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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