SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999
Commission File Number: 001-07791
McMoRan Exploration Co.
Incorporated in 72-1424200
Delaware (IRS Employer Identification No.)
1615 Poydras Street, New Orleans, Louisiana 70112
Registrant's telephone number, including area code: (504) 582-4000
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 _
On June 30, 1999, there were issued and outstanding 13,255,175
shares of the registrant's Common Stock, par value $0.01 per
share.
McMoRan EXPLORATION CO.
TABLE OF CONTENTS
Page
Part I. Financial Information
Financial Statements:
Condensed Balance Sheets 3
Statements of Operations 4
Statements of Cash Flow 5
Notes to Financial Statements 6
Remarks 8
Report of Independent Public Accountants 9
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Part II. Other Information 16
Signature 17
Exhibit Index E-1
2
McMoRan EXPLORATION CO.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
McMoRan EXPLORATION CO.
CONDENSED BALANCE SHEETS (Unaudited)
June 30, December 31,
1999 1998
--------- ---------
(In Thousands)
ASSETS
Cash and cash equivalents $ 13,978 $ 17,816
Accounts receivable 26,816 32,076
Inventories 18,531 14,915
Deferred tax asset and prepaid expenses 6,897 4,762
--------- ---------
Total current assets 66,222 69,569
Property, plant and equipment, net 173,514 187,137
Deferred tax asset 30,110 31,834
Other assets including goodwill (net of
accumulated amortization of $361,000 and
$144,000, respectively) 31,563 31,848
--------- ---------
Total assets $ 301,409 $ 320,388
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 31,802 $ 27,549
Accrued liabilities 5,496 13,895
Current portion of reclamation and mine
shutdown reserves and other 7,977 7,145
--------- ---------
Total current liabilities 45,275 48,589
Reclamation and mine shutdown reserves 56,900 60,047
Other long-term liabilities 32,329 32,952
Stockholders' equity 166,905 178,800
--------- ---------
Total liabilities and stockholders' equity $ 301,409 $ 320,388
========= =========
The accompanying notes are an integral part of these financial
statements.
3
McMoRan EXPLORATION CO.
STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1999 1998 1999 1998
-------- ------- --------- --------
(In Thousands, Except Per Share Amounts)
Revenues $ 63,289 $ 5,999 $ 125,400 $ 11,778
Costs and expenses:
Production and delivery costs 47,291 832 95,321 1,811
Depreciation and amortization 9,843 5,763 19,247 10,970
Exploration expenses 1,303 6,174 3,853 12,258
General and administrative expenses 3,785 1,419 7,107 2,349
Gain on sale of oil and gas property - - (3,090) -
-------- ------- --------- --------
Total costs and expenses 62,222 14,188 122,438 27,388
-------- ------- --------- --------
Operating income (loss) 1,067 (8,189) 2,962 (15,610)
Interest expense (75) - (133) -
Other income, net 299 331 495 732
-------- ------- --------- --------
Net income (loss) before
income taxes 1,291 (7,858) 3,324 (14,878)
Provision for income taxes (452) - (1,171) -
-------- ------- --------- --------
Net income (loss) $ 839 $(7,858) $ 2,153 $(14,878)
======== ======= ========= ========
Net income (loss) per share
of common stock:
Basic $0.06 $(0.92) $0.16 $(1.74)
===== ====== ===== ======
Diluted $0.06 $(0.92) $0.15 $(1.74)
===== ====== ===== ======
Average shares outstanding:
Basic 13,662 8,572 13,878 8,563
====== ===== ====== =====
Diluted 13,901 8,572 14,059 8,563
====== ===== ====== =====
The accompanying notes are an integral part of these financial
statements.
4
McMoRan EXPLORATION CO.
STATEMENTS OF CASH FLOW (Unaudited)
Six Months Ended
June 30,
----------------------
1999 1998
-------- ---------
(In Thousands)
Cash flow from operating activities:
Net income (loss) $ 2,153 $ (14,878)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 19,247 10,970
Exploration expenses 3,853 12,258
Gain on sale of oil and gas property (3,090) -
Reclamation and mine shutdown expenditures (1,851) -
Utilization of deferred tax asset 1,159 -
Change in asset and liabilities:
(Increase) decrease in working capital
Accounts receivable 1,493 12,203
Accounts payable and accrued liabilities 3,146 (3,141)
Inventories and prepaid expense (5,384) 65
Other (1,087) 669
-------- --------
Net cash provided by operating activities 19,639 18,146
-------- --------
Cash flow from investing activities:
Exploration and development expenditures (23,011) (27,940)
Proceeds from disposition of assets, net 13,243 -
Other 758 -
-------- --------
Net cash used in investing activities (9,010) (27,940)
-------- --------
Cash flow from financing activities:
Proceeds from exercise of stock options
and other 298 -
Purchase of MMR common stock (14,765) -
-------- --------
Net cash used in financing activities (14,467) -
-------- --------
Net decrease in cash and cash equivalents (3,838) (9,794)
Cash and cash equivalents at beginning of year 17,816 29,149
-------- --------
Cash and cash equivalents at end of period $ 13,978 $ 19,355
======== ========
The accompanying notes are an integral part of these financial
statements.
5
McMoRan EXPLORATION CO.
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
Background. McMoRan Exploration Co. (MMR), a Delaware
corporation, became a publicly traded entity on November 17, 1998
when McMoRan Oil & Gas Co. (MOXY) and Freeport-McMoRan Sulphur
Inc. (FSC) combined their respective operations (the Merger). In
the Merger, FSC's shareholders received 0.625 MMR common shares
for each FSC outstanding common share, or a total of 5.5 million
MMR shares, while MOXY's shareholders received 0.20 MMR common
shares for each MOXY outstanding common share, or a total of 8.6
million MMR common shares.
Basis of Presentation. The Merger is reflected in the
accompanying financial statements using the purchase method of
accounting, with MOXY as the acquiring entity. Accordingly,
financial statements for any period prior to the Merger reflect
the historical assets, liabilities, revenues and expenses
attributable to MOXY as the predecessor of MMR. Operating
results of the acquired assets are included after November 17,
1998. The 1998 earnings per share and weighted average shares
outstanding amounts have been restated to reflect the effective
reverse stock split of MOXY's shares resulting from the Merger.
The assets acquired and liabilities assumed from FSC were
recorded at estimated fair values using independent appraisals
where available. For further discussion on the acquisition of FSC
see "Note 3. Acquisitions," to the Notes to Financial
Statements included in MMR's 1998 Annual Report on
Form 10-K.
2. EARNINGS PER SHARE
The earnings per share (EPS) data for 1998 have been restated to
reflect the effective reverse stock split resulting from the
Merger. Basic net income (loss) per share of common stock was
calculated by dividing net income or net loss applicable to
common stock by the weighted-average number of common shares
outstanding during the periods presented. The diluted net income
(loss) per share was calculated by dividing net income by the
weighted-average number of common shares outstanding during the
periods presented plus outstanding dilutive stock options, which
represented approximately 239,000 and 181,000 shares of common
stock during the second quarter and six months ended June 30,
1999, respectively. MMR had options outstanding representing
approximately 270,000 and 210,000 shares of common stock during
the second quarter and six months ended June 30, 1998 that
otherwise would have been included in the calculation of diluted
net (loss) per share, but were excluded as anti-dilutive
considering the losses incurred during the respective periods.
Outstanding options to purchase approximately 406,000 and
57,000 shares of common stock at average exercise prices of
$20.26 and $25.30 per share during the second quarter of 1999 and
1998, respectively, and outstanding options to purchase
approximately 942,000 and 66,000 shares of common stock at
average exercise prices of $19.03 and $24.70 for the six months
ended June 30, 1999 and 1998, respectively, were not included in
the computation of diluted EPS because the exercise prices were
greater than the average market price during the periods
presented.
3. FINANCIAL INSTRUMENTS AND CONTRACTS
MMR currently does not hedge or otherwise enter into price
protection contracts for its principal products, although in
April 1998 FSC entered into a price protection program for its
anticipated 1998 natural gas purchase requirements. Commencing in
May 1998, purchases of 450,000 million British thermal units
(mmbtu) of natural gas per month (representing approximately 75
percent of Main Pass' natural gas purchases) were subject to the
terms of this price protection program at $2.175 per mmbtu. The
program also granted the supplier the option to put 450,000 mmbtu
per month to MMR at a price of $2.175 per mmbtu during 1999. On
June 30, 1999, the related contract under this program had a fair
value of zero, based upon the quoted futures prices of natural
gas during the remainder of the year. Accordingly, MMR recorded a
$0.7 million reduction in production costs during the second
quarter of 1999 reflecting the elimination of its previously
accrued liability under this contract.
In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting
standards that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded
6
in the balance sheet as either an asset or liability measured at
its fair value. In June 1999, the FASB delayed SFAS 133's
effective date by one year to fiscal years beginning after June
15, 2000, with earlier application permitted. MMR has not
determined when it will adopt SFAS 133; however, adoption is
expected to have little or no impact on its financial position or
results of peerraations.
4. BUSINESS SEGMENTS
MMR has adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," which requires that
companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring
their performance. MMR had only one operating segment, Oil and
Gas, until the Merger, when it acquired FSC's sulphur assets.
MMR's oil and gas are produced offshore in the Gulf of Mexico and
currently include MMR's facilities at Vermilion Blocks 160 and
159 and at West Cameron Block 616. MMR's oil and gas segment
also includes the oil produced at Main Pass 299 from the same
geologic formation containing the deposit's sulphur. Frasch
sulphur is produced at the Main Pass mine located 32 miles
offshore Louisiana and was produced from the Culberson mine in
west Texas, until it permanently ceased production on June 30,
1999. The sulphur business segment includes purchasing recovered
sulphur and the transporting and terminaling of sulphur, both
mined and purchased, utilizing its extensive logistics network of
sulphur terminaling and transportation assets in the Gulf Coast
region. MMR's segment data for the second quarter and six months
ended June 30, 1999 are shown below (in thousands).
Eliminations
Sulphur Oil & Gas and Other Total
--------- -------- --------- ---------
Second Quarter Ended
June 30, 1999
Revenues $ 49,439 $ 13,850 $ - $ 63,289
Production and delivery 43,237 4,054 - 47,291
Depreciation and amortization 1,221 8,622 - 9,843
Exploration expenses - 1,303 - 1,303
General and administrative
expenses 1,890 974 921 3,785
--------- -------- -------- ---------
Operating income (loss) 3,091 (1,103) (921) 1,067
Interest expense (65) (10) - (75)
Interest and other income 113 186 - 299
Income tax provision - - (452) (452)
--------- -------- -------- ---------
Net income (loss) $ 3,139 $ (927) $ (1,373) $ 839
========= ======== ======== =========
Capital expenditures $ 11 $ 5,759 $ - $ 5,770
========= ======== ======== =========
Six Months Ended
June 30, 1999
Revenues $ 100,474 $ 24,926 $ - $ 125,400
Production and delivery 88,093 7,228 - 95,321
Depreciation and amortization 2,402 16,845 - 19,247
Exploration expenses - 3,853 - 3,853
General and administrative
expenses 3,666 1,712 1,729 7,107
Gain on sale of property - (3,090) - (3,090)
--------- -------- -------- ---------
Operating income (loss) 6,313 (1,622) (1,729) 2,962
Interest expense (114) (19) - (133)
Interest and other income 264 231 - 495
Income tax provision - (12) (1,159) (1,171)
--------- -------- -------- ---------
Net income (loss) $ 6,463 $ (1,422) $ (2,888) $ 2,153
========= ======== ======== =========
Capital expenditures $ 6,599 $ 16,412a $ - $ 23,011
========= ======== ======== =========
Total assets $ 172,499 $ 90,592 $ 38,318b $ 301,409
========= ======== ======== =========
(a) Includes oil and gas exploration and development expenditures incurred.
(b) Represents assets held by the parent company, the most significant of
which include MMR's deferred tax assets and certain prepaid pension
benefits.
7
-----------------
Remarks
The information furnished herein should be read in conjunction
with MMR's financial statements contained in its 1998 Annual
Report on Form 10-K. The information furnished herein reflects
all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the periods.
All such adjustments are, in the opinion of management, of a
normal recurring nature.
8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of McMoRan Exploration
Co.:
We have reviewed the accompanying condensed balance sheet of
McMoRan Exploration Co. (a Delaware corporation) as of June 30,
1999, the related statements of operations for the three-month
and six month periods ended June 30, 1999 and 1998 and the
statements of cash flow for the six month periods ended June 30,
1999 and 1998. These financial statements are the responsibility
of the company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of McMoRan Exploration Co.
as of December 31, 1998, and the related statements of
operations, stockholders' equity and cash flow for the year then
ended (not presented herein), and, in our report dated January 19, 1999,
we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the
accompanying condensed balance sheet as of December 31, 1998, is
fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
/s/ ARTHUR ANDERSEN LLP
New Orleans, Louisiana
July 20, 1999
9
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
McMoRan Exploration Co. (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 region and in the
mining, purchasing, transporting, terminaling and marketing of
sulphur. On November 17, 1998, McMoRan Oil & Gas Co. (MOXY) and
Freeport-McMoRan Sulphur Inc. (FSC) became wholly owned
subsidiaries of MMR (the Merger). 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.
The assets acquired from FSC included two operating sulphur
mines: Main Pass 299, located offshore Louisiana in which FSC
owns an 83.3 percent interest and the wholly owned Culberson mine
located in west Texas, which permanently ceased production on
June 30, 1999. Other 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, which involves
producing oil from the same geologic formation containing the
deposit's sulphur.
OPERATIONAL ACTIVITIES
The following significant operational activities
occurred during the second quarter of 1999.
Oil and Gas
- -----------
. During the second quarter of 1999, MMR and its joint interest
partners commenced the development of Brazos Block A-19.
Construction of the facilities and pipeline are currently
underway. A platform has been set on location. Initial
production from Brazos Block A-19 is expected in the fourth
quarter of 1999. MMR has an approximate 13.3 percent net
revenue interest in Brazos Block A-19, which is located in
approximately 135 feet of water, 35 miles offshore Texas.
. Current combined gross daily production from MMR's producing
fields totals approximately 46 million cubic feet of gas
(MMCF) and 1,100 barrels of condensate at Vermilion Blocks 159
and 160 and 35 MMCF of gas at West Cameron Block 616. Remedial
efforts to date have offset in part decreasing production from
West Cameron Block 616. Net capitalized costs of this property
approximate its undiscounted estimated future net cash flows
at June 30, 1999. Any events causing a reduction in the estimated
future net cash flows of this field could result in a future write-down
of the related capitalized costs.
. In late July 1999, MMR and its exploration partner, Phosphate
Resource Partners Limited Partnership (PLP), agreed to sell
their aggregate 50 percent working interest in West Cameron
Block 492. Under terms of the sale, MMR and PLP will share
proportionally in the $1.3 million of sales proceeds and each
retain a proportionate overriding royalty interest, which net
to MMR totals 1.5 percent and may increase to 2.5 percent if
certain cumulative production volumes are achieved. The sale
is expected to close by the end of the third quarter of 1999.
MMR has an approximate 25 percent working interest and 19.4
percent net revenue interest in West Cameron Block 492 located
in approximately 150 feet of water, 100 miles offshore
Louisiana.
Sulphur
- -------
. Current gross daily sulphur production from the Main Pass mine
has increased approximately 52 percent from levels achieved at
December 31, 1998, reflecting the first quarter of 1999
completion of the redrilling of the wells lost as a result of
Hurricane Georges in September 1998.
. MMR permanently ceased production from its Culberson mine in
west Texas on June 30, 1999. Abandonment and salvage
operations are underway and are anticipated to be completed by
the end of 1999. MMR had previously accrued the costs
associated with the closure of the Culberson mine and expects
its closure will have no material impact on the future
earnings of MMR.
10
RESULTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 a 1998 1999 a 1998 b
--------- --------- --------- ---------
Sales volumes:
Gas (thousand cubic feet,
or MCF) 3,751,900 2,441,200 7,539,400 5,022,500
Oil (barrels) 368,300 27,900 764,600 62,600
Sulphur (long tons) 743,500 - 1,523,600 -
Average realization:
Gas (per MCF) $ 2.19 $ 2.27 $ 2.00 $ 2.20
Oil (per barrel) 14.87 12.58 12.61 14.52
Sulphur (per long ton) 65.75 - 65.34 -
a.Includes operating data of FSC. Main Pass oil operations
contributed approximately 299,000 and 610,300 barrels at average
realizations of $14.40 and $12.15 for the three months and six
months ended June 30, 1999, respectively.
b.The prior period effects of the re-determination of ownership interest
in Vermilion Block 160 were excluded from the above table, which would have
reduced six-month volumes of gas and oil by approximately 150,400
mcf and 6,200 barrels, respectively, and reduced the combined
revenues from gas and oil by approximately $486,000.
MMR's oil and gas revenues increased to $13.9 million and
$24.9 million for the second quarter and six months ended June
30, 1999, respectively, from $6.0 million and $11.8 million for
the comparable periods in 1998. These increases primarily
reflect the inclusion of oil revenues, totaling $4.3 million and
$7.5 million during the second quarter and six months ended June
30, 1999, respectively, from Main Pass 299, which was acquired in
the Merger. Additionally, oil and gas revenues for the second
quarter and six months ended June 30, 1999 reflect the increased
production volumes associated with the commencement of operations
at the Vermilion Block 160 #4 sidetrack well and Vermilion Block
159 #3 well during January 1999, and at West Cameron Block 616
during March 1999, together with the purchase of an additional
10.3 percent net revenue interest in the Vermilion Block 160
field unit during the first quarter of 1999. These increases were
offset in part by lower average oil and gas realizations during
the first half of 1999 compared to the same period last year.
However, oil realizations have improved during the second quarter
of 1999 compared to the second quarter of 1998 as a result of the
recent oil price increases. Revenues during the first half of
1999 were also negatively impacted by the sale of the Vermilion
Block 410 field in early March 1999. During the first quarter of
1998, as a result of a redetermination of ownership interests in
the Vermilion Block 160 field unit, revenues were reduced
approximately $0.5 million for production volumes recorded prior
to 1998.
Sulphur operations had revenues of $49.4 million and $100.5
million and operating income of $3.1 million and $6.3 million
during the second quarter and six months ended June 30, 1999,
respectively. MMR's sulphur revenues benefited from a $4.00 per
long ton increase during the first half of 1999. However,
changed market conditions have resulted in sulphur prices
decreasing by $4.00 per long ton in the third quarter of 1999.
Future sulphur prices will continue to fluctuate as a result of
changes in sulphur market conditions. Sulphur's oprating income
benefited from reductions to production costs totaling $1.8
million and $3.6 million during the second quarter and six months
ended June 30, 1999, respectively, resulting from MMR's approved
settlements to date on its business interruption insurance claim
related to the effects Hurricane Georges had on Main Pass'
production. A significant portion of the sulphur produced or
purchased by MMR is sold to the IMC-Agrico Joint Venture (IMC-
Agrico), a phosphate fertilizer producer, under a long-term
supply contract that extends for as long as IMC-Agrico has a
requirement for sulphur. Sales to IMC-Agrico during the second
quarter and six months ended June 30, 1999 totaled 57.9 percent
of MMR's total revenues for both periods presented and 75.0
percent and 72.9 percent of its sulphur sales, respectively. The Sulphur
Supply Agreement contains a provision that requires good faith renegotiation
of the pricing provisions if a party can prove that fundamental changes
in IMC-Agrico's operations or the sulphur and sulphur transportation
markets invalidate certain assumptions and result in the performance
by that party becoming "commericially impractible" or "grossly inequitable."
In the fourth quarter of 1998, IMC-Agrico attempted to invoke this contract
provision in an effort to renegotiate the pricing terms of the Sulphur Supply
Agreement. After careful review of the agreement, IMC-Agrico's operations
and the referenced markets, FSC determined that there is no basis for
11
renegotiation of the pricing provisions under the terms of the agreement.
After discussions failed to resolve this dispute, FSC filed suit against
IMC-Agrico seeking a judicial declaration that no basis exists under the
agreement for a renegotiation of its pricing terms.
Depreciation and amortization expense for the second quarter
and six months ended June 30, 1999 totaled $9.8 million and $19.2
million, respectively, versus $5.8 million and $11.0 million
during the comparable periods in 1998. Oil and gas depreciation
increased to $8.6 million and $16.8 million during the second
quarter and six months ended June 30, 1999, respectively, from
$5.8 and $11.0 million during the same periods in 1998. These
increases resulted from the higher production volumes associated
with the commencement of operations discussed above, together
with increased depreciable capitalized costs incurred since the
1998 first quarter. Sulphur depreciation totaled $1.2 million and
$2.4 million during the second quarter and six months ended June
30,1999, respectively. Goodwill amortization totaled $0.2 million
during the six months ended June 30, 1999.
Production and delivery expense for the second quarter and
six months ended June 30, 1999 totaled $47.3 million and $95.3
million, respectively, compared to $0.8 million and $1.8 million
for the same periods in 1998. These significant increases are
primarily the result of the inclusion of $43.2 million and $88.1
million of production and delivery costs during the second
quarter and six months ending June 30, 1999, respectively,
associated with MMR's acquired sulphur operations. During the
first quarter of 1999, MMR's sulphur operations capitalized
approximately $4.6 million of drilling costs incurred to increase
the productive capacity of Main Pass, which had been temporarily
reduced in the second half of 1998 by Hurricane Georges (see
"Capital Resources and Liquidity" below). Future sulphur
drilling costs will be charged to production costs as incurred.
Oil and gas production and delivery expense totaled $4.1 million
and $7.2 million during the second quarter and six months ended
June 30, 1999, respectively, compared to $0.8 million and $1.8
million during the same periods last year. The increases reflect
the higher production volumes associated with the commencement of
operations at the facilities discussed above, together with $2.4
million and $4.9 million of costs associated with production from
the acquired Main Pass oil facilities.
MMR's exploration expenses fluctuate from period to period based on
the level, results and costs of exploratory drilling projects and the
volume of and extent to which seismic data are acquired and interpreted.
The first half of 1999 includes approximately $1.6 million of exploratory
drilling costs primarily associated with the farm-in of Vermilion Block 162
and the subsequent drilling of the #5 exploratory well in January
1999. MMR's other exploration expenses totaled approximately $2.3
million primarily for geological and geophysical costs including
the purchase of seismic data. During the first half of 1998, MMR
expensed $9.3 million of drilling and leasehold costs associated
with four unsuccessful exploratory wells, and other exploration
expenses totaling $3.0 million. MMR has focused its efforts
during 1999 on assessing selective growth opportunities and did
no exploration drilling during the second quarter of 1999.
Exploratory drilling is anticipated during the second half of 1999.
As a result of anticipated future exploration expenditures,
MMR may report operating losses in future periods.
CAPITAL RESOURCES AND LIQUIDITY
Operating activities provided net cash of $19.6 million
during the six months ended June 30, 1999 compared to $18.1
million during the six months ended June 30, 1998. The increase
relates to additional revenues generated primarily by the sulphur
assets acquired in the Merger and from MMR's initial production
from the Vermilion Block 160 #4 sidetrack well, the Vermilion
Block 159 #3 well and West Cameron Block 616. This increase was
offset in part by the increase in sulphur inventories during 1999
and to the payment of $1.9 million in mine shutdown and
reclamation expenditures. Operating cash flows during the six
months ended June 30, 1998 benefited from MMR's significant
collection of accounts receivable outstanding at December 31,
1997.
Net cash used in investing activities totaled $9.0 million
for the six months ended June 30, 1999 compared with $27.9
million during the same period in 1998. During the 1999 period,
MMR incurred $23.0 million of exploration, development and other
capital expenditures. Oil and gas exploration and development
expenditures totaled $16.4 million, which included capitalized
oil and gas drilling costs of $12.5 million primarily for the
development of West Cameron Block 616, the Vermilion Block 160
#4 sidetrack well and Brazos Block A-19, geological and
geophysical and other exploration expenses of $2.3 million and
12
expensed drilling costs of $1.6 million primarily associated with
the Vermilion Block 162 #5 exploratory well. MMR's sulphur
operations incurred $6.6 million of capitalized costs during the
six months ended June 30, 1999 consisting of $4.6 million related
to drilling the replacement wells for those damaged by Hurricane
Georges (see "Sulphur Operational Activities" above) and the
approximate $1.8 million purchase of certain sulphur rail cars
that had previously been leased. MMR's sulphur segment received
$7.5 million in connection with an agreement to sell and
leaseback approximately 270 of its sulphur rail cars. MMR's oil
and gas operations provided net proceeds of $5.7 million from the
sale of a portion of its additional net revenue interest
purchases in the Vermilion Block 160 field unit and the Vermilion
Block 159 #3 well and the sale of its approximate 28 percent net
revenue interest in the Vermilion Block 410 field during the
first quarter of 1999. During the six months ended June 30, 1998,
MMR incurred $15.6 million of capitalized drilling costs
primarily for development of West Cameron Block 616 and the
Vermilion Block 160 #4 sidetrack well, $9.3 million in expensed
drilling and leasehold costs associated with four exploratory
wells and $3.0 million in geological and geophysical and other
exploration expenses.
Net cash used in financing activities totaled $14.5 million
for the six months ended June 30, 1999 resulting from MMR's
purchase of shares of its common stock on the open market (see
below), offset in part by stock option exercise proceeds.
Based on current projections, management believes that MMR's
existing cash balances, its expected cash flow from operations
and its bank credit availability will be sufficient to fund its
ongoing working capital requirements, reclamation costs, and
projected capital expenditures for the foreseeable future. MMR
believes that exploration prospects and producing properties are
available through farm-in and/or acquisition transactions and that
it has the capital resources and credit availability to enable it
to pursue selected opportunities. In particular, MMR has considered
and expects to continue to evaluate opportunities to acquire both
proved and unproved oil and gas properties. Such acquisitions, if
consummated, may require MMR to use its current bank credit availability and
possibly additional sources of financing, including the possibility of
incurring debt and issuing common stock . At June 30, 1999, MMR
had no outstanding debt and expects its cash and bank credit
availability to exceed $100 million during the second half of
1999.
MMR has received $4.2 million of a total $4.7 million in
committed insurance proceeds, from the business interruption
insurance claim filed during the first quarter of 1999 covering
the estimated damages and lost production from the Main Pass
sulphur mine resulting from the effects of Hurricane Georges in
September 1998. MMR recorded the portion of these proceeds
estimated to relate to lost production prior to the Merger as a
purchase price adjustment to goodwill ($1.1 million) and the
remainder as a reduction of production costs (see Results of
Operations, above). Additional insurance proceeds during the
remainder of 1999, if any, will be recorded only at the time MMR
has a firm settlement commitment from the insurance underwriter.
In May 1999, MMR's Board of Directors authorized an open
market share purchase program for up to 1 million shares of its
common stock, representing approximately 7 percent of its then
outstanding 14.1 million common shares. MMR purchased 877,735
shares of its common stock for $14.8 million, an average of
$16.83 per share, during the remainder of the second quarter of
1999. These purchased shares included one transaction with PLP.
In this transaction, MMR purchased all 769,535 shares of its
common stock owned by PLP for $12.8 million, $16.64 per share.
In July 1999, the Board authorized the purchase of up to an
additional 1 million shares of its common stock. The timing of
the purchases is dependent upon many factors, including the price
of MMR's common stock, MMR's operating results, cash flows and
financial position, and general economic and market conditions.
For the period July 1, 1999 through August 6, 1999, MMR purchased
376,800 shares of its common stock for $7.8 million, an average
of $20.60 per share. As of August 6, 1999 approximately 0.7
million of the total 2 million shares authorized remain available
for purchase.
IMPACT OF YEAR 2000 COMPLIANCE
The Year 2000 (Y2K) issue is the result of computerized
systems being written to store and process the year portion of
dates using two digits rather than four. Date-aware systems,
(i.e., any system or component that performs calculations,
comparisons, sequencing, or other operations involving dates) may
fail or produce erroneous results on or before January 1, 2000
because the year 2000 will be interpreted as the year 1900.
13
MMR's State of Readiness. MMR has been pursuing a strategy to
ensure all of its significant computer systems will be able to
process dates from and after January 1, 2000, including leap
years, without mission-critical system failure (Y2K Compliance or
Y2K Compliant). Computerized systems are integral to the
operations of MMR, particularly for various engineering systems
used for exploration, reserve, production and modeling functions
as well as for plant and equipment process control at its Gulf of
Mexico production facilities. Certain computerized business
systems and related services are provided by FM Services Company
(FMS), which is responsible for ensuring Y2K Compliance for the
systems it manages. FMS has separately prepared a plan for its
Y2K Compliance. Progress of the Y2K plan is being monitored by
MMR executive management and reported to the Audit Committee of
the MMR Board of Directors. In addition, the independent
accounting firm functioning as MMR's internal auditors is
assisting management in monitoring the progress of the Y2K plan.
Critical components of the plan are complete with the remaining
activities focused on contingency planning. Like other companies,
MMR cannot, however, make Y2K Compliance certifications because
the ability of any organization's systems to operate reliably
after midnight on December 31, 1999 is dependent upon factors
that may be outside the control of, or unknown to, the
organization.
Information Technology (IT) Systems - The bulk of MMR oil and gas
specific processing is provided through third party software
licensed by MMR. The Y2K Compliant version of this software was
implemented in the fourth quarter of 1998. The remaining
business processing is provided by FMS. With the exception of
testing interfaces to computerized disbursement systems provided
by its primary bank, FMS has completed Y2K remediation and
testing work for critical systems it provides to MMR. Testing of
the banking interfaces is in process, with completion expected in
the third quarter of 1999.
Non-IT Systems - Systems used for exploration, reserve,
production and modeling functions are integral to the operations
of MMR. Y2K remediation and testing work has been completed for
these systems. MMR also utilizes process control systems in the
operation of its offshore facilities. In the fourth quarter of
1998, MMR engaged an engineering firm to complete assessment and
testing of the compliance of these systems. Results from this
work indicate no outstanding issues. MMR contracted with a third
party to conduct a Y2K Compliance review for the Main Pass
process control system. The results of this third-party review
also indicate no significant problems. Recommendations stemming
from this review have been implemented.
Third Party Risks - As is the case with most oil and gas
exploration companies, MMR relies extensively on third party
contractors for a significant portion of its operating functions.
MMR has completed an assessment of Y2K external risk that may
arise from the failure of critical suppliers and customers to
become Y2K Compliant. This assessment indicates that MMR's
business partners are well aware of the Y2K problem and are
themselves aggressively seeking resolution of any outstanding
issues. MMR's contingency planning is well underway with
completion scheduled for the third quarter of 1999. The Y2K risk
that could have the largest potential business impact would
probably be a short-term shutdown of Main Pass sulphur operations
caused by a disruption of key materials from suppliers,
especially natural gas. Compliance statements have been received
for critical MMR suppliers, customers, transportation providers,
and business partners, and MMR will continue to monitor Y2K
readiness plans for critical third parties.
The Costs to Address MMR's Y2K Issues. Expenditures for the
necessary Y2K related modifications will largely be funded by
routine software and hardware maintenance fees paid by MMR or FMS
to the related software providers. Based on current information,
MMR believes that the incremental cost of Y2K Compliance not
covered by routine software and hardware maintenance fees will
not exceed $0.3 million, most of which is expected to be incurred
in 1999. If the software modifications and conversions referred
to above are not made, or are delayed, the Y2K issue could have a
material impact on MMR's operations. Additionally, current
estimates are based on management's best assessment, which was
derived using numerous assumptions of future events including the
continued availability of certain resources, third party
modification plans and other factors. There can be no assurance
that these estimates will be achieved, and actual results could
differ materially from these plans. There also can be no
assurance that the systems of other companies will be converted
on a timely basis or that failure to convert will not have a
material adverse effect on MMR.
14
The Risks of MMR's Y2K Issues. Based on detailed risk assessment
work conducted thus far, MMR believes the most likely Y2K-related
failures would probably be temporary disruption in certain
materials and services provided by third parties, which would not
be expected to have a material adverse effect on MMR's financial
condition or results of operations. MMR believes that these
third-party risks will be mitigated through close monitoring of
compliance by third parties that are important to its operations.
MMR's Contingency Plans. Although MMR believes the likelihood of
any or all of the above risks occurring to be low, specific
contingency plans to address certain risk areas are being
developed. These areas include critical operations, key customers
and suppliers, marine transportation providers,
telecommunications providers, banks, utilities, and other
critical infrastructure providers. 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.
CAUTIONARY STATEMENT
Management's Discussion and Analysis of Financial Condition
and Results of Operations contain forward-looking statements.
All statements other than statements of historical fact included
in this report, including, without limitation, statements
regarding plans and objectives of MMR's management for future
operations and MMR's exploration and development activities are
forward-looking statements.
Important factors that could cause actual oil and gas
operations results to differ materially from MMR's expectations
include, without limitation, drilling results, unanticipated
fluctuations in flow rates of producing wells, depletion rates,
economic and business conditions, Y2K compliance, general
development risks and hazards and risks inherent with the
production of oil and gas, such as fires, natural disasters,
blowouts and the encountering of formations with abnormal
pressures, changes in laws or regulations and other factors, many
of which are beyond the control of MMR. Important factors that
could affect the future results of MMR's sulphur operations
include without limitation reserve expectations, demand for
sulphur, the availability of financing, the ability to satisfy
future cash obligations and environmental costs, the reliance on
IMC-Agrico as a customer, the seasonality and volatility of
sulphur markets, competition and environmental issues. Further
information regarding these and other factors that may cause
MMR's future performance to differ from that projected in the
forward-looking statements are described in more detail under
"Cautionary Statements" in MMR's 1998 Annual Report on Form 10-K.
--------------------------
The results of operations reported and summarized above are not
necessarily indicative of future operating results.
15
PART II--OTHER INFORMATION
Item 1. 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). In the first quarter
of 1999, IMC Global Inc. (IGL) and Phosphate Resource Partners
Limited Partnership (PLP) filed an amended complaint against MOXY
and four former directors of Freeport-McMoRan Inc. (FTX). The
plaintiffs allege that the individual defendants and FTX acted in
bad faith and breached their fiduciary duties to FTX stockholders
and PLP and its unitholders by causing PLP to enter into the
exploration program with MOXY. The suit also alleges that MOXY
conspired with the individual defendants and FTX and aided and
abetted their alleged breaches of fiduciary duties. The
plaintiffs seek unspecified monetary damages and recision 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.
Freeport-McMoRan Sulphur LLC v. IMC-Agrico Company., Civ. Act.
No. 462,776 (19th Jud. Dist. Ct. for Parish of East Baton Rouge,
La.; filed July 22, 1999). The Sulphur Supply Agreement contains a
provision that requires good faith renegotiation of the pricing
provisions if a party can prove that fundamental changes in IMC-Agrico's
operations or the sulphur and sulphur transportation markets invalidate
certain assumptions and result in the performance by that party becoming
"commericially impractible" or "grossly inequitable." In the fourth
quarter of 1998, IMC-Agrico attempted to invoke this contract provision
in an effort to renegotiate the pricing terms of the Sulphur Supply
Agreement. After careful review of the agreement, IMC-Agrico's
operations and the referenced markets, FSC determined that there is
no basis for renegotiation of the pricing provisions under the terms of the
agreement. After discussions failed to resolve this dispute, FSC filed
suit against IMC-Agrico seeking a judicial declaration that no basis
exists under the agreement for a renegotiation of its pricing terms.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits to this report are listed in the Exhibit Index
appearing on page E-1 hereof.
(b) The registrant filed no Current Reports on Form 8-K during the
period covered by this Quarterly Report on Form 10-Q.
16
McMoRan Exploration Co.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
McMoRan Exploration Co.
By: /s/ C. Donald Whitmire, Jr.
----------------------------
C. Donald Whitmire, Jr.
Vice President and Controller-
Financial Reporting
(authorized signatory and
Principal Accounting Officer)
Date: August 09, 1999
17
McMoRan Exploration Co.
Exhibit Index
Exhibit Number
2.1 Agreement and Plan of Mergers dated
as of August 1, 1998. (Incorporated by reference to
Annex A to MMR's Registration Statement on Form S-4
(Registration No. 333-61171) filed with the SEC on
October 6, 1998 (the MMR S-4)).
3.1 Amended and Restated Certificate of Incorporation of
MMR. (Incorporated by reference to Exhibit 3.1 to
MMR's 1998 Annual Report on Form 10-K (the MMR 1998
Form 10-K).
3.2 By-laws of MMR as amended effective February 11, 1999.
(Incorporated by reference to Exhibit 3.2 to the MMR
1998 Form 10-K).
4.1 Form of Certificate of MMR Common Stock. (Incorporated
by reference to Exhibit 4.1 of the MMR S-4).
4.2 Rights Agreement dated as of November 13, 1998.
(Incorporated by reference to Exhibit 4.2 to MMR 1998
Form 10-K).
4.3 Amendment to Rights Agreement dated December 28, 1998.
(Incorporated by reference to Exhibit 4.3 to MMR 1998
Form 10-K).
10.1 MMR Adjusted Stock Award Plan. (Incorporated by
reference to Exhibit 10.1 of the MMR S-4).
10.2 MMR 1998 Stock Option Plan for Non-Employee Directors.
(Incorporated by reference to Exhibit 10.2 of the MMR
S-4).
10.3 MMR 1998 Stock Option Plan. (Incorporated by reference
to Annex D to the MMR S-4).
10.4 Stock Bonus Plan (Incorporated by reference from MMR's
Registration Statement on Form S-8 (Registration No.
333-67963) filed with the SEC on November 25, 1998.
10.5 Master Agreement dated July 14, 1997 between MOXY and
Freeport-McMoRan Resource Partners, Limited
Partnership, now named Phosphate Resource Partners
Limited Partnership ("PLP"). (Incorporated by
reference to Exhibit 10.1 to the Current Report on Form
8-K filed by MOXY dated July 14, 1997 (the "MOXY July
14, 1997 8-K")).
10.6 Purchase and Sale Agreement dated July 11, 1997 by and
among PLP, MCNIC Oil & Gas Properties, Inc., MCN
Investment Corporation and MOXY. (Incorporated by
reference to Exhibit 10.4 of the MOXY July 14, 1997 8-K).
10.7 Agreement for Purchase and Sale dated as of August 1,
1997 between FM Properties Operating Co. and MOXY.
(Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed by MOXY dated as of
September 2, 1997).
10.8 Participation Agreement between MOXY and PLP dated as
of April 1, 1997. (Incorporated by reference to
Exhibit 10.4 to MOXY's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (the "MOXY
1997 10-K")).
10.9 Amendment to Participation Agreement between MOXY and
PLP dated as of December 15, 1997. (Incorporated by
reference to Exhibit 10.5 to the MOXY 1997 10-K).
10.10 Participation Agreement between MOXY
and Gerald J. Ford dated as of December 15, 1997.
(Incorporated by reference to Exhibit 10.6 to the MOXY
1997 10-K).
E-1
10.11 Services Agreement dated as of
November 17, 1998 between MMR and FM Services Company.
(Incorporated by reference to Exhibit 10.11 to MMR 1998
Form 10-K).
10.12 Exploration Agreement effective July
1, 1996, between MOXY and PLP. (Incorporated by
reference to Exhibit 10.1 to MOXY's Quarterly Report on
Form 10-Q for the quarter ending June 30, 1996).
10.13 MMR Financial Counseling and Tax
Return Preparation and Certification Program, effective
September 30, 1998. (Incorporated by reference to
Exhibit 10.13 to MMR 1998 Form 10-K).
10.14 Employee Benefits Agreement by and
between Freeport-McMoRan Inc. ("FTX" ) and FSC.
(Incorporated by reference to Exhibit 10.1 to FSC's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "FSC 1997 10-K" )).
10.15 Asset Sale Agreement for Main Pass
Block 299 between Freeport-McMoRan Resource Partners,
Limited Partnership ("FRP" ) and Chevron USA, Inc.
dated as of May 2, 1990. (Incorporated by reference to
Exhibit 10.2 to FSC's Registration Statement on Form S-
1 (Registration No. 333-40375) filed with the SEC on
November 17, 1997 (the "FSC S-1" )).
10.16 Main Pass 299 Sulphur and Salt Lease,
effective May 1, 1988. (Incorporated by reference to
Exhibit 10.3 to the FSC S-1).
10.17 Joint Operating Agreement by and
between FRP, IMC-Fertilizer, Inc. and Felmont Oil
Corporation, dated as of June 5, 1990. (Incorporated by
reference to Exhibit 10.4 to the FSC S-1).
10.18 MMR Performance Incentive Awards
Program as amended effective February 1, 1999.
(Incorporated by reference to Exhibit 10.18 to MMR 1998
Form 10-K).
10.19 Joint Operating Agreement by and
between FRP, IMC-Fertilizer, Inc. and Felmont Oil
Corporation, dated as of May 1, 1988. (Incorporated by
reference to Exhibit 10.5 to the FSC S-1).
10.20 Agreement to Coordinate Operating Agreements by
and between FRP, IMC-Fertilizer and Felmont Oil
Corporation, dated as of May 1, 1988. (Incorporated by
reference to Exhibit 10.6 to the FSC S-1).
10.21 Asset Purchase Agreement between FRP
and Pennzoil Company dated as of October 22, 1994 (the
"Asset Purchase Agreement" ). (Incorporated by
reference to Exhibit 10.7 to the FSC S-1).
10.22 Amendment No. 1 to the Asset Purchase
Agreement dated as of January 3, 1995. (Incorporated by
reference to Exhibit 10.8 to the FSC S-1).
10.23 Agreement for Sulphur Supply, as
amended, dated as of July 1, 1993 among FRP, IMC
Fertilizer and IMC-Agrico Company (the "Sulphur Supply
Agreement"). (Incorporated by reference to Exhibit
10.9 to the FSC S-1).
10.24 Side letter with IGL regarding the
Sulphur Supply Agreement. (Incorporated by reference to
Exhibit 10.10 to the FSC S-1).
10.25 Processing and Marketing Agreement
between the FSC (a division of FRP) and Felmont Oil
Corporation dated as of June 19, 1990 (the "Processing
Agreement"). (Incorporated by reference to Exhibit
10.11 to the FSC S-1).
E-2
10.26 Amendment Number 1 to the Processing
Agreement. (Incorporated by reference to Exhibit 10.12
to the FSC S-1).
10.27 Amendment Number 2 to the Processing
Agreement. (Incorporated by reference to Exhibit 10.13
to the FSC S-1).
10.28 Credit Agreement dated as of December
12, 1997 among FSC, as borrower, the financial
institutions party thereto, the Chase Manhattan Bank,
as administrative agent and documentary agent, and
Hibernia National Bank, as co-agent. (Incorporated by
reference to Exhibit 10.15 to the FSC 1997 10-K).
10.29 Amended and Restated Credit Agreement
dated November 17, 1998 among Freeport-McMoRan Sulphur
Inc., as borrower, MMR, as Guarantor and, the financial
institutions party thereto. (Incorporated by reference
to Exhibit 10.29 to MMR 1998 Form 10-K.)
10.30 Letter Agreement dated December 22,
1997 between FMS and Rene L. Latiolais. (Incorporated
by reference to Exhibit 10.19 to FSC 1997 10-K).
10.31 Supplemental Letter Agreement between
FMS and Rene L. Latiolais effective as of January 1,
1999. (Incorporated by reference to Exhibit 10.31 to
MMR 1998 Form 10-K).
10.32 Agreement for Consulting Services
between FTX and B. M. Rankin, Jr. effective as of
January 1, 1991)(assigned to FMS as of January 1,
1996); as amended on December 15, 1997 and on December
7, 1998. (Incorporated by reference to Exhibit 10.32
to MMR 1998 Form 10-K).
15.1 Letter dated July 20, 1999 from Arthur Andersen LLP
regarding the unaudited financial statements.
27.1 MMR Financial Data Schedule.
E-3