22, 1998). Gregory J. Sheffield and Moise Katz vs. Richard
C. Adkerson, J. Terrell Brown, Thomas D. Clark, Jr., Rene L.
Latiolais, James R. Moffett, B.M. Rankin, Jr., Robert M. Wohleber
and McMoRan Exploration Co., (Court of Chancery of the State of
Delaware, filed December 15, 1998.) These two lawsuits were
consolidated on January 13, 1999. The complaint alleges that
FSC's directors breached their fiduciary duty to FSC stockholders
in connection with the Merger. The plaintiffs contend that the
merger transaction was structured to give preference to MOXY
stockholders and failed to recognize the true value of FSC. The
plaintiffs claim that the directors failed to take certain
actions that were necessary to obtain the true value of FSC such
as auctioning the company to the highest bidder or evaluating
FSC's worth as a merger candidate. The plaintiffs also claim that
MOXY knowingly aided and abetted the breaches of fiduciary duty
committed by the other defendants. The plaintiffs seek
injunctive relief and monetary damages. MMR believes that this
suit is without merit and intends to vigorously defend this
action.
Other than the proceedings discussed above, MMR may from
time to time be involved in various legal proceedings of a
character normally incident to the ordinary course of its
business, MMR believes that potential liability from any such
pending or threatened proceedings will not have a material
adverse effect on the financial condition or results of
operations of MMR. MMR maintains liability insurance to cover
some, but not all, of the potential liabilities normally incident
to the ordinary course of its businesses as well as other
insurance coverages customary in its business, with such coverage
limits as management deems prudent.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
Listed below are the names and ages, as of March 9, 1999, of
the present executive officers of MMR together with the principal
positions and offices with MMR held by each.
Name Age Position or Office
---- --- ------------------
James R. Moffett 60 Co-Chairman of the Board
Richard C. Adkerson 52 Co-Chairman of the Board, President
and Chief Executive Officer
Rene L. Latiolais 56 Vice Chairman of the Board
Robert M. Wohleber 48 Executive Vice President, Chief Financial
Officer and Director
C. Howard Murrish 58 Executive Vice President
Michael J. Arnold 46 Senior Vice President
Craig E. Saporito 47 Senior Vice President and Treasurer
John G. Amato 55 General Counsel
James R. Moffett has served as the Co-Chairman of the Board
of MMR since November 1998. From 1994 to November 1998 he served
as Co-Chairman of the Board of MOXY. From November 1997 to
November 1998 he also served as Co-Chairman of the Board of FSC.
Mr. Moffett has also served as the Chairman of the Board and
Chief Executive Officer of Freeport-McMoRan Copper & Gold Inc.
(FCX) since July 1995, and as Chairman of the Board of FCX since
May 1992. Mr. Moffett served as Chairman of the Board of FTX from
May 1992 until December 1997.
18
Richard C. Adkerson has served as Co-Chairman of the Board,
President and Chief Executive Officer of MMR since November 1998.
From April 1994 to November 1998 he was Co-Chairman of the Board
and Chief Executive Officer of MOXY. From November 1997 to
November 1998 he was Vice Chairman of the Board of FSC. Mr.
Adkerson has also served as President and Chief Operating Officer
of FCX since April 1997. Mr. Adkerson served as Executive Vice
President of FCX from July 1995 to April 1997, and as Senior Vice
President of FCX from February 1994 to July 1995 and as Chief
Financial Officer from July 1995 to November 1998. He also
served as Chairman of the Board of Stratus Properties Inc.
(Stratus), a real estate development company, from May 1993 to
August 1998, as President from August 1995 to May 1996 and as
Chief Executive Officer from May 1996 to May 1998. Mr. Adkerson
served as Vice Chairman of FTX until December 1997 and as Senior
Vice President and Chief Financial Officer of FTX from 1992 to
1995.
Rene L. Latiolais has served as Vice Chairman of the Board
of MMR since November 1998, and as Vice Chairman of the Board of
FCX since 1994. From 1997 to November 1998, Mr. Latiolais served
as Co-Chairman of the Board of FSC. He also held the office of
President and Chief Executive Officer of FTX from August 1995
until December 1997, the office of Chief Operating Officer of
FTX from 1993 until 1995, and the office of Executive Vice
President of FTX from 1992 until 1993.
Robert M. Wohleber has served as Director, Executive Vice
President and Chief Financial Officer of MMR since November 1998.
Mr. Wohleber served as President and Chief Executive Officer of
FSC from November 1997 to November 1998 and as a Director from
August 1997 to November 1998. Mr. Wohleber has also served as
Senior Vice President of FCX since November 1997. He served as a
Vice President of FCX from July 1994 to November 1997 and as Vice
President and Treasurer of FCX from July 1993 to July 1994. Mr.
Wohleber served as Senior Vice President and Chief Financial
Officer of FTX from November 1996 to December 1997, as Vice
President of FTX from June 1994 to November 1996, and as Vice
President and Treasurer of FTX from May 1992 to June 1994. From
May 1994 to August 1994, Mr. Wohleber served as Vice President
and Treasurer of MOXY.
C. Howard Murrish has served as Executive Vice President of
MMR since November 1998. He has served as President and Chief
Operating Officer of McMoRan Oil & Gas LLC and its predecessor,
MOXY, since September 1994. He was a partner in CLK until
September 1994. He served in as a Senior Executive Vice
President of the oil and gas division of FTX from 1986 until
February 1992.
Michael J. Arnold has served as Senior Vice President of MMR
since November 1998 and of FCX since November 1996. Mr. Arnold
served as Senior Vice President and Treasurer of FSC from August
1997 to November 1997. From July 1994 to November 1996, Mr.
Arnold was Vice President and Controller " Operations of FCX.
Mr. Arnold served as a Senior Vice President of FTX from November
1996 until December 1997. From October 1991 to November 1996, he
was Vice President of FTX, serving as Controller " Operations
from May 1993 to November 1996.
Craig E. Saporito has served as Senior Vice President and
Treasurer of MMR since November 1998 and Treasurer of FCX since
November 1997. He served as Vice President of MOXY from April to
November 1998. From July 1994 to November 1997, Mr. Saporito was
a Vice President of FCX and from May 1988 to December 1997 he was
a Vice President of FTX.
John G. Amato has served as General Counsel of MMR since
November 1998. Mr. Amato served as General Counsel to MOXY from
April 1994 to November 1998, to FSC from November 1997 to
November 1998, and to Stratus from August 1995 to August 1998.
Prior to August 1995, Mr. Amato served as General Counsel of FCX
and to FTX. Mr. Amato currently provides legal and business
advisory services to FCX under a consulting arrangement.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
MMR's common stock is listed on the New York Stock Exchange
(NYSE) under the symbol "MMR." MMR's common shares have been
trading since November 18, 1998. The following table sets forth
the range of high and low closing bid prices, as reported by the
NYSE for the period subsequent to the Merger.
High Low
------ ------
Fourth Quarter 1998 $16.00 $13.25
As of March 9, 1999 there were 12,952 holders of record of
MMR's common stock. MMR has not in the past paid, and does not
anticipate in the future paying, cash dividends on its common
stock. The decision whether or not to pay dividends and in what
amounts is solely at the discretion of MMR's Board of Directors.
19
Item 6. Selected Financial Data
The following table sets forth selected audited historical
financial and unaudited operating data for MMR for each of the
four years in the period ended December 31, 1998 and for the
period from inception (May 1994) through December 31, 1994. MMR
became a publicly traded entity on November 17, 1998, following
the Merger of MOXY and FSC (see Note 1 of Notes to Financial
Statements). The Merger was accounted for as a purchase with MOXY
as the acquiring entity. Accordingly, the information presented
below reflects the historical financial and operating data
attributable to MOXY. Financial and operating data attributable
to the assets acquired from FSC are included after November 17,
1998. The information shown in the table below may not be
indicative of future results of MMR. The information below
should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations and
Disclosures About Market Risks" and the historical financial
statements and notes thereto contained elsewhere in this Form 10-K.
Inception to
Years Ended December 31, December 31
---------------------------------------- --------
1998a 1997 1996 1995 1994
------- ------- ------- -------- --------
(Financial Data in thousands,except per share amounts)
Financial Data
Revenues $45,902 $13,552 $ 4,070 $ 3,267 $ 174b
Exploration expenses 14,533 11,966 9,818c 11,756 15,518
Operating loss (19,324) (9,904) (9,883) (14,799) (17,682)
Net loss (18,116) (10,538) (9,862) (14,635) (15,200)
Basic and diluted net loss per
share d $ (1.96) $ (2.80) $ (3.55) $ (5.31) $ (5.52)
Basic and diluted average shares
outstanding d 9,230 3,769e 2,779 2,754 2,754
At December 31:
Working capital $20,980 $33,749e $ 2,972 $ 8,257 $15,063
Property, plant and
equipment, net 187,137 57,705e 18,231 9,878f 17,094
Total assets 320,388 101,088e 30,980 21,633f 34,425
Production loan, less current
portion - - e 12,391 530 -
Stockholders' equity 178,800 90,698e 8,246 17,605 32,157
Operating Data
Sales Volumes:
Gas (thousand cubic feet,
or Mcf) 8,634,100g4,061,000 631,000 1,093,000 -
Oil (barrels) 304,100h 34,000 29,000 45,000 -
Sulphur (long tons) 386,600 - - - -
Average realization:
Gas (per Mcf) $ 2.14 $ 2.62 $2.72 $1.63 $-
Oil (per barrel) 10.33 19.19 22.22 18.83 -
Sulphur (per ton) 62.40 - - - -
a. Reflects consolidated MMR data from November 17, 1998 and
MOXY data prior to November 17, 1998.
b. Represents miscellaneous net royalty income; no production
quantities or average realizations shown since amounts are not
meaningful.
c. Includes a reduction of $2.1 million ($0.75 per share)
resulting from reimbursement of previously expensed costs.
d. Represents MMR loss per share and average shares
outstanding. MOXY historical loss per share and average shares
outstanding have been restated to reflect the effective
reverse stock split to MOXY shares as a result of the Merger.
e. Includes issuance of MOXY shares in a rights offering, the
proceeds of which were used to purchase producing property
interests and repay borrowings, with the remainder held to
fund Exploration Program commitments.
f. After giving effect to transfer of property interests
resulting from the formation of a previous exploration
program.
g. Excludes the prior period effects of the re-determination of
ownership interest in the Vermilion Block 160 field unit which
reduced volumes of gas and oil by approximately 150,400 Mcf
and 6,200 barrels, respectively, and combined revenues by
approximately $486,000.
h. Includes production of 202,700 barrels of oil from the Main
Pass 299 operations subsequent to the Merger.
20
Items 7. And 7A. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations And Disclosures
About Market Risks
OVERVIEW
MMR engages in the exploration, development and production
of oil and gas offshore in the Gulf of Mexico (Gulf) and onshore
in the Gulf Coast area; and the mining, purchasing, transporting,
terminaling and marketing of sulphur. On November 17, 1998 MOXY
and FSC became wholly owned subsidiaries and operating segments
of MMR. The Merger was recorded as a purchase with MOXY as the
acquiring entity (see Note 1). All following references to MMR
for any period prior to the Merger are to activities or
operations originally conducted by MOXY.
MMR and its predecessors have conducted oil and gas
exploration, development and production operations offshore in
the Gulf and onshore in the Gulf Coast region and other areas for
more than 25 years, which has provided it with an extensive
geological and geophysical database and significant technical and
operational expertise. MMR expects to continue to concentrate its
efforts in this selected geographic area where its management
team has significant exploration experience. MMR believes the
opportunities to discover meaningful oil and gas reserves are
significant and that these opportunities can best be achieved
through the use of advanced 3-D seismic technology, applied in
conjunction with selective exploration and acquisition
activities. At December 31, 1998 MMR had proved reserves of
approximately 4.0 million barrels of oil and 58.5 billion cubic
feet (BCF) of gas or an aggregate of 82.2 BCF equivalent (see
Note 11).
The assets acquired from FSC include two operating sulphur
mines: Main Pass 299, in which FSC owns an 83.3 percent interest,
located offshore Louisiana; and wholly owned Culberson, located
in west Texas, which is expected to cease production by the end
of the second quarter of 1999. Other acquired sulphur assets
include five sulphur terminals located across the Gulf Coast and
various marine and rail transportation assets. MMR also acquired
FSC's 83.3 percent interest in the Main Pass oil operations.
MMR's sulphur reserves at December 31, 1998 totaled approximately
52.6 million long tons (see Note 12).
OPERATIONAL ACTIVITIES
For a discussion of MMR's oil and gas operational activities
during 1998 and early 1999 see Items 1 and 2 "Business and
Properties," included elsewhere herein in this Annual Report on
Form 10-K.
Sulphur Operations. MMR's net daily production from both sulphur
mines for the period after the Merger totaled approximately 3,900
long tons. Work is progressing at the Main Pass mine to restore
production to optimum levels (see "Recent Developments" below).
RECENT DEVELOPMENTS
Oil and Gas. On December 30, 1998, MMR purchased for $5.0
million an additional 11.6 percent net revenue interest in the
Vermilion Block 160 field unit and a 6.0 percent net revenue
interest in the Vermilion Block 159 #3 well, as well as the lease
rights associated with Vermilion Blocks 144 and 159. In January
1999, MMR completed a second purchase of additional net revenue
interests for these blocks resulting in increases of 7.8 percent
in the Vermilion Block 160 field
unit and 4.0 percent in the Vermilion Block 159 #3 well.
Additionally, in these purchases an approximate $1.9 million
abandonment liability ($0.9 million net to MMR) associated with a
platform located at Vermilion Block 144 was assumed. Future
production operations could be conducted from this platform if
additional reserves are discovered. MMR has offered to sell a
portion of these purchased interests to certain of its affiliated
partners and others on the same terms as it acquired them.
Offers totaling 9.1 percent, representing the entire amount
offered to MMR's partners, in the Vermilion 160 field unit have
been accepted at a purchase price of approximately $3.9 million,
subject to certain customary closing adjustments. Offers
totaling 5.2 percent, representing the entire amount offered to
its affiiliated partners in the Vermilion 159 #3 well have been
accepted at a purchase price of approximately $0.6 million
subject to certain customary closing adjustments.
In March 1999, MMR sold its approximate 28.0 percent net
revenue interest in the Vermilion Block 410 field resulting in an
approximate $3 million gain being recorded during the first
quarter of 1999.
In January 1999, MMR and its affiliated partners purchased
for $500,000 ($188,000 net to MMR) a seismic option covering
three prospects in the West Cameron area, offshore Louisiana. In
February 1999, after careful consideration of the purchased data,
MMR elected not to participate in any of the prospects.
Sulphur. In late September 1998, all drilling and production
operations at FSC's Main Pass facility were shut down in
accordance with standard safety procedures in response to
significant adverse weather conditions caused by Hurricane
21
Georges. After three days of shutdown, FSC restarted production,
which involved re-heating the portion of the sulphur deposit
being produced prior to the shutdown. Nine previously producing
wells required redrilling of which four have been redrilled as of
December 31, 1998. MMR has contracted a third-party drilling rig
to supplement its two sulphur rigs at Main Pass 299 in an attempt
to accelerate the process of drilling replacement wells and to
restore Main Pass' production to optimum levels. In the interim,
MMR is meeting customer demand from available Main Pass
production, existing inventories, an increase in purchases of
recovered sulphur and production from the Culberson mine. In
response to a weak sulphur market, FSC had previously decided to
reduce production at the Culberson mine in early 1998 and
announced on June 30, 1998 that it planned to permanently cease
mine operations during the third quarter of 1998. However,
operations will be extended through the second quarter of 1999 in
order to help alleviate the production shortfall at Main Pass.
Tightness in near-term sulphur supply has resulted in a $4.00 per
ton increase in sulphur prices for the first quarter of 1999.
See "Antidumping Finding" in Items 1 and 2 "Business and
Properties" for a discussion of a regulatory announcement
potentially impacting the domestic sulphur industry, including
MMR.
RESULTS OF OPERATIONS
As a result of the Merger, MMR has two operating segments:
"oil and gas" and "sulphur". The oil and gas segment includes all
operations of MOXY, as well as FSC's oil operations at Main Pass
299. MMR's sulphur segment includes all of FSC's sulphur
operations. The results of operations during 1998 includes
revenues, cost of sales and expenses pertaining to FSC's assets
acquired and liabilities assumed for the period November 17,
1998 through December 31, 1998 as well as the historical results
of MOXY. The following table presents the results of operations
and operating data for the three years ended December 31, 1998:
Years Ended December 31,
--------------------------------
1998 1997 1996
--------- -------- -------
(Dollars in thousands, except
for realized prices)
FINANCIAL DATA:
Oil and gas
Revenues $ 21,626 $ 13,552 $ 4,070
Operating loss (18,664) (9,904) (9,883)
Net loss (17,538) (10,538) (9,862)
Sulphur
Revenues 24,276 - -
Operating loss (660) - -
Net loss (578) - -
OPERATING DATA:
Sales Volumes
Gas (thousand cubic feet,
or MCF) 8,634,100 4,061,000 31,000
Oil (barrels) 304,100 34,000 29,000
Sulphur (long tons) 386,600 - -
Average Realization
Gas (per MCF) $2.14 $2.62 $2.72
Oil (per barrel) 10.33 19.19 22.22
Sulphur (per long ton) 62.40 - -
1998 Compared With 1997
Oil and gas revenues increased to $21.6 million during 1998
compared with $13.6 million for 1997. The increase resulted
primarily from the inclusion of $1.8 million in oil revenues
from Main Pass 299 following the Merger, increased production at
the Vermilion Block 160 field unit from three wells that
commenced production during the fourth quarter of 1997 and the
purchase in late 1997 of additional net revenue interests in
Vermilion Blocks 160 and 410. The increase was partially offset
by lower natural gas and oil prices throughout 1998 and by a
cumulative adjustment for production prior to 1998 for the
redetermination of ownership interests in the Vermilion Block 160
field unit, which reduced combined oil and gas revenues by
approximately $486,000 during the first quarter of 1998. Oil
production from the Main Pass facility was sold exclusively to
Amoco Production Company during the second half of 1998 under a
sales contract which has been extended through June 30, 1999.
Oil production at Main Pass is depleting rapidly, and current
estimates are that the oil reserves at Main Pass 299 will be
fully depleted by the year 2002.
22
Sulphur operations had revenues of $24.3 million and an
operating loss of $0.7 million during the period after the
Merger. A significant portion of the sulphur produced or
purchased is sold to the IMC-Agrico Joint Venture (IMC-Agrico), a
phosphate fertilizer producer, under a long-term supply contract
that extends for as long as IMC-Agrico has a requirement for
sulphur. Sales to IMC-Agrico totaled 35.9 percent of MMR's total
revenues and 68.4 percent of its sulphur sales. In the fourth
quarter of 1998, IMC-Agrico requested that MMR engage in good
faith negotiations with respect to the pricing terms of the
Sulphur Supply Agreement. The Sulphur Supply Agreement requires
renegotiation if a party's performance under the agreement has
been rendered "commercially impracticable" or "grossly
inequitable" as a result of fundamental changes in the party's
operations or the sulphur and sulphur transportation markets.
Representatives of MMR and IMC-Agrico have met to discuss the
pricing terms of the agreement, and MMR has advised IMC-Agrico
that it does not believe that the conditions warranting
renegotiation have occurred.
Depreciation and amortization totaled $17.7 million in 1998,
including $0.6 million from the acquired sulphur operations
(including $0.1 million of goodwill amortization), compared with
$10.1 million in 1997. The increase primarily reflects increased
capitalized costs from Vermilion Blocks 160 and 410 and resulting
increased production.
Production and delivery costs increased to $27.7 million in
1998 compared to $1.2 million in 1997. The significant increase
reflects $23.1 million associated with production from the
sulphur operations and $1.3 million associated with Main Pass oil
assets following the Merger, together with the increased
production volumes from MMR's oil and gas properties.
MMR's exploration expenses fluctuate from period to period
based on the level, results and costs of exploratory drilling
projects and the volume of and extent to which seismic data is
acquired and interpreted. MMR did not participate in exploratory
drilling during the second half of 1998 because in the first half
of 1998 MMR committed all of the funds available to it under the
McMoRan Exploration Program (Exploration Program) (see "Capital
Resources and Liquidity"). Exploratory drilling and leasehold
costs expensed in 1998 were approximately $9.1 million compared
with $6.3 million in 1997. The 1998 costs were primarily
associated with the unsuccessful exploratory wells at Atchafalaya
Bay, Grand Isle Block 54 #1, West Cameron Block 617 #2, and West
Cameron Block 157 #1. MMR will continue to drill exploratory
wells and may incur more unsuccessful exploratory drilling costs
as a result.
General and administrative expense increased to $5.7 million
in 1998 from $2.1 million in 1997. The increase was due primarily
to the acquisition of FSC and increased actual general and
administrative expense charged to MMR for certain services
provided by an affiliated company under an amended services
agreement, which prior to 1998 were charged at a fixed annual
amount of $1.0 million (see Note 5).
Interest expense decreased to $0.2 million in 1998 from $1.3
million in 1997 reflecting MMR's repayment of outstanding debt
with the proceeds from its 1997 rights offering.
As a result of anticipated future exploration expenditures,
MMR may continue to report operating losses for at least the near
future.
1997 Compared to 1996
Oil and gas sales revenues for 1997 increased nearly four-
fold over 1996 because of increased production from the Vermilion
410 field and, late in 1997, from the Vermilion Block 160 field
unit. Production from additional interests in these fields
acquired from Phosphate Resource Partners Limited Partnership
(PLP) in November 1997 also contributed to the increase.
Management fee revenue increased because of different contractual
arrangements prior to MMR's acquisition of these additional
interests. Production costs and depreciation and amortization
expenses increased consistent with increased production volumes.
In addition, proved reserves at the Vermilion Block 410 field
were revised downward in the 1997 second quarter based on
production experience, resulting in additional depreciation
expense of $1.0 million. Exploration expenses were similar to
the prior year level after considering a $2.1 million
reimbursement of previously expensed costs in 1996. General and
administrative expenses were substantially the same as the prior
year's levels. Interest expense increased consistent with
increased borrowings from the production loan before repayment of
those borrowings from rights offering proceeds.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided by (used in) operating activities totaled
$26.2 million in 1998, ($3.5) million in 1997 and $6.7 million in
1996. MMR's increased revenues and significant collections of
outstanding joint interest receivables during 1998 contributed to
the increase in operating cash flows compared with 1997. The
significant amounts outstanding from joint interest accounts
receivable at December 31, 1997 contributed heavily to the
decrease in operating cash flows for
23
1997 compared with 1996.
Net cash used in investing activities totaled $36.9 million
in 1998, $57.3 million in 1997 and $18.6 million in 1996. MMR
incurred $49.8 million of exploration and development
expenditures during 1998. These expenditures consisted of $32.2
million for capitalized drilling, primarily for development and
facilities costs associated with West Cameron Block 616, the
Vermilion Block 160 #4 sidetrack well, and the Vermilion Block
159 #3 well, as well as the successful drilling costs associated
with the Brazos Block A-19 and the West Cameron Block 617 #1
exploratory wells; geological and geophysical and other
exploratory expenses of $5.4 million; and $9.1 million of
expensed drilling and leasehold costs. Additionally, 1998
development expenditures included $3.1 million of costs
associated with MMR's sulphur divisions' efforts to restore
production at Main Pass to levels existing prior to Hurricane
Georges. In December 1998, MMR purchased additional interests in
the Vermilion Block 160 field unit and Vermilion Block 159 # 3
prospect for $5.0 million, net of adjustments, which was offset
in part by the proceeds from MMR's July sale of its interest in
West Cameron Block 519 for $450,000. MMR acquired $17.7 million
of cash and cash equivalents, net of related acquisition costs of
$3.1 million, from FSC as a result of the Merger. The 1997
expenditures consisted of $22.1 million of capitalized drilling
costs associated primarily with the development of the Vermilion
Block 160 field unit and with successful drilling at West Cameron
Block 616 and the Vermilion Block 160 #4 sidetrack well; $5.3
million in geological and geophysical expense; and $6.3 million
in expensed drilling and leasehold costs. In 1997 MMR purchased
oil and gas properties from PLP and Stratus Properties Inc. for
$26.0 million (see Note 5) offset in part by the sale of certain
properties for $2.4 million. In 1996 MMR incurred $9.8 million
for capitalized drilling and leasehold cost associated primarily
with the development of Vermilion Block 410; $5.7 million in
geological and geophysical expense; and $5.0 million in expensed
drilling and leasehold costs.
Net cash provided by (used in) financing activities totaled
($0.6) million in 1998, $79.5 million in 1997 and $12.1 million
in 1996. The 1998 activity reflects costs associated with
completion of the Merger, offset in part by proceeds from stock
options exercised. The proceeds in 1997 reflects MMR's completion
of the rights offering, offset in part by the net repayment of
its outstanding debt incurred under a previous exploration
program. The 1996 proceeds reflect net borrowings under the
previous exploration program (see Note 4).
MMR realized proceeds of $92.2 million from a November 1997
rights offering. MMR used the proceeds to purchase additional
interests in the Vermilion Block 160 and 410 fields ($24.5
million), to retire its existing debt ($20.0 million) and to fund
a portion of its share of the multi-year $210 million Exploration
Program (see Note 4). The Exploration Program's agreement
provides that, without the consent of the participants,
expenditures will not likely exceed $60 million for any
cumulative 12 month period. The Exploration Program had
committed to approximately $60 million of exploratory costs by
June 30, 1998, as a result of numerous drilling opportunities
that became available during the period. As a result, MMR's
operational activities during the second half of 1998 focused
primarily on developing its recent discoveries and identifying
exploration prospects for 1999. At December 31, 1998
approximately $105.2 million had been expended under the
Exploration Program.
Based on current projections, management believes that MMR's
cash and its expected cash flow from operations will be
sufficient to fund its ongoing working capital requirements,
reclamation costs, and projected capital expenditures for the
foreseeable future. The current low market prices for both oil
and natural gas have created an environment in which numerous
farm-in, acquisition and other opportunities are becoming
available for exploration prospects and producing properties.
Drilling and service costs have also decreased dramatically from
1997 and early 1998 levels, reflecting less demand for rigs and
related services in the Gulf. MMR, because of the Merger and
its resulting improved financial position, has the capital
resources and liquidity it believes are necessary to pursue
opportunities offered by the current oil and gas environment. At
December 31, 1998, MMR had no debt and had cash and bank credit
availability of approximately $90 million (see Note 9).
MMR is currently negotiating a sale and leaseback
transaction affecting all of its railcars. The transaction,
expected to be completed during the first half of 1999, would
provide MMR with approximately $10 million and require subsequent
annual rental payments of $1.1 million over a 12 year period,
with a buyout provision included after 10 years.
MMR filed an insurance claim during the first quarter of
1999 covering the estimated damages and lost production from the
Main Pass mine resulting from the effects of Hurricane Georges in
September 1998. MMR's financial statements do not include any
potential recovery amounts related to this insurance claim.
MMR's insurance carrier is currently reviewing the claim and has
indicated that a partial payment of $2.5 million covering the
additional costs to restore Main Pass production to pre-hurricane
levels could be processed by the end of the second quarter of
1999. Any remaining payment, if approved by the insurance
carrier would more likely than not be received by December 31,
24
1999. MMR will record any insurance recovery only when it has a
firm settlement commitment from the insurance company.
For discussion of litigation matters see Item 3, "Legal
Proceedings."
IMPACT OF YEAR 2000 COMPLIANCE
The Year 2000 (Y2K) issue is the result of computerized
systems being written to store and process the year portion of
dates using two digits rather than four. Date-aware systems,
(i.e., any system or component that performs calculations,
comparisons, sequencing, or other operations involving dates) may
fail or produce erroneous results on or before January 1, 2000
because the year 2000 will be interpreted as the year 1900.
MMR's State of Readiness. MMR has been pursuing a strategy to
ensure all of its significant computer systems will be able to
process dates from and after January 1, 2000, including leap
years, without mission-critical system failure (Y2K Compliance or
Y2K Compliant). Computerized systems are integral to the
operations of MMR, particularly for various engineering systems
used for exploration, reserve, production and modeling functions
as well as for plant and equipment process control at its Gulf of
Mexico production facilities. Certain computerized business
systems and related services are provided by FM Services Company
(FMS), which is responsible for ensuring Y2K Compliance for the
systems it manages. FMS has separately prepared a plan for its
Y2K Compliance. Progress of the Y2K plan is being monitored by
MMR executive management and reported to the Audit Committee of
the MMR Board of Directors. In addition, the independent
accounting firm functioning as MMR's internal auditors is
assisting management in monitoring the progress of the Y2K plan.
MMR believes all critical components of the plan are on schedule
for completion by the end of the second quarter of 1999. Like
other companies, MMR cannot, however, make Y2K Compliance
certifications because the ability of any organization's systems
to operate reliably after midnight on December 31, 1999 is
dependent upon factors that may be outside the control of, or
unknown to, the organization.
The majority of computerized date-sensitive hardware and
software components used by MMR or FMS are covered by maintenance
contracts with the vendors who originally implemented them. All
of these vendors have already been contacted regarding Y2K
Compliance of their products. Where necessary, software
modifications to ensure compliance will be provided by the
appropriate vendors under their maintenance contracts.
Information Technology (IT) Systems - The bulk of MMR oil and gas
specific processing is provided through third party software
licensed by MMR. The Y2K Compliant version of this software was
implemented in the fourth quarter of 1998. The remaining
business processing is provided by FMS. Third party software is
used for general accounting and accounts payable. FMS has
installed a Y2K Compliant version of this same software in the
fourth quarter of 1998 for an affiliated entity. This will allow
any installation issues to be identified and rectified prior to
installation of this system for MMR in the second quarter of
1999. FMS also provides payroll and cash disbursements
processing for MMR. FMS has implemented the Y2K version of the
payroll interface software and will conduct Y2K Compliance
testing of third party-provided payroll services in early 1999.
FMS will also conduct Y2K testing of the interfaces to its
primary bank and bank-provided computerized disbursement services
in early 1999 after the bank has completed its internal Y2K
Compliance work.
Non-IT Systems - Systems used for exploration, reserve,
production and modeling functions are integral to the operations
of MMR. The major provider of these systems has indicated that
Y2K Compliant versions of its software will be available in the
first quarter of 1999. MMR is participating in an oil and gas
industry Y2K consortium to jointly help ensure compliance of its
products. MMR also utilizes process control systems in the
operation of its offshore facilities. In the fourth quarter of
1998, MMR engaged an engineering firm to complete assessment and
testing of the compliance of these systems. Results from this
work indicate no outstanding issues. MMR has also contracted
with a third party to conduct a Y2K Compliance review for the
Main Pass process control system. The results of this third-
party review also indicate no significant problems.
Recommendations stemming from this review will be implemented by
the end of the first quarter of 1999.
Third Party Risks - As is the case with most oil and gas
exploration companies, MMR relies extensively on third party
contractors for a significant portion of its operating functions.
MMR has completed an assessment of Y2K external risk that may
arise from the failure of critical suppliers and customers to
become Y2K Compliant. This assessment indicates that MMR's
business partners are well aware of the Y2K problem and are
themselves aggressively seeking resolution of any outstanding
issues. Contingency plans are being outlined and are due to be
completed by the third quarter of 1999. The Y2K risk that could
have the largest potential business impact would probably be a
short-term shutdown of Main Pass sulphur operations caused by a
disruption of key materials from suppliers, especially natural
gas.
25
The Costs to Address MMR's Y2K Issues. Expenditures for the
necessary Y2K related modifications will largely be funded by
routine software and hardware maintenance fees paid by MMR or FMS
to the related software providers. Based on current information,
MMR believes that the incremental cost of Y2K Compliance not
covered by routine software and hardware maintenance fees will
total approximately $0.3 million, most of which is expected to be
incurred in 1999. If the software modifications and conversions
referred to above are not made, or are delayed, the Y2K issue
could have a material impact on MMR's operations. Additionally,
current estimates are based on management's best assessment,
which was derived using numerous assumptions of future events
including the continued availability of certain resources, third
party modification plans and other factors. There can be no
assurance that these estimates will be achieved, and actual
results could differ materially from these plans. There also can
be no assurance that the systems of other companies will be
converted on a timely basis or that failure to convert will not
have a material adverse effect on MMR.
The Risks of MMR's Y2K Issues. Based on detailed risk assessment
work conducted thus far, MMR believes the most likely Y2K-related
failures would probably be temporary disruption in certain
materials and services provided by third parties, which would not
be expected to have a material adverse effect on MMR's financial
condition or results of operations. MMR believes that these
third-party risks will be mitigated through close monitoring of
compliance by third parties that are important to its operations.
MMR's Contingency Plans. Although MMR believes the likelihood of
any or all of the above risks occurring to be low, specific
contingency plans to address certain risk areas will be
developed, if needed, beginning in the first quarter of 1999.
While there can be no assurance that MMR will not be materially
adversely affected by Y2K problems, it is committed to ensuring
that it is fully Y2K ready and believes its plans adequately
address the above-mentioned risks.
DISCLOSURES ABOUT MARKET RISKS
MMR's revenues are derived from the sale of sulphur, crude
oil and natural gas. In addition, natural gas purchases comprise
a significant portion of the sulphur division's production costs.
MMR's results of operations and cash flow can vary significantly
with fluctuations in the market prices of these commodities.
Based on projected 1999 sales volumes, each $5 per ton change in
the average realized price on sulphur sales would have an
approximate $16.5 million impact on revenues and an approximate
$6.7 million impact on net income. Based on projected annual
sales volumes from both existing producing properties and those
expected to produce later in 1999, a $.10 per mcf and a $1 per
barrel change in the average prices realized on natural gas and
oil sales would have an approximate $1.3 million and $0.9 million
net impact on both revenues and net income, respectively.
At the present time MMR does not hedge or otherwise enter
into price protection contracts for its principal products,
although in April 1998, FSC entered into a price protection
program for its anticipated 1998 natural gas purchase
requirements. Under the terms of the contract, commencing in May
1998 MMR began purchasing 450,000 million British thermal units
(mmbtu) of natural gas per month (representing approximately 75
percent of Main Pass' natural gas purchases) for $2.175 per
mmbtu. The contract also granted the supplier the option to put
450,000 mmbtu per month to MMR at a price of $2.175 per mmbtu
during 1999. The estimated fair market value of this contract
was an approximate $1.1 million loss at December 31, 1998.
As MMR has no outstanding debt, conducts all its operations
within the U.S. in U.S. dollars and has no investments in equity
securities, it is currently not subject to interest rate risk,
foreign currency exchange risk or equity price risk.
ENVIRONMENTAL
MMR, through its predecessors, has a history of commitment
to environmental responsibility. Since the 1940's, long before
public attention focused on the importance of maintaining
environmental quality, MMR has conducted pre-operational,
bioassay, marine ecological and other environmental surveys to
ensure the environmental compatibility of its operations. MMR's
environmental policy commits its operations to compliance with
local, state, and federal laws and regulations, and prescribes
the use of periodic environmental audits of all facilities to
evaluate compliance status and communicate that information to
management. MMR believes that its operations are being conducted
pursuant to necessary permits and are in compliance in all
material respects with the applicable laws, rules and
regulations. MMR has access to environmental specialists who
have developed and implemented corporate-wide environmental
programs. MMR continues to study methods to reduce discharges and
emissions.
26
Federal legislation (sometimes referred to as "Superfund"
legislation) requires payments for cleanup of certain waste
sites, even though waste management activities were performed in
compliance with regulations applicable at the time. Under the
Superfund legislation, one party may, under certain
circumstances, be required to bear more than its proportional
share of cleanup costs at a site where it has responsibility
pursuant to the legislation, if payments cannot be obtained from
other responsible parties. Other legislation mandates cleanup of
certain wastes at operating sites. States also have regulatory
programs that can mandate waste cleanup. Liability under these
laws involves inherent uncertainties. MMR has, at this time, no
known significant liability under these laws.
Estimated future expenditures to restore properties and
related facilities to a condition that complies with
environmental and other regulations are accrued over the life of
the properties. The future expenditures are estimated based on
current costs, laws and regulations. As of December 31, 1998,
MMR had fully accrued $41.8 million ($9.7 million of which will
be reimbursed by third parties) for the estimated future
abandonment and restoration costs associated with its non-
operating sulphur assets, including the Culberson mine, which is
anticipated to cease operations by the end of the second quarter
of 1999. Current estimated abandonment costs for the Main Pass
sulphur mine and related facilities total $59.5 million, of which
$14.8 million was accrued at December 31, 1998. The total
estimated abandonment cost for Main Pass' oil operations is $7.0
million, all of which was accrued at December 31, 1998. The
estimated total abandonment costs associated with MMR's remaining
oil and gas properties totaled $7.6 million, of which $3.0
million was accrued through December 31, 1998. These estimates
are by their nature imprecise and can be expected to be revised
over time because of changes in governmental regulations,
operations, technology and inflation.
MMR has made, and will continue to make, expenditures at its
operations for the protection of the environment. Continued
government and public emphasis on environmental issues can be
expected to result in increased future investments for
environmental controls, which will be charged against income from
future operations. Present and future environmental laws and
regulations applicable to current operations may require
substantial capital expenditures and may affect operations in
other ways that cannot now be accurately predicted.
MMR maintains insurance coverage in amounts deemed prudent
for certain types of damages associated with environmental
liabilities that arise from sudden, unexpected and unforeseen
events.
CAUTIONARY STATEMENT
Management's Discussion and Analysis of Financial Condition
and Results of Operations and Disclosures about Market Risks
contain forward-looking statements. All statements other than
statements of historical fact included in this report, including,
without limitation, statements regarding plans and objectives of
MMR's management for future operations and MMR's exploration and
development activities are forward-looking statements.
Important factors that could cause actual oil and gas
operations results to differ materially from MMR's expectations
include, without limitation, drilling results, unanticipated
fluctuations in flow rates of producing wells, depletion rates,
economic and business conditions, Y2K compliance, general
development risks and hazards and risks inherent with the
production of oil and gas, such as fires, natural disasters,
blowouts and the encountering of formations with abnormal
pressures, changes in laws or regulations and other factors, many
of which are beyond the control of MMR. Important factors that
could affect the future results of MMR's sulphur operations
include without limitation reserve expectations, demand for
sulphur, the availability of financing, the ability to satisfy
future cash obligations and environmental costs, the reliance on
IMC-Agrico as a customer, the seasonality and volatility of
sulphur markets, competition and environmental issues. Further
information regarding these and other factors that may cause
MMR's future performance to differ from that projected in the
forward-looking statements are described in more detail under
"Cautionary Statements" in Item 1 in this Form 10-K.
__________________________
The results of operations reported and summarized above are not
necessarily indicative of future operating results.
27
Item 8. Financial Statements and Supplementary Data
REPORT OF MANAGEMENT
McMoRan Exploration Co. (MMR) is responsible for the
preparation of the financial statements and all other information
contained in this Annual Report. The financial statements have
been prepared in conformity with generally accepted accounting
principles and include amounts that are based on management's
informed judgments and estimates.
MMR maintains a system of internal accounting controls
designed to provide reasonable assurance at reasonable costs that
assets are safeguarded against loss or unauthorized use, that
transactions are executed in accordance with management's
authorization and that transactions are recorded and summarized
properly. The system is tested and evaluated on a regular basis
by MMR's internal auditors, PricewaterhouseCoopers LLP. In
accordance with generally accepted auditing standards, MMR's
independent public accountants, Arthur Andersen LLP, have
developed an overall understanding of our accounting and
financial controls and have conducted other tests as they
consider necessary to support their opinion on the financial
statements.
The Board of Directors, through its Audit Committee composed
solely of non-employee directors, is responsible for overseeing
the integrity and reliability of MMR's accounting and financial
reporting practices and the effectiveness of its system of
internal controls. Arthur Andersen LLP and
PricewaterhouseCoopers LLP meet regularly with, and have access
to, this committee, with and without management present, to
discuss the results of their audit work.
James R. Moffett Richard C. Adkerson Robert M.Wohleber
Co-Chairman of Co-Chairman of the Board, Executive Vice President and
the Board President and Chief Financial Officer
Chief Executive Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF McMoRan EXPLORATION
CO.:
We have audited the accompanying balance sheets of McMoRan
Exploration Co. (a Delaware Corporation) as of December 31, 1998
and 1997 and the related statements of operations, cash flow and
changes in stockholders' equity for each of the three years in
the period ended December 31, 1998. 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 financial statements referred to above
present fairly, in all material respects, the financial position
of McMoRan Exploration Co. as of December 31, 1998 and 1997 and
the results of its operations and its cash flow for each of the
three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
New Orleans, Louisiana
January 19, 1999
28
McMoRan EXPLORATION CO.
BALANCE SHEETS
December 31,
--------------------
1998 1997
-------- --------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 17,816 $ 29,149
Accounts receivable:
Customers 21,136 3,167
Joint interest participants 6,939 10,070
Other 4,001 -
Inventories:
Material and supplies 9,105 -
Product 5,810 -
Deferred tax asset 3,166 -
Prepaid expenses 1,596 828
-------- --------
Total current assets 69,569 43,214
-------- --------
Property, plant and equipment 214,406 68,585
Less accumulated depreciation and
amortization (27,269) (10,880)
-------- --------
187,137 57,705
-------- --------
Deferred tax asset 31,834 -
Goodwill (net of accumulated
amortization of $144,000) 18,078 -
Other assets 13,770 169
-------- --------
Total assets $320,388 $101,088
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,549 $ 5,466
Accrued liabilities 13,895 3,999
Current portion of abandonment, reclamation
and mine shutdown reserves 6,536 -
Other 609 -
-------- --------
Total current liabilities 48,589 9,465
Abandonment, reclamation and mine
shutdown reserves 60,047 584
Other liabilities 32,952 341
Stockholders' equity:
Preferred stock, par value $0.01, 50,000,000
shares authorized and unissued - -
Common stock, par value $0.01, 150,000,000
shares authorized,14,080,033 shares and
42,740,476 shares issued and
outstanding, respectively 141 427
Capital in excess of par value of common stock 247,010 140,506
Accumulated deficit (68,351) (50,235)
-------- --------
178,800 90,698
-------- --------
Total liabilities and stockholders' equity $320,388 $101,088
======== ========
The accompanying notes are an integral part of these financial
statements.
29
McMoRan EXPLORATION CO.
STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------
1998 1997 1996
-------- ------- -------
(In Thousands, Except
Per Share Amounts)
Revenues $ 45,902 $ 13,552 $ 4,070
Costs and expenses:
Production and delivery costs 27,728 1,180 759
Depreciation and amortization 17,733 10,071 741
Exploration expenses 14,533 12,380 9,818
General and administrative
expenses 5,679 2,114 2,635
Gain on sale of oil and
gas properties (447) (2,289) -
-------- -------- -------
Total costs and expenses 65,226 23,456 13,953
-------- -------- -------
Operating loss (19,324) (9,904) (9,883)
Interest expense (238) (1,272) (403)
Other income, net 1,446 638 424
-------- -------- -------
Net loss $(18,116) $(10,538) $(9,862)
======== ======== =======
Basic and diluted net loss
per share $ (1.96) $ (2.80) $ (3.55)
======== ======== =======
Basic and diluted average
shares outstanding 9,230 3,769 2,779
======== ======== =======
The accompanying notes are an integral part of these financial
statements.
30
McMoRan EXPLORATION CO.
STATEMENTS OF CASH FLOW
Years Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
Cash flow from operating activities:
Net loss $(18,116) $(10,538) $ (9,862)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 17,733 10,071 741
Exploration expenses 14,533 12,380 9,818
Gain on sale of oil and gas properties (447) (2,289) -
Change in assets and liabilities, net of
effects of acquisitions:
(Increase) decrease in working capital:
Accounts receivable 10,291 (11,367) (868)
Accounts payable and accrued liabilities (1,120) (1,305) 6,954
Inventories, prepaid expense and other 585 (617) (35)
Other 2,753 153 (85)
-------- -------- --------
Net cash provided by (used in)
operating activities 26,212 (3,512) 6,663
-------- -------- --------
Cash flow from investing activities:
Exploration and development expenditures (49,750) (33,677) (20,678)
Purchase of producing properties (5,037) (26,005) -
Cash and cash equivalents acquired from FSC,
net of Merger costs 17,699 - -
Proceeds from joint venture arrangements,
property sales and other 157 2,382 2,059
-------- -------- --------
Net cash used in investing activities (36,931) (57,300) (18,619)
-------- -------- --------
Cash flow from financing activities:
Merger costs and other (907) - -
Proceeds from exercise of stock options 293 - -
Net proceeds from rights offering - 92,217 -
Proceeds from production loan - 13,520 12,927
Payments on production loan - (26,276) (794)
-------- -------- --------
Net cash provided by (used in)
financing activities (614) 79,461 12,133
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (11,333) 18,649 177
Cash and cash equivalents at beginning of year 29,149 10,500 10,323
-------- -------- --------
Cash and cash equivalents at end of year $ 17,816 $ 29,149 $ 10,500
======== ======== ========
Interest paid $ 238 $ 1,272 $ 304
======== ======== ========
The accompanying notes, which include information in Notes 2, 3,
6, 7, 8 and 9 regarding noncash transactions, are an integral
part of these financial statements.
31
McMoRan EXPLORATION CO.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
Capital in
Excess
Preferred Common of Par Accumulated
Stock Stock Value Deficit Total
------- ------ -------- -------- --------
Balance at January 1, 1996 $ - $ 138 $ 47,302 $(29,835) $ 17,605
Stock payments to CLK, stock
option exercises and other - 2 501 - 503
Net loss - - - (9,862) (9,862)
------- ------ -------- -------- --------
Balance at December 31, 1996 - 140 47,803 (39,697) 8,246
Shares issued in rights offering- 286 91,931 - 92,217
Stock payments to CLK, stock
option exercises and other - 1 772 - 773
Net loss - - - (10,538) (10,538)
------- ------ -------- -------- --------
Balance at December 31, 1997 - 427 140,506 (50,235) 90,698
Effective five to one reverse stock
split resulting from the Merger - (342) 342 - -
Shares issued to FSC shareholders
in the Merger - 55 105,695 - 105,750
Stock payments to CLK, stock option
exercises and other, net of
Merger acquisition costs of
$0.9 million - 1 467 - 468
Net loss - - - (18,116) (18,116)
------- ------ -------- -------- --------
Balance at December 31, 1998 $ - $ 141 $247,010 $(68,351) $178,800
======= ====== ======== ======== ========
The accompanying notes are an integral part of these financial
statements.
32
McMoRan EXPLORATION CO.
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
Background. McMoRan Exploration Co. (MMR), a Delaware
corporation, became a publicly traded entity on November 17, 1998
when McMoRan Oil & Gas Co. (MOXY) and Freeport-McMoRan Sulphur
Inc. (FSC) combined their respective operations (the Merger). In
the Merger, FSC's shareholders received 0.625 MMR common shares
for each FSC outstanding common share or a total of 5.5 million
MMR shares, while MOXY's shareholders received 0.20 MMR common
shares for each MOXY outstanding common share, or a total of 8.6
million MMR common shares. MMR's Board of Directors and executive
management include former members of the Boards of Directors and
executive management of both MOXY and FSC.
Basis of Presentation. The Merger is reflected in the
accompanying financial statements using the purchase method of
accounting, with MOXY as the acquiring entity. Accordingly, these
financial statements reflect historical assets, liabilities,
revenues and expenses attributable to MOXY as the predecessor of
MMR and all subsequent references to MMR for the period prior to
the Merger refer to the oil and gas operations previously
conducted by MOXY. Operating results of the acquired assets are
included since November 17, 1998. Prior years' earnings per
share, weighted average shares outstanding and certain stock
option information have been restated to reflect the effective
reverse stock split of MOXY's shares resulting from the Merger.
The assets acquired and liabilities assumed from FSC have been
recorded at estimated fair values using independent appraisals
where available (Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation. Investments in joint ventures and
partnerships are reflected in the accompanying financial
statements using the proportionate consolidation method in
accordance with standard industry practice.
Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in these financial statements and the
accompanying notes. The more significant estimates include
useful lives for depreciation and amortization, valuation
allowances for deferred tax assets, reclamation and environmental
obligations, postretirement and other employee benefits, and
estimates of proved oil, gas and sulphur reserves and related
future cash flows. Actual results could differ from those
estimates.
Cash and Cash Equivalents. Highly liquid investments purchased
with a maturity of three months or less are considered cash
equivalents.
Inventories. Inventories are stated at the lower of average cost
or market.
Property, Plant and Equipment.
Oil and Gas. MMR follows the successful efforts method of
accounting for its oil and gas exploration and development
activities. Costs of exploratory wells are capitalized if the
wells find proved reserves and otherwise are expensed. Costs of
leases, productive exploratory wells and development activities
are also capitalized. Other exploration costs are expensed.
Depreciation and amortization are determined on a field-by-field
basis using the unit-of-production method. Gains or losses are
included in earnings when properties are sold.
Sulphur. MMR's sulphur property, plant and equipment are carried
at cost, which includes the estimated fair values of assets
acquired in the Merger (Note 3) together with subsequent
expenditures for improvements which extend the lives of the
related assets. Depreciation for sulphur mining and production
assets, including mineral interests, is determined using the
unit-of-production method based on estimated recoverable
reserves. Other sulphur-related assets are depreciated on a
straight line basis over estimated lives of 15 to 20 years for
buildings and 5 to 15 years for machinery and equipment.
Other. Other property, plant and equipment are carried at cost
less salvage value and are depreciated on a straight-line basis
over their useful life or 5 years whichever is less.
When events or circumstances indicate that asset carrying
amounts may not be recoverable, a reduction of the carrying
amount of long-lived assets to fair value is required.
Measurement of the impairment loss is based on the fair value of
the asset. Generally, MMR determines fair value using valuation
techniques such as expected future cash flows. No impairment
losses are reflected in the accompanying financial statements.
33
Financial Instruments and Contracts. The carrying amounts of
receivables, other current assets and accounts payable reported
in the balance sheet approximate fair value. MMR currently does
not hedge or otherwise enter into price protection contracts for
its principal products, although in April 1998, FSC entered into
a price protection program for its anticipated 1998 natural gas
purchase requirements. Under the terms of the contract,
commencing in May 1998 MMR began purchasing 450,000 million
British thermal units (mmbtu) of natural gas per month
(representing approximately 75 percent of Main Pass' natural gas
purchases) for $2.175 per mmbtu. The contract also granted the
supplier the option to put 450,000 mmbtu per month to MMR at a
price of $2.175 per mmbtu during 1999. The estimated fair market
value of this contract was an approximate $1.1 million loss at
December 31, 1998 which was included in the purchase price
determination (see Note 3). This loss, adjusted for any
subsequent changes in fair market value, will be recognized in
earnings during 1999.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging
Activity," which establishes accounting and reporting standards
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its
fair value. SFAS 133 is effective for fiscal years beginning
after June 15, 1999 with earlier application permitted. MMR has
not adopted SFAS 133 and its adoption is expected to have little
or no impact on its future financial position.
Environmental Remediation and Compliance. MMR incurs significant
costs for environmental programs and projects. Expenditures
pertaining to future revenues from operations are capitalized.
Expenditures resulting from the remediation of conditions caused
by past operations that do not contribute to future revenue
generation are expensed. Liabilities are recognized for remedial
activities when the efforts are probable and the costs can be
reasonably estimated.
Estimated future expenditures to restore properties and
related facilities to a condition that complies with
environmental and other regulations are accrued over the life of
the properties. These future expenditures are estimated based on
current costs, laws and regulations. At December 31, 1998, MMR
had $66.6 million in accrued abandonment and restoration costs.
This total includes $41.8 million for the fully accrued estimated
abandonment costs associated with its non-operating sulphur
assets and the Culberson mine, which is expected to cease
operations by the end of the second quarter of 1999, offset by
$9.7 million in Other Assets, which will be reimbursed by a third
party. Additionally, at December 31, 1998 MMR had fully accrued
the estimated abandonment costs of Main Pass' oil operations
totaling $7.0 million. MMR's share of abandonment and restoration
costs associated with its Main Pass sulphur mine and related
facilities and its other oil and gas properties are currently
estimated to total approximately $59.5 million and $7.6 million,
with $14.8 million and $3.0 million being accrued, respectively,
at December 31, 1998. These estimates are by their nature
imprecise and can be expected to be revised over time because of
changes in government regulations, operations, technology and
inflation.
Earnings Per Share. Historical MMR Earnings Per Share (EPS) data
has been restated to reflect the effective reverse stock split
resulting from the Merger. Basic net loss per share was
calculated by dividing net loss applicable to common stock by the
weighted average number of common shares outstanding during the
year. MMR had outstanding options representing approximately
164,000 shares in 1998, 125,000 shares in 1997, and no shares in
1996 that have been excluded from the calculation of diluted EPS
as these options would be anti-dilutive considering the net
losses incurred during the years presented.
Outstanding options to purchase approximately 813,000 shares
at an average exercise price of $19.31 in 1998, 428,000 shares at
an average exercise price of $18.30 in 1997 and 173,000 shares at
an average exercise price of $21.50 in 1996 were excluded from
the diluted EPS calculation because these exercise prices were
greater than the average market price of MMR's common shares for
the years presented.
3. ACQUISITIONS
As a result of the Merger, MMR acquired FSC, a business engaged
in the mining, purchasing, transporting, terminaling, and
marketing of sulphur and the production of related oil reserves.
The purchase price ($109.1 million) was based on the market value
of FSC's stock at the time the Merger was announced plus related
Merger costs. The excess purchase price over the estimated fair
value of the net assets acquired was allocated to goodwill, which
is being amortized on a straight-line basis over the estimated
average remaining lives of the assets acquired (30 years). The
preliminary purchase price allocation, which is subject to
adjustment when additional valuation information is obtained, is
as follows (in thousands):
34
Current assets $ 59,182a
Property, plant and equipment 104,684
Deferred tax asset 35,000
Goodwill 18,222
Current liabilities (26,484)b
Reclamation and mine shutdown reserves (net) (53,939)a
Other long-term liabilities and assets (net) (27,609)
---------
Investment in FSC $ 109,056
=========
a.Includes all reclamation and mine shutdown reserves offset by
a $0.1 million current receivable and a $9.6 million long-term
receivable, which represents a third party obligation to
reimburse MMR for costs.
b.Excludes current portions of reclamation and mine shutdown
reserves totaling $8.8 million.
The following unaudited selected pro forma information
presents the results of operations of MMR as if the Merger had
occurred on January 1, 1997 and as if MMR's property acquisitions
described in Notes 4 and 5 had occurred January 1, 1996. These
unaudited pro forma results of operations have been prepared for
informational purposes only and do not necessarily indicate the
results of operations that actually would have occurred had the
acquisitions taken place on these dates, or which may result in
the future.
Years Ended December 31,
---------------------------
1998 1997 1996
--------- --------- -------
(In Thousands)
Revenues $ 198,324 $ 230,516 $ 9,046
Net loss (9,966) (9,247) (8,784)
Basic and diluted net loss per share (0.71) (0.66) (1.05)
4. RIGHTS OFFERING AND EXPLORATION AGREEMENTS
In November 1997, MMR received net proceeds of $92.2 million
from the sale of 28.6 million shares of common stock at $3.50 per
share (equivalent to approximately 5.7 million MMR common stock
shares at $17.50 per share, as adjusted to reflect the effects of
the Merger) under the terms of a rights offering to existing
shareholders (the Rights Offering). The proceeds included $13.5
million from Phosphate Resource Partners Limited Partnership
(PLP) (see Note 5). MMR used approximately $44.5 million of the
Rights Offering proceeds to purchase from PLP certain assets of,
and to repay borrowings under, a previous exploration program
with MCN Energy Group Inc. (MCN) (the MCN Program). MMR used the
remaining portion of the Rights Offering proceeds to fund a
portion of its share of an aggregate $210 million, multi-year oil
and gas exploration program to explore and develop prospects
primarily offshore in the Gulf and onshore in the Gulf Coast
region (the Exploration Program). PLP and MMR contributed all of
their joint interests in exploration properties formerly part of
the MCN Program and certain other properties to the Exploration
Program. Under this program most exploration expenses are shared
56.4 percent by PLP, 37.6 percent by MMR and 6 percent by Mr.
Gerald J. Ford , an individual investor who is a director of MMR
(see Note 5), with other costs and revenues shared 47 percent by
PLP, 48 percent by MMR and 5 percent by Mr. Ford.
5. TRANSACTIONS WITH AFFILIATES
Management Services. FM Services Company (FMS) provides certain
management and administrative services to MMR including
technical, administrative, accounting, financial, tax and other
services under a management services agreement. The costs of
these services, which include related overhead, were allocated to
MMR on a cost reimbursement basis which totaled $4.3 million in
1998. Prior to the Merger MMR owned 25 percent of FMS.
Effective with the Merger, MMR now owns 45 percent of FMS.
During 1997 and 1996 FMS provided services for a fixed annual fee
of $1 million. Management believes the costs for these services
do not differ materially from the costs that would have been
incurred had the relevant personnel providing the services been
employed directly by MMR during 1998.
Property Purchase. In September 1997, MMR purchased for $4.5
million all of the oil and gas interests owned by Stratus
Properties Inc. (STRS), a publicly traded company affiliated with
MMR at the time of the sale because it shared common management
and a common director. These properties, which included three
exploration prospects representing $3.0 million of the purchase
price and numerous property interests, are located offshore in
the Gulf of Mexico and in various onshore areas of the United
States. The acquisition cost of the three exploration properties
were shared 60 percent by PLP and 40 percent by MMR and were
included in the Exploration Program.
Phosphate Resource Partners Limited Partnership. As discussed in
Note 4 in November 1997, PLP purchased approximately 9 percent or
3.9 million of MMR's total shares (equivalent to approximately
5.5 percent or 770,000 of
35
MMR's post Merger total shares) for
$13.5 million in fulfillment of its commitment to purchase any
shares relating to unexercised rights from the Rights Offering
(the Stand-By Commitment). In August 1997, PLP purchased MCN's
interest in the Vermilion Blocks 160 and 410 oil and gas fields
($24.5 million), and assumed the then outstanding debt owed by
MMR under the MCN Program ($20.0 million). MMR paid PLP a $6.0
million Stand-By Commitment fee for acquiring and holding these
assets until completion of the Rights Offering, entering into the
Stand-By Commitment and agreeing to enter the Exploration
Program. For further discussion of certain litigation with PLP
see Note 9.
Program Participant. Effective December 15, 1997, Mr. Gerald J.
Ford, an individual investor elected to MMR's Board of Directors
in January 1998, became an individual participant in the
Exploration Program. Through December 31, 1998, Mr. Ford has
paid $4.0 million for his proportionate share of Exploration
Program and related development costs incurred.
6. PROPERTY, PLANT AND EQUIPMENT
MMR's property, plant and equipment was associated solely with
its oil and gas exploration and development activities prior to
the Merger and includes the acquisition of FSC's assets
thereafter. The components of net property, plant and equipment
follow (in thousands):
December 31,
--------------------
1998 1997
--------- --------
Buildings and facilities, other than oil and gas $ 42,598 $ -
Oil and gas exploration and development costs 108,212 68,085
Transportation and terminaling 62,034 -
Other 1,562 500
--------- --------
Property, plant and equipment 214,406 68,585
Accumulated depreciation and amortization (27,269 (10,880)
--------- --------
Property, plant and equipment, net $ 187,137 $ 57,705
========= ========
7. EMPLOYEE BENEFITS
Pension Plans and Other Benefits. MMR's defined benefit plan
assets and liabilities and related costs prior to the Merger were
immaterial due to its limited number of employees. In connection
with the Merger MMR acquired FSC's defined benefit plan and
merged its plan into FSC's. At December 31, 1998 substantially
all employees are covered by MMR's defined benefit plan. Under
the plan, MMR credits each participant's account annually with at
least 4 percent of the participant's qualifying compensation.
Additionally, interest is credited annually to each participant's
account balance. MMR funds its respective pension liability in
accordance with Internal Revenue Service guidelines.
Additionally, for those employees in the qualified defined
benefit plan whose benefits are limited under federal income tax
laws, MMR sponsors an unfunded, nonqualified plan. MMR, as a
result of the Merger, also provides certain health care and life
insurance benefits (Other Benefits) for retired employees. MMR
has the right to modify or terminate these benefits. Information
on the MMR plans for 1998 follows (dollars in thousands):
Pension Other
Benefits Benefits
--------- -------
Change in benefit obligation:
Acquisition of FSC $ (10,860) $(1,856)
Service cost (60) (9)
Interest cost (60) (10)
Actuarial gain (losses) 613 (78)
Benefits paid 1 -
--------- -------
Benefit obligation at end of year (10,366) (1,953)
--------- -------
Change in plan assets:
Acquisition of FSC 14,714 -
Actual return on plan assets 593 -
Benefits paid (1) -
--------- -------
Fair value of plan assets at end of year 15,306 -
--------- -------
Funded status 4,940 (1,953)
Unrecognized net acturial (gain) loss (1,095) 78
--------- -------
Prepaid (accrued) benefit cost $ 3,845 $(1,875)
--------- -------
Weighted-average assumptions:
Discount rate 6.75 6.75
Expected return on plan assets 9.00 -
Rate of compensation increase 4.25 -
36
The initial health care cost trend rate used for the other
benefits was 7.5 percent for 1998, decreasing 0.5 percent per
year until reaching 5.0 percent. Based on the current plan
provisions, a change in the trend rate would have no material
impact. The components of net periodic benefit cost for MMR's
plans during 1998 follow (in thousands):
Pension Other
Benefits Benefits
-------- --------
Service cost $ 60 $ 9
Interest cost 60 10
Expected return on plan assets (112) -
-------- -------
Net periodic benefit cost $ 8 $ 19
======== =======
MMR has a savings plan under Section 401(k) of the Internal
Revenue Code. The plan allows eligible employees to contribute
up to 20 percent of their pre-tax compensation. MMR matches 100
percent of the first 5 percent of the employees' contribution,
with such matching amounts vesting after 5 years of service, the
amounts of which were inmaterial for the three years ended
December 31, 1998. MMR has other employee benefit plans, certain
of which are related to MMR's performance, which costs are
recognized currently in general and administrative expense.
Stock Options. Prior to the Merger, both MOXY and FSC had
outstanding non-qualified stock options and MOXY had outstanding
stock appreciation rights (collectively stock-based awards)
previously granted under certain MOXY and FSC benefit plans.
Pursuant to the Merger, all outstanding stock based awards were
cancelled and substituted with MMR stock options granted under
the MMR Adjusted Stock Award Plan (MMR Adjusted Plan).
The MMR Adjusted Plan issued stock options on the same basis
as the MMR common shares were distributed to the former MOXY and
FSC shareholders upon consummation of the Merger. Accordingly,
for each MOXY and FSC stock-based award outstanding at the Merger
date, MMR stock options were granted in amounts and with exercise
prices equal to the previous MOXY and FSC awards, as adjusted to
reflect the Merger. Each MMR stock option has the same vesting
schedule, expiration date and substantially the same terms and
conditions as the original MOXY and FSC stock-based awards. If
however, at any time within two years of the Merger the former
directors of either MOXY or FSC do not comprise a majority of the
MMR board of directors, subject to certain exceptions, then the
MMR options substituted to either MOXY or FSC, depending upon
whose directors' representation is not in the majority, will
become fully exercisable.
In November 1998, the MOXY and FSC shareholders approved the
MMR 1998 stock option plan (the 1998 Plan) in connection with the
Merger. The 1998 Plan is authorized to grant options representing
up to 775,000 MMR common shares. At December 31, 1998 there had
been no grants under the 1998 Plan. Generally stock options
granted will be exercisable in 25 percent annual increments
beginning one year from the date of grant and will expire 10
years after the date of grant. A summary of stock options
outstanding (with prior years' outstanding MOXY options adjusted
to reflect the effective reverse stock split as a result of the
Merger) follows:
1998 1997 1996
------------------- ------------------- -----------------
Average Average Average
Number of Option Number of Option Number of Option
Options Price Options Price Options Price
--------- -------- --------- -------- -------- -------
Beginning of year 1,021,227 $15.80 427,939 $19.40 451,566 $19.60
Granted 65,500 24.95 469,546 17.95 4,981 12.70
Issued to FSC
optionholders 464,784 17.87 - - - -
Adjustments - 156,449 -
Exercised (19,885) 15.23 (6,932) 16.40 (116) 15.15
Expired/forfeited (29,742) 17.70 (25,775) 17.70 (28,492) 21.65
--------- --------- -------
End of year 1,501,884 16.82 1,021,227 15.80 427,939 19.40
========= ========= =======
In July 1997, pursuant to a new stock option plan approved
by Board of Directors, options exercisable over a four-year
period to purchase 390,800 equivalent MMR common shares were
granted to certain officers, employees, and others. All the
options were granted at the July 1997 market price of $18.13.
MMR's shareholders approved the new stock option plan and
subsequent grants in October 1997. As a result of the difference
between July's market price and the market price of $21.35
following the shareholders' approval, MMR is amortizing a $1.3
million non-cash charge over the four year vesting period.
Summary information of fixed stock options outstanding at
December 31, 1998 follows:
37
Options Outstanding Options Exercisable
-------------------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Option Number Option
Range of Exercise Prices of Options Life Price Of Options Price
- ------------------------ --------- --------- -------- --------- -------
$9.44 to $13.89 414,970 5.2 years $ 11.81 330,080 $ 11.97
$14.20 to $21.01 1,019,374 6.9 years 18.33 561,125 18.26
$21.70 to $25.31 67,540 8.9 years 24.75 9,865 22.16
--------- ---------
1,501,884 901,070
========= =========
MMR has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock Based Compensation," and continues to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting
for its stock-based compensation plans. Accordingly, no
compensation cost has been recognized for MMR's fixed stock
option grants except as discussed above. Had compensation cost
for MMR's fixed stock option grants been determined based on the
fair value at the grant dates for awards under those plans
consistent with SFAS 123, MMR's pro forma net loss would have
increased by $3.0 million to $21.1 million ($2.29 per share) in
1998, $1.1 million to $11.6 million ($3.08 per share) in 1997 and
$0.2 million to $10.1 million ($3.63 per share) in 1996. For the
pro forma computations, the fair values of the fixed option
grants were estimated on the dates of grant using the Black-
Scholes option pricing model. The weighted average fair value
for fixed stock option grants as adjusted for the effects of the
Merger were $7.89 per option in 1998, $14.45 per option in 1997,
$8.45 per option in 1996. The weighted average assumptions used
include a risk-free interest rate of 5.3 percent in 1998 and 6.6
percent in 1997 and 1996, with expected volatility of 47 percent
in 1998, 67 percent in 1997 and 45 percent in 1996 and expected
lives of 10 years. The pro forma effects on net income are not
representative of future years because they do not take into
consideration grants made prior to 1995. No other discounts or
restrictions related to vesting or the likelihood of vesting of
fixed stock options were applied.
8. INCOME TAXES
At December 31, 1997, MMR had $30.2 million of net deferred tax
assets resulting from temporary differences related to its
exploration activities. MMR provided a valuation allowance equal
to these tax assets because of its expectation of continuing to
incur losses at that time. MMR recorded a $35.0 million net
deferred tax asset pursuant to SFAS 109, "Accounting for Income
Taxes," upon the acquisition of FSC's assets (see Note 3). MMR's
results of operations are highly dependent upon oil, gas and
sulphur prices and production quantities, which may vary from
estimates. MMR has evaluated the realizability of the net
deferred tax asset in light of estimates of production
quantities, oil, gas and sulphur prices and the level of expected
future expenses. Although MMR currently believes that these net
deferred tax assets more likely than not will be realized through
future earnings and/or tax planning strategies, changes in
estimates of projected operating results could result in changes
in the amount of deferred tax assets considered realizable. The
pre-tax losses for each of the three years ending December 31,
1998 ordinarily would create accompanying income tax benefits
approximating the applicable statutory rates. However, these
benefits were not recognized as a result of MMR's evaluation of
the realizability of its net deferred tax assets for each of the
years presented. Recognition of future tax benefits resulting
from reduction of the valuation allowance relating to the FSC
acquisition will reduce any related goodwill remaining at that
time, while other changes in the valuation allowance will be
charged to earnings. The components of MMR's deferred taxes at
December 31, 1998 and 1997 follow (in thousands):
December 31,
--------------------
1998 1997
-------- --------
Net operating loss carryforwards (expire 2006-2018) $ 43,157 $ 21,559
Capital loss carryforwards (expire 1999) 4,924 5,511
Property, plant & equipment 29,714 2,111
Reclamation and shutdown reserves 19,060 613
Deferred compensation, postretirement
and pension benefits 3,650 -
Goodwill 3,529 -
Other 957 371
Less valuation allowance (69,991) (30,165)
-------- --------
Net deferred tax asset $ 35,000 $ -
======== ========
38
9. COMMITMENTS AND CONTINGENCIES
Credit Facilities. MMR has two separate credit facilities in
place, providing for aggregate borrowings of up to $120 million,
subject to certain restrictions. As a result of the Merger, MMR
assumed a $100 million variable rate revolving credit facility
with a group of banks previously established by FSC. The
variable rate facility matures in December 2002, provides
specified cash flows to interest coverage and maximum allowable
debt to cash flow levels for MMR's sulphur subsidiary. The
facility is subject to a negative pledge on MMR's sulphur assets.
Facility fees on the unused amount are variable, with a minimum
of 0.2 percent annually. In August 1998, MMR entered into a one-
year, unsecured variable rate $15 million line of credit with a
group of banks. Under the terms of the facility, MMR is able to
increase the size of the facility to $20 million and extend the
term for two additional years, subject to certain conditions,
including providing security for the facility. Borrowings under
the facility are subject to a borrowing base redetermined
semiannually. There were no amounts outstanding under either of
these facilities at December 31, 1998. At December 31, 1998, MMR
had an aggregate cash and bank credit availability, subject to
certain conditions, of approximately $90 million.
Commitments. At December 31, 1998, MMR had actual and probable
1999 commitments for drilling and related expenditures of
approximately $12.9 million. Additionally, MMR has a contract
with CLK Company L.L.C. (CLK), a company independently owned by
its employees, to provide geological and geophysical services to
MMR on an exclusive basis. The contract provides for an annual
retainer fee of $2.2 million ($0.5 million of the annual fee paid
in MMR common stock, recorded at fair market value), plus certain
expenses and a 3 percent overriding royalty interest in prospects
accepted by MMR. Cost of services provided by CLK, totaled $2.6
million in 1998, $3.0 million in 1997 and $3.1 million in 1996.
Long-term Contracts and Operating Leases. MMR's minimum annual
contractual charges under non-cancelable long-term contracts and
operating leases total $176.9 million, with $18.7 million in
1999, $13.5 million in 2000, $13.5 million in 2001, $13.5 million
in 2002, $13.5 million in 2003 and $104.2 million thereafter.
These operating lease payments are primarily associated with MMR
leasing the services of an additional tanker to enhance its
sulphur marine transportation services.
Other Liabilities. FSC has a liability to IMC Global Inc. (IGL)
for a portion of IGL's postretirement benefits costs relating to
certain retired employees of FSC. At December 31, 1998 the
liability was estimated to total $14.9 million, including $3.4 in
current liabilities. Future changes to this estimate because of
changes in assumptions or actual results varying from projected
results will be recorded in earnings.
Additionally, FSC has a liability to Pennzoil Company
arising from FSC's previous acquisition of Pennzoil's sulphur
division, including the Culberson mine in west Texas. The
quarterly payments are based on the average market price of
sulphur for a given quarter, which also determines what assumed
volume would be produced during that specific quarter. Under the
terms of the agreement FSC will continue to make the required
quarterly payments to Pennzoil until the earlier of 2015 or the
quarter in which the cumulative assumed volume of production
exceeds 18.6 million long tons of sulphur. The estimated future
installment payments, based on estimated long-term sulphur
prices, were recorded in MMR's accrued long-term liabilities.
The installment payments may be terminated earlier either by FSC,
beginning on January 1, 1999 and each subsequent third
anniversary of that date through the exercise of a $65 million
call option or by Pennzoil, within a defined time period after
each option date, through the exercise of a $10 million put
option.
Litigation. In May 1998, IGL, the managing partner of PLP, and
PLP filed suit against four former directors of Freeport-McMoRan
Inc. (FTX) and MOXY. A second suit was filed subsequently on
behalf of a purported class of plaintiffs who own depository
units of PLP naming the same defendants as above as well as IGL
and PLP. The plaintiffs in both cases allege the defendants
breached their fiduciary duties in the approval of the
Exploration Program. The plaintiffs seek unspecified monetary
damages and recission or equitable reformation of the Exploration
Program agreement. PLP continues to participate in the
Exploration Program pursuant to its contractual agreements and is
current on payments due on its joint interest billings. MMR
believes that these suits are without merit and intends to
vigorously defend itself and enforce its contract rights.
On October 22, 1998, a plaintiff purporting to represent a
class of public stockholders of FSC filed a compliant against
FSC, certain directors or officers of FSC and MOXY. A second
class action suit was filed on December 15, 1998 naming the same
individual directors as above and MMR as defendants. These
lawsuits were later consolidated into one suit on January 13,
1999. The plaintiffs allege that the individual defendants
breached their fiduciary duties in structuring the Merger in a
manner unfair to former FSC shareholders and failed to obtain the
true value of FSC. The plaintiffs also allege that MOXY aided
and abetted the alleged breach of fiduciary duties. The
plaintiffs seek damages and other relief. MMR believes that this
suit is without merit and intends to vigorously defend itself.
39
Environmental. MMR has made, and will continue to make,
expenditures for the protection of the environment. MMR is
subject to contingencies as a result of environmental laws and
regulations. Increased emphasis on environmental matters could
affect present and future environmental laws and regulations
applicable to MMR's operations which could require substantial
capital expenditures or could adversely affect its operations in
other ways that cannot be accurately predicted at this time.
10. BUSINESS SEGMENTS
MMR has adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," which requires that
companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring
their performance. MMR had only one operating segment until the
Merger, when it acquired FSC's sulphur assets. Oil and gas are
produced at the Vermilion Block 160 field unit, located 42 miles
offshore Louisiana. Gas is produced at the Vermilion Block 410
field, located 115 miles offshore Louisiana and oil is produced
at Main Pass from the same geologic formation that holds the
deposit's sulphur. Frasch sulphur is produced at the Main Pass
mine located 32 miles offshore Louisiana and the Culberson mine
in west Texas. The sulphur business segment also includes an
extensive logistics network, including sulphur terminaling and
transportation assets, and purchases of recovered sulphur.
A significant portion of the sulphur produced or purchased
is sold to the IMC-Agrico Joint Venture (IMC-Agrico), a chemical
fertilizer producer jointly owned by IGL and PLP, under a long-
term supply contract that extends for as long as IMC-Agrico has a
requirement for sulphur. Sales to IMC-Agrico totaled 35.9
percent of MMR's total revenues or 68.4 percent of sulphur sales,
for the 1998 period after the Merger. As a percentage of total
customer accounts receivable, the receivable from IMC-Agrico
totaled 56.6 percent or 64.6 percent of the sulphur customer
receivables at December 31, 1998. During the second half of 1998
oil produced from the Main Pass facility was sold to AMOCO
Production Company exclusively under a sales contract, which has
been extended through June 30, 1999. Oil and gas production is
sold to various U.S. purchasers, including one gas purchaser
comprising over 90 percent of total gas revenue. No other single
customer accounted for greater than 10 percent of the total
revenues in 1996 through 1998. All of MMR's customers are
currently located in the United States.
Sulphur Oil & Gas Other Total
-------- -------- -------- ---------
(In Thousands)
1998
Revenues $ 24,276 $ 21,626 $ - $ 45,902
Production and delivery 23,096 4,632 - 27,728
Depreciation and amortization 573 17,160 - 17,733
Exploration expense - 14,533 - 14,533
General and administrative
expense 1,267 4,412 - 5,679
Gain on sale of property - (447) - (447)
-------- -------- ------- ---------
Operating loss (660) (18,664) - (19,324)
Interest expense (50) (188) - (238)
Interest and other income 132 1,314 - 1,446
-------- -------- ------- ---------
Net loss $ (578) $(17,538) $ - $ (18,116)
======== ======== ======== =========
Capital expenditures, net $ 3,087 $ 51,543 $ - $ 54,630
======== ======== ======== =========
Total assets $190,310 $ 90,485 $ 39,593a $ 320,388
======== ======== ======== =========
(a)Represents assets held by theparent company, the most significant of
which include MMR's deferred tax assets and certain prepaid pension benefits.
11. SUPPLEMENTARY OIL AND GAS INFORMATION
MMR's oil and gas exploration, development and production
activities are conducted in the offshore Gulf of Mexico and
onshore Gulf Coast areas of the United States. Supplementary
information presented below is prepared in accordance with
requirements prescribed by SFAS 69.
40
Oil and Gas Capitalized Costs.
Years Ended
December 31,
---------------------
1998 1997
-------- --------
(In Thousands)
Unevaluated properties $ 5,953 $ 14,856
Evaluated 102,259 53,229
-------- --------
Subtotal 108,212 68,085
Less accumulated depreciation
and amortization (26,941) (10,880)
-------- --------
Net oil and gas properties $ 81,271 $ 57,205
======== ========
Costs Incurred in Oil and Gas Property Acquisition, Exploration
and Development Activities.
Years Ended December 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
Acquisition of properties:
Proved $ 5,037 $ 26,005 $ -
Unproved 103 3,332 2,499
Exploration costs 19,006 20,551 11,672
Development costs 27,554 9,794 6,507
-------- -------- --------
$ 51,700 $ 59,682 $ 20,678
======== ======== ========
Proved Oil and Gas Reserves (Unaudited). Proved oil and gas
reserves at December 31, 1998 have been estimated by independent
petroleum engineers in accordance with guidelines established by
the Securities and Exchange Commission (SEC). Thus, the
following reserve estimates are based upon existing economic and
operating conditions; they are only estimates and should not be
construed as being exact. Substantially all of MMR's proved
reserves, including the 3,668,000 barrels of oil acquired at Main
Pass, are located in offshore United States waters. Oil,
including condensate and plant products, is stated in thousands
of barrels and natural gas is in millions of cubic feet.
Oil Gas
------------------- -----------------------
1998 1997 1996 1998 1997 1996
----- ---- ---- ------ ------ ------
Proved reserves:
Beginning of year 463 168 94 40,234 16,054 8,521
Revisions of previous estimates 14 1 31 4,111 38 1,155
Discoveries and extensions 68 195 72 18,788 21,481 7,009
Production (304) (34) (29) (8,634) (4,061) (631)
Sale of reserves - (17) - - (3,307) -
Purchase of reserves 3,755 150 - 3,962 10,029 -
----- ---- ---- ------ ------ ------
End of year 3,996 463 168 58,461 40,234 16,054
===== ==== ==== ====== ====== ======
Proved developed reserves:
Beginning of year 383 58 20 23,086 7,530 779
===== ==== ==== ====== ====== ======
End of year 3,984 383 58 39,428 23,086 7,530
===== ==== ==== ====== ====== ======
Standardized Measure of Discounted Future Net Cash Flows From
Proved Oil and Gas Reserves (Unaudited).
MMR's standardized measure of discounted future net cash flows
and changes therein relating to proved oil and gas reserves were
computed using reserve valuations based on regulations prescribed
by the SEC. These regulations provide for the use of current oil
and gas prices (escalated only when known and determinable price
changes are provided by contract and law) in the projection of
future net cash flows.
41
December 31,
---------------------
1998 1997
--------- ---------
(In Thousands)
Future cash flows $ 165,216 $ 111,655
Future costs applicable to future cash flows:
Production costs (51,226) (20,984)
Development and abandonment costs (33,527) (31,211)
--------- ---------
Future net cash flows before income taxes 80,463 59,460
Future income taxes - -
--------- ---------
Future net cash flows 80,463 59,460
Discount for estimated timing of net cash flows
(10% discount rate) (13,012) (13,837)
--------- ---------
$ 67,451 $ 45,623
========= =========
Because MMR has sufficient tax deductions and losses to
utilize against estimated future taxable income, in accordance
with SFAS 69 no deductions for future income taxes have been made
above.
Changes in Standardized Measure of Discounted Future Net Cash
Flows From Proved Oil and Gas Reserves (Unaudited).
Years Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
Beginning of year $ 45,623 $ 35,341 $ 8,330
Revisions:
Changes in prices (9,128) (13,869) 12,894
Accretion of discount 4,562 3,534 833
Other changes, including revised estimates
of development costs and rates of production 1,029 (6,040) (2,863)
Discoveries and extensions, less related costs 10,273 15,502 10,837
Development costs incurred during the year 24,007 6,630 6,985
Revenues, less production costs (16,994) (10,193) (1,675)
Sale of reserves in place - (3,437) -
Purchase of reserves in place 8,079 18,155 -
-------- -------- --------
End of year $ 67,451 $ 45,623 $ 35,341
======== ======== ========
12. SUPPLEMENTARY MINERAL RESERVE INFORMATION (UNAUDITED)
Proved and probable sulphur reserves for the Main Pass and
Culberson mines totaled approximately 52.6 million long tons at
December 31, 1998. Culberson sulphur reserves totaled 0.2
million long tons at December 31, 1998, which represents the
production MMR expects from the mine through the second quarter
of 1999 prior to its permanent closure. Main Pass and Culberson
reserves are subject to a 12.5 percent and 9.0 percent royalty,
respectively, based on net mine revenues.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Basic and
Diluted
Operating Net Net Loss
Revenues Loss Loss Per Share a
-------- -------- -------- ----------
(In Thousands, Except Per Share Amounts)
1998
1st Quarter $ 5,779 $ (7,421) $ (7,020) $ (0.80)
2nd Quarter 5,999 (8,189) (7,858) (0.90)
3rd Quarter 4,147 (1,490) (1,102) (0.15)
4th Quarter b 29,977 (2,224) (2,136) (0.16)
-------- -------- --------
$ 45,902 $(19,324) $(18,116) (1.96)
======== ======== ========
1997
1st Quarter $ 2,773 $ (2,260) $ (2,489) $ (0.90)
2nd Quarter 2,248 (1,192)c (1,395)c (0.50)c
3rd Quarter 2,688 (6,274)d (6,545)d (2.30)d
4th Quarter 5,843 (178) (109) (0.02)
-------- -------- --------
$ 13,552 $ (9,904) $(10,538) (2.80)
======== ======== ========
42
a.Restated to reflect the effective reverse stock split
resulting from the Merger.
b.Includes the results of FSC, subsequent to its acquisition on
November 17, 1998 (see Notes 1 and 3).
c.Includes a gain of $2.3 million ($0.80 per share) resulting
from the sale of the West Cameron Block 503 property and $1.0
million ($0.35 per share) of additional depreciation from
downward revisions to reserve estimates for the Vermilion
Block 410 property.
d.Includes $3.9 million ($1.05 per share) of non-productive
exploratory drilling costs on the Grand Isle Block 65, Eugene
Island 18/19 and Vermilion Block 159 prospects.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information regarding executive officers required by
Item 10 may be found under Item 4(a) of this report. Information
concerning MMR's directors required by Item 10 is incorporated by
reference from MMR's definitive proxy statement for its 1999
Annual Meeting of Stockholders.
Item 11. Executive Compensation
Information concerning the compensation of MMR's executives
required by Item 11 is incorporated by reference from MMR's
definitive proxy statement for its 1999 Annual Meeting of
Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain
beneficial owners and management required by Item 12 is
incorporated by reference from MMR's definitive proxy statement
for its 1999 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related
transactions required by Item 13 is incorporated by reference
from MMR's definitive proxy statement for its 1999 Annual Meeting
of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a)(1). Financial Statements. Reference is made to Item 8
hereof.
(a)(2). Financial Statement Schedules. Schedules have not
been included because they are not required, not
applicable or the information required has been included
elsewhere herein.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited, in accordance with generally accepted
auditing standards, the financial statements as of December 31,
1998 and 1997 for each of the three years in the period ended
December 31, 1998 included in McMoRan Exploration Co.'s annual
report to shareholders included elsewhere in this Form 10-K, and
have issued our report thereon dated January 19, 1999. Our
audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule below is the
responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
New Orleans, Louisiana,
January 19, 1999
43
Schedule II - Valuation and Qualifying Accounts
Additions
------------------
Balance Charged
at to Charged Balance
Beginning Costs to Other - at
of and Other Add End of
Period Expense Accounts (Deduct) Period
------- -------- -------- -------- --------
(In Thousands)
Reclamation
and mine shutdown
reserves:
1998
Sulphur $ - $ 100 $ - $ 56,497 a $ 56,597
Oil 584 1,100 - 8,302 b,c 9,986
------- -------- -------- -------- --------
$ 584 $ 1,200 $ - $ 64,799 $ 66,583
======= ======== ======== ======== ========
1997
Oil $ 110 $ 474 $ - $ - $ 584
------- -------- -------- -------- --------
$ 110 $ 474 $ - $ - $ 584
======= ======== ======== ======== ========
1996
Oil $ - $ 110 $ - $ - $ 110
------- -------- -------- -------- --------
$ - $ 110 $ - $ - $ 110
======= ======== ======== ======== ========
a. Includes the liabilities assumed in connection with the
acquisition of FSC's sulphur operations.
b. Includes the $7.0 million liability assumed in connection
with the acquisition of FSC's oil operations at Main Pass
299.
c. Includes the $1.3 million liability assumed in connection
with the acquisition of the platform at Vermilion Block 144.
____________________
No other schedules have been included because they are not
required, not applicable or the information has been included
elsewhere herein.
(a)(3) Exhibits
Reference is made to the Exhibit Index beginning on
page E-1 hereof.
(b) Reports on Form 8-K
The registrant filed a Current Report on Form 8-K dated November
17, 1998 reporting under Items 2 and 7 the Merger between MOXY
and FSC. Additionally, the registrant filed three additional
Current Reports on Form 8-K dated December 22 and December 30,
1998 and February 12, 1999 reporting events under Item 5.
44
SIGNATURES
Pursuant to the requirements of Section 13 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 on March 24, 1999.
McMoRan Exploration Co.
By: /s/Richard C.Adkerson
---------------------------------
Richard C. Adkerson
Co-Chairman of the Board, President and
Chief Executive Officer
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 the capacities indicated,
on March 24, 1999.
* Co-Chairman of the Board
-------------------------
James R. Moffett
/s/ Richard C. Adkerson Co-Chairman of the Board, President and
-------------------------- Chief Executive Officer
Richard C. Adkerson (Principal Executive Officer)
* Vice Chairman of the Board
--------------------------
Rene L. Latiolais
/s/ Robert M. Wohleber Executive Vice President,
-------------------------- Chief Financial Officer and Director
Robert M. Wohleber (Principal Financial Officer)
* Vice President and Controller
- Financial Reporting
- --------------------------- (Principal Accounting Officer)
C. Donald Whitmire
* Director
- ---------------------------
Robert A. Day
* Director
- ---------------------------
Gerald J. Ford
* Director
- ---------------------------
B. M. Rankin, Jr.
*By: /s/ Richard C. Adkerson
----------------------------
Richard C. Adkerson
Attorney-in-Fact
S-1
McMoRan Exploration Co.
Exhibit Index
Exhibit Number
2.1 Agreement and Plan of Mergers dated as of August 1,
1998. (Incorporated by reference to Annex A to MMR's
Registration Statement on Form S-4 (Registration No.
333-61171) filed with the SEC on October 6, 1998 (the
MMR S-4)).
3.1 Amended and Restated Certificate of Incorporation of
MMR.
3.2 By-laws of MMR. (Incorporated by reference to Exhibit
3.2 to the MMR S-4).
4.1 Form of Certificate of MMR Common Stock (Incorporated
by reference to Exhibit 4.1 of the MMR S-4).
4.2 Rights Agreement dated as of November 13, 1998.
4.3 Amendment to Rights Agreement dated December 28, 1998.
10.1 MMR Adjusted Stock Award Plan. (Incorporated by
reference to Exhibit 10.1 of the MMR S-4).
10.2 MMR 1998 Stock Option Plan for Non-Employee Directors.
(Incorporated by reference to Exhibit 10.2 of the MMR
S-4).
10.3 MMR 1998 Stock Option Plan. (Incorporated by reference
to Annex D to the MMR S-4).
10.4 Stock Bonus Plan (Incorporated by reference from MMR's
Registration Statement on Form S-8 (Registration No.
333-67963) filed with the SEC on November 25, 1998.
10.5 Master Agreement dated July 14, 1997 between MOXY and
Freeport-McMoRan Resource Partners, Limited
Partnership, now named Phosphate Resource Partners
Limited Partnership ("PLP") (Incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K filed
by MOXY dated July 14, 1997 (the "MOXY July 14, 1997 8-
K")).
10.6 Purchase and Sale Agreement dated July 11, 1997 by and
among PLP, MCNIC Oil & Gas Properties, Inc., MCN
Investment Corporation and MOXY (Incorporated by
reference to Exhibit 10.4 of the MOXY July 14, 1997 8-
K).
10.7 Agreement for Purchase and Sale dated as of August 1,
1997 between FM Properties Operating Co. and MOXY
(Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed by MOXY dated as of
September 2, 1997).
10.8 Participation Agreement between MOXY and PLP dated as
of April 1, 1997 (Incorporated by reference to Exhibit
10.4 to MOXY's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (the "MOXY 1997 10-
K")).
10.9 Amendment to Participation Agreement between MOXY and
PLP dated as of December 15, 1997 (Incorporated by
reference to Exhibit 10.5 to the MOXY 1997 10-K).
10.10 Participation Agreement between MOXY
and Gerald J. Ford dated as of December 15, 1997
(Incorporated by reference to Exhibit 10.6 to the MOXY
1997 10-K).
10.11 Services Agreement dated as of
November 17, 1998 between MMR and FM Services Company.
10.12 Exploration Agreement effective July
1, 1996, between MOXY and PLP (Incorporated by
reference to Exhibit 10.1 to MOXY's Quarterly Report on
Form 10-Q for the quarter ending June 30, 1996).
E-1
10.13 MMR Financial Counseling and Tax
Return Preparation and Certification Program, effective
September 30, 1998.
10.14 Employee Benefits Agreement by and
between Freeport-McMoRan Inc. ("FTX") and FSC.
(Incorporated by reference to Exhibit 10.1 to FSC's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "FSC 1997 10-K")).
10.15 Asset Sale Agreement for Main Pass
Block 299 between Freeport-McMoRan Resource Partners,
Limited Partnership ("FRP") and Chevron USA, Inc. dated
as of May 2, 1990. (Incorporated by reference to
Exhibit 10.2 to FSC's Registration Statement on Form S-
1 (Registration No. 333-40375) filed with the SEC on
November 17, 1997 (the "FSC S-1")).
10.16 Main Pass 299 Sulphur and Salt Lease,
effective May 1, 1988. (Incorporated by reference to
Exhibit 10.3 to the FSC S-1).
10.17 Joint Operating Agreement by and
between FRP, IMC-Fertilizer, Inc. and Felmont Oil
Corporation, dated as of June 5, 1990. (Incorporated by
reference to Exhibit 10.4 to the FSC S-1)
10.18 MMR Performance Incentive Awards
Program as amended effective February 1, 1999.
10.19 Joint Operating Agreement by and
between FRP, IMC-Fertilizer, Inc. and Felmont Oil
Corporation, dated as of May 1, 1988. (Incorporated by
reference to Exhibit 10.5 to the FSC S-1)
10.20 Agreement to Coordinate Operating
Agreements by and between FRP,
IMC-Fertilizer and Felmont Oil
Corporation, dated as of May 1, 1988.
(Incorporated by reference to Exhibit
10.6 to the FSC S-1)
10.21 Asset Purchase Agreement between FRP
and Pennzoil Company dated as of October 22, 1994 (the
"Asset Purchase Agreement"). (Incorporated by reference
to Exhibit 10.7 to the FSC S-1)
10.22 Amendment No. 1 to the Asset Purchase
Agreement dated as of January 3, 1995. (Incorporated by
reference to Exhibit 10.8 to the FSC S-1)
10.23 Agreement for Sulphur Supply, as
amended, dated as of July 1, 1993 among FRP, IMC
Fertilizer and IMC-Agrico Company (the "Sulphur Supply
Agreement"). (Incorporated by reference to Exhibit 10.9
to the FSC S-1)
10.24 Side letter with IGL regarding the
Sulphur Supply Agreement. (Incorporated by reference to
Exhibit 10.10 to the FSC S-1)
10.25 Processing and Marketing Agreement
between the FSC (a division of FRP) and Felmont Oil
Corporation dated as of June 19, 1990 (the "Processing
Agreement"). (Incorporated by reference to Exhibit
10.11 to the FSC S-1)
10.26 Amendment Number 1 to the Processing
Agreement. (Incorporated by reference to Exhibit 10.12
to the FSC S-1)
10.27 Amendment Number 2 to the Processing
Agreement. (Incorporated by reference to Exhibit 10.13
to the FSC S-1)
10.28 Credit Agreement dated as of December
12, 1997 among FSC, as borrower, the financial
institutions party thereto, the Chase Manhattan Bank,
as administrative agent and documentary agent, and
Hibernia National Bank, as co-agent. (Incorporated by
reference to Exhibit 10.15 to the FSC 1997 10-K)
E-2
10.29 Amended and Restated Credit Agreement
dated November 17, 1998 among Freeport-McMoRan Sulphur
Inc., as borrower, McMoRan Exploration Co., as
Guarantor and, the financial institutions party
thereto.
10.30 Letter Agreement dated December 22,
1997 between FMS and Rene L. Latiolais. (Incorporated
by reference to Exhibit 10.19 to FSC 1997 10-K).
10.31 Supplemental Letter Agreement between
FMS and Rene L. Latiolais effective as of January 1,
1999.
10.32 Agreement for Consulting Services
between FTX and B. M. Rankin, Jr. effective as of
January 1, 1991)(assigned to FMS as of January 1,
1996); as amended on December 15, 1997 and on December
7, 1998.
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen.
23.2 Consent of Ryder Scott.
24.1 Certified resolution of the Board of Directors of MMR
authorizing this report to be signed on behalf of any
officer or director pursuant to a Power of Attorney.
24.2 Powers of Attorney pursuant to which this report has
been signed on behalf of certain officers and directors
of MMR.
27.1 MMR Financial Data Schedule.
E-3