ITEM 3. LEGAL PROCEEDINGS
The Company, its subsidiaries and other related companies are named defendants in several lawsuits and named parties in certain governmental proceedings arising in the ordinary course of business. For a description of certain proceedings in which the Company is involved, see Items 1 and 2 "Business and Properties -- SANTA FE CONSOLIDATED -- Other Business Matters -- Environmental Regulation" and Note 14 to the Consolidated Financial Statements. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, the Company does not expect these matters to have a material adverse effect on its financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Santa Fe's common stock is listed on the New York Stock Exchange and trades under the symbol SFR. The following table sets forth information as to the last sales price per share of Santa Fe's common stock as quoted on the Consolidated Tape System for each calendar quarter in 1995 and 1996.
LOW HIGH ---- ---- 1st Quarter..................... 8 9 3/4 2nd Quarter..................... 9 1/8 10 1/2 3rd Quarter..................... 9 10 5/8 4th Quarter..................... 8 1/2 9 7/8
1st Quarter..................... 8 3/8 10 1/2 2nd Quarter..................... 10 1/4 12 3/8 3rd Quarter..................... 11 1/4 14 1/4 4th Quarter..................... 13 15 1/8
The Company has not paid dividends on its common stock since the third quarter of 1993. The determination of the amount of future cash dividends, if any, to be declared and paid is in the sole discretion of Santa Fe's Board of Directors and will depend on dividend requirements with respect to the Company's convertible preferred stock, the Company's financial condition, earnings and funds from operations, the level of its capital and exploration expenditures, dividend restrictions in its financing agreements, its future business prospects and other matters as the Company's Board of Directors deems relevant. For a discussion of certain restrictions on Santa Fe's ability to pay dividends, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financing Activities."
At December 31, 1996 the Company had approximately 38,500 shareholders of record.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
- ------------
(a) Certain prior period amounts have been restated to conform to 1996 presentation.
(b) 1993 amount includes losses on property dispositions of $27.8 million, long-term debt repayment penalties of $8.6 million and accruals of certain personnel benefits and related costs of $2.2 million. 1994 amount represents severance, benefits and relocation expenses.
(c) Includes production attributable to properties sold during 1993 of 4.1 MBbls of oil and 21.7 MMcf of natural gas per day (7.7 MBOE per day) and gives effect to the sale in 1993 of approximately 8.0 MMBOE of proved reserves.
(d) On May 19, 1992 Adobe was merged with and into the Company.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported a loss to common shares for the fourth quarter of 1996 of $46.2 million, or $0.51 per share, compared to earnings to common shares of $4.7 million, or $0.05 per share, in the fourth quarter of 1995. Earnings for the fourth quarter of 1996 included pretax charges of $47.0 million for impairment of oil and gas properties and $9.2 million in debt extinguishment costs associated with the IPO and, in addition, a $33.7 million premium paid with respect to the purchase of 3.8 million shares of the Company's Convertible Preferred Stock, 7% Series. Earnings for the fourth quarter also included a $12.3 million gain on the sales of certain surface lands in California. Crude oil and liquids sales of 76.5 MBbls per day represents the highest quarterly average in the Company's history. The Company's average hedged sales price for crude oil and liquids of $18.80 per barrel was $4.74 per barrel higher than the fourth quarter of 1995. Similarly, the Company's average hedged sales price for natural gas increased $0.40 per Mcf from the fourth quarter of 1995 to $2.04 per Mcf.
The Company reported a loss to common shares for the full year 1996 of $10.8 million, or $0.12 per share, compared to earnings to common shares of $11.8 million, or $0.13 per share, in 1995. Crude oil and liquids sales averaged 74.3 MBbls per day, the highest annual average in the Company's history. The Company's average hedged sales price for crude oil and liquids of $16.87 per barrel was $2.12 per barrel higher than 1995. Average natural gas sales of 166.9 MMcf per day were also the highest in the Company's history. The Company's average hedged sales price for natural gas increased $0.38 per Mcf from the 1995 average to $1.81 per Mcf in 1996.
GENERAL
As an independent oil and gas producer, the Company's results of operations are dependent upon the difference between the prices received for oil and gas and the costs of finding and producing such resources. A material portion of the Company's crude oil production is from long-lived fields in the San Joaquin Valley of California where EOR methods are being utilized. The market price of the heavy (i.e., low gravity, high viscosity) and sour (i.e., high sulfur content) crude oils produced in these fields is lower than sweeter, light (i.e., low sulfur and low viscosity) crude oils, reflecting higher transportation and refining costs. In addition, the lifting costs of heavy crude oils are generally higher than the lifting costs of light crude oils.
The lower price received for the Company's domestic heavy and sour crude oil is reflected in the average sales price of the Company's domestic crude oil and liquids (excluding the effect of hedging transactions) for 1996 of $17.17 per barrel, compared to $20.44 per barrel for West Texas Intermediate ("WTI") crude oil (an industry posted price generally indicative of prices for sweeter light crude oil). In 1996 the Company's average sales price for California heavy crude oil was $15.77 per barrel, approximately 77% of the annual average posted price for WTI.
Crude oil prices are subject to significant changes in response to fluctuations in the domestic and world supply and demand and other market conditions as well as the world political situation as it affects OPEC, the Middle East and other producing countries. During 1995 and 1996 the actual average sales price (unhedged) received by the Company ranged from a high of $18.80 per barrel in the fourth quarter of 1996 to a low of $14.16 per barrel for the fourth quarter of 1995. Based on operating results for the year 1996, the Company estimates that a $1.00 per barrel increase or decrease in its average domestic crude oil sales prices would result in a corresponding $14.6 million change in net income and a $18.0 million change in cash flow from operating activities. The foregoing estimates do not give effect to changes in any other factors, such as the effect of the Company's hedging program or its debt levels and related interest expense, that might result from a change in oil prices.
The price of natural gas fluctuates due to weather conditions, the level of natural gas in storage, the relative balance between supply and demand and other economic factors. The actual average sales price (unhedged) received by the Company in 1996 and 1995 for its natural gas ranged from a high of $2.45 per Mcf in the fourth quarter of 1996 to a low of $1.31 per Mcf in the first quarter of 1995.
Based on operating results for the year 1996, the Company estimates that a $0.10 per Mcf increase or decrease in its average domestic natural gas sales price would result in a corresponding $2.1 million change in net income (net of $1.0 million in costs associated with natural gas purchased for use in steam generation) and a $2.6 million change in cash flow from operating activities (net of $1.3 million in costs associated with natural gas purchased for steam generation). The foregoing estimates do not give effect to changes in any other factors, such as the effect of the Company's hedging program or its debt levels and related interest expense, that might result from a change in natural gas prices.
From time to time the Company hedges a portion of its oil and gas sales to provide a certain minimum level of cash flow from its sales of oil and gas. While the hedges are generally intended to reduce the Company's exposure to declines in market price, the Company's gain from increases in market price may be limited. The Company uses various financial instruments whereby monthly settlements are based on differences between the prices specified in the instruments and the settlement prices of certain futures contracts quoted on the New York Mercantile Exchange ("NYMEX") or certain other indices. Generally, in instances where the applicable settlement price is less than the price specified in the contract, the Company receives a settlement based on the difference; in instances where the applicable settlement price is higher than the specified price, the Company pays an amount based on the difference. The instruments utilized by the Company differ from futures contracts in that there is no contractual obligation which requires or allows for the future delivery of the product. Gains or losses on hedging activities are recognized in oil and gas revenues in the period in which the hedged production is sold.
The Company has open crude hedges on an average of approximately 7,700 barrels per day for the period January to July 1997. The instruments used have floors ranging from $21 to $23 per barrel and ceilings ranging from $24 to $27 per barrel. Under the terms of the instruments, if the aggregate average of the applicable daily settlement prices is below the floor, the Company will receive a settlement based on the difference, and if the aggregate average of the applicable daily settlement prices is above the ceiling, the Company will be required to pay an amount based on the difference. The following table reflects estimated amounts due to or from the Company assuming the stated settlement prices are in effect for the entire period the aforementioned hedges are in effect.
SETTLEMENT PRICE DUE TO (FROM) COMPANY (DOLLARS PER BARREL) (MILLIONS OF DOLLARS) -------------------- --------------------- 27.00 (1.6) 26.00 (0.2) 25.00 (0.1) 23.00 - 24.00 -- 22.00 0.3 21.00 1.1 20.00 2.7
Crude oil hedges resulted in a $13.4 million decrease in revenues in 1996 and a $2.4 million increase in revenues in 1995.
The Company has no open natural gas hedges. In 1996 and 1995 natural gas hedges resulted in decreases in revenues of $21.4 million and $0.3 million, respectively.
In addition to its oil and gas sales hedges, for the first six months of 1996 the Company hedged 20.0 MMcf per day of the natural gas it purchases for use in its steam generation operations in the San Joaquin Valley of California. Such hedges resulted in a $3.2 million increase in 1996 production and operating costs.
In February 1996 the Bureau of Land Management ("BLM") of the United States Department of the Interior (which operates the Company's leases of Federal lands) agreed, effective as of June 1, 1996, to reduce the royalties payable on any Federal lease that produces heavy oil. As a result of this
program, the Company's royalty rate on its Federal leases which produce heavy oil (all of which are operated by Monterey) has been reduced from 12.5% to an average of 4.8%, resulting in a net increase in the production attributable to the Company's net revenue interests in such leases of approximately 1,600 barrels per day. The royalty reduction will be terminated upon the first to occur of (i) the determination by the BLM that the WTI average oil price (as adjusted for inflation) has remained above $24 per barrel for six consecutive months and (ii) such time after September 10, 1999, as the Secretary of the Interior determines that the heavy oil royalty rate reduction has not produced the intended results (i.e., to reduce the loss of otherwise recoverable reserves).
RESULTS OF OPERATIONS
REVENUES
The following table reflects the components of the Company's crude oil and liquids and natural gas revenues:
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- CRUDE OIL AND LIQUIDS PRODUCED REVENUES ($ MILLIONS) Sales Domestic California Heavy........... 251.4 193.9 161.8 Other...................... 165.3 115.9 104.3 --------- --------- --------- 416.7 309.8 266.1 Argentina..................... 25.8 13.8 11.6 Indonesia..................... 29.5 30.8 31.3 Hedging......................... (13.4) 2.4 -- Net Profits Payments............ (3.2) (4.4) (3.8) --------- --------- --------- 455.4 352.4 305.2 ========= ========= ========= VOLUMES (MBBLS/DAY) Domestic California Heavy.............. 43.5 38.9 38.3 Other......................... 22.8 19.6 19.3 --------- --------- --------- 66.3 58.5 57.6 Argentina....................... 3.7 2.6 2.4 Indonesia....................... 4.3 5.2 5.7 --------- --------- --------- 74.3 66.3 65.7 ========= ========= ========= SALES PRICES ($/BBL) Domestic California Heavy.............. 15.77 13.65 11.57 Other......................... 19.84 16.24 14.83 Total......................... 17.17 14.52 12.66 Argentina....................... 19.06 14.72 13.23 Indonesia....................... 18.92 16.10 15.09 Total........................... 17.36 14.65 12.89 Total Hedged.................... 16.87 14.75 12.89 NATURAL GAS PRODUCED REVENUES ($ MILLIONS) Sales Domestic...................... 122.2 73.3 87.2 Foreign....................... 9.8 5.5 0.1 --------- --------- --------- 132.0 78.8 87.3 Hedging......................... (21.4) (0.3) (1.0) Net Profits Payments............ (4.8) (1.4) (2.9) --------- --------- --------- 105.8 77.1 83.4 ========= ========= ========= VOLUMES (MMCF/DAY) Domestic........................ 145.7 137.7 136.3 Foreign......................... 21.2 12.3 0.3 --------- --------- --------- 166.9 150.0 136.6 ========= ========= ========= SALES PRICES ($/MCF) Unhedged Domestic...................... 2.29 1.46 1.75 Foreign....................... 1.27 1.22 0.99 Total......................... 2.16 1.44 1.75 Hedged.......................... 1.81 1.43 1.73
Total revenues increased 30% from $449.4 million in 1995 to $583.3 million in 1996. Revenues from the sales of crude oil and liquids produced increased $103.0 million, primarily reflecting increased sales prices ($65.6 million) and increased volumes ($52.1 million). Such increases were partially offset by a $13.4 million hedging loss in 1996 compared to a $2.4 million hedging gain in 1995. Crude oil and liquids sales volumes increased 8.0 MBbls per day primarily due to capital spending on the Company's heavy oil properties (3.5 MBbls per day), reduced royalties on Federal heavy oil leases (1.0 MBbls per day) and new domestic production and acquired interests in certain producing properties (3.4 MBbls per day).
Revenues from the sales of natural gas produced increased $28.7 million, primarily reflecting increased sales prices ($39.5 million) and increased volumes ($13.7 million). Such increases were partially offset by a $21.4 million hedging loss in 1996 compared to a loss of $0.3 million in 1995. Domestic natural gas sales volumes increased 8.0 MMcf per day primarily reflecting new production partially offset by declines in production from more mature fields. The increase in international sales volumes primarily reflects a full year's production from the Company's Sierra Chata field in Argentina, which commenced production in April 1995, and increased demand for the Argentine natural gas.
Revenues from the sales of crude oil purchased relate to the sale of crude oil purchased and blended with certain of the Company's heavy oil production to facilitate pipeline transportation. The cost to purchase such crude oil is included in Costs and Expenses. The increase in 1996 reflects an increase in blending to transport heavy oil to more attractive markets outside southern California.
Total revenues increased 11% from $404.2 million in 1994 to $449.4 million in 1995. Crude oil and liquids revenues increased $47.2 million, primarily reflecting the effect of increased sales prices ($44.3 million) and increased volumes ($4.3 million). Natural gas revenues declined $6.3 million primarily due to the effect of lower sales prices ($14.6 million) which was partially offset by the effect of higher sales volumes ($8.6 million). The increase in natural gas sales volumes is principally due to sales from the Company's Sierra Chata field in Argentina, which commenced production in April 1995. Other revenues for 1995 includes $10.2 million related to the favorable settlement of a disputed natural gas sales contract.
Total revenues declined 10% from $449.5 million in 1993 to $404.2 million in 1994. Crude oil and liquids revenues declined $10.2 million. The sale of certain domestic properties in the fourth quarter of 1993 and the second quarter of 1994 resulted in a decrease in oil revenues of approximately $20.4 million. The effect of increased volumes of California heavy and Indonesian crude, approximately $14.5 million, and lower net profits payments were partially offset by the effect of lower sales prices. Daily average oil production in 1994 decreased 1,000 barrels per day from 1993. The 3,800 barrel per day decrease in oil production resulting from the sale of properties was partially offset by a 1,300 barrel per day increase in California heavy crude and a 1,600 barrel per day increase in Indonesian production.
Natural gas revenues declined from $107.8 million in 1993 to $83.4 million in 1994. The sales of properties resulted in a decrease in natural gas revenues of approximately $13.1 million and lower sales prices resulted in a reduction in revenues of approximately $7.6 million. In addition, revenues for 1993 included a positive adjustment of $3.2 million related to production in prior periods from certain nonoperated properties. Net profits payments in 1994 were $3.3 million lower than in 1993. Natural gas sales volumes decreased from 165.4 MMcf per day in 1993 to 136.6 MMcf per day in 1994 with the property sales accounting for approximately 18.6 MMcf per day of the decrease. The Company's curtailment program due to low prices resulted in a reduction in 1994 volumes of approximately 5.1 MMcf per day and a prior period adjustment included in 1993 represented volumes of approximately 4.0 MMcf per day.
COSTS AND EXPENSES
The following table sets forth, on a per barrel of oil equivalent produced basis, certain of the Company's costs and expenses (in dollars):
1996 1995 1994 --------- --------- --------- Production and operating (a)......... 5.02(f) 4.65 4.65 Exploration, including dry hole costs.............................. 0.92 0.70 0.63 Depletion, depreciation and amortization (b)................... 3.89 3.96 3.76 General and administrative........... 0.67(g) 0.81 0.85 Taxes other than income (c).......... 0.71 0.58 0.80 Interest, net (d)(e)................. 0.82 0.93 1.08
- ------------
(a) Excluding related production, severance and ad valorem taxes.
(b) Excludes effect of unproved property writedowns of $0.07 per BOE in 1996 and $0.03 per BOE in 1995.
(c) Includes production, severance and ad valorem taxes.
(d) Reflects interest expense less amounts capitalized and interest income.
(e) Excludes effects of (i) benefit of federal income tax audit refund of $0.25 per BOE in 1995; (ii) benefit of an adjustment to certain financing costs recorded in a prior period of $0.05 per BOE in 1995; (iii) benefit of adjustments to provisions for potential state income tax obligations of $0.15 per BOE in 1995 and $0.36 per BOE in 1994; (iv) benefit of adjustment to provisions made in prior periods with respect to interest on certain federal income tax audit adjustments of $0.07 per BOE in 1994; and (v) benefit of Federal income tax audit refund and revised tax sharing agreement with the Company's former parent of $0.36 per BOE in 1993.
(f) Excludes effect of $0.9 million charge for environmental clean-up costs ($0.02 per BOE).
(g) Excludes effect of $1.6 million charge related to the abandonment of an office lease and $3.3 million in costs and expenses related to the IPO ($0.14 per BOE).
Costs and expenses totalled $493.8 million in 1996 compared to $395.5 million in 1995. Production and operating costs increased $32.6 million, primarily reflecting higher production volumes, $3.2 million in expenses related to hedges of natural gas purchased in connection with steam generation operations in California (see -- General) and higher volumes and prices for natural gas purchased in connection with such steam generation operations. The cost of crude oil purchased increased primarily due to increased blending activity (see -- REVENUES). The $11.1 million increase in exploration costs primarily reflects higher geological and geophysical expenditures ($6.4 million) and higher dry hole costs ($5.7 million). The increase in depletion, depreciation and amortization ("DD&A") primarily reflects higher production volumes. The impairments of oil and gas properties of $57.4 million in 1996 and $30.2 million in 1995 represent writedowns taken in accordance with the Company's accounting policy discussed in Note 1 to the Consolidated Financial Statements. The increase in general and administrative expense primarily reflects $3.3 million in expenses related to the IPO. The increase in taxes other than income primarily reflects higher production and severance taxes due to higher prices and volumes ($2.7 million) and higher ad valorem taxes. Taxes other than income in 1995 included a $0.7 million benefit related to the settlement of certain disputed sales and use taxes. The gain on disposition of properties in 1996 includes a $12.3 million gain on the fourth quarter sale of certain surface properties in Orange County, California.
Costs and expenses totalled $395.5 million in 1995 compared to $356.0 million in 1994. DD&A increased $11.9 million primarily reflecting such expense associated with new production from the Company's Sierra Chata field in Argentina and increased expense associated with certain of the Company's Gulf Coast and Permian Basin properties principally due to the high level of capital expenditures in 1995. In 1995 the Company recognized $30.2 million in impairment of oil and gas properties associated with the adoption of a new accounting standard with respect to the impairment of certain assets. Taxes other than income are $6.6 million lower in 1995, primarily reflecting lower
ad valorem taxes and a $0.7 million benefit reflecting adjustments to amounts accrued in prior periods due to the favorable settlement of a dispute with respect to certain sales and use taxes.
Costs and expenses for 1994 totalled $356.0 million compared to $562.5 million for 1993. Costs and expenses for 1993 included impairments of oil and gas properties of $99.3 million and restructuring charges of $38.6 million. Costs and expenses for 1994 included restructuring charges of $7.0 million (see -- Liquidity and Capital Resources). Property sales in the fourth quarter of 1993 and the second quarter of 1994 resulted in reductions in production and operating costs and DD&A of $12.4 million and $11.5 million, respectively. The remainder of the decrease in DD&A is primarily attributable to the effect of the property impairments taken in the fourth quarter of 1993. Exploration expenses were down $10.6 million primarily reflecting lower geological and geophysical costs with respect to foreign operations and lower overhead. General and administrative expenses were $5.0 million lower, primarily reflecting the effect of the corporate restructuring program.
Interest income for 1995 includes $7.4 million related to a $12.0 million refund with respect to the audit of the Company's federal income tax returns for 1981 through 1985 and $0.8 million related to a $1.3 million refund with respect to the audit of Adobe's federal income tax returns for 1984 and 1985.
Interest expense for 1995 includes a $5.0 million benefit reflecting adjustments to provisions made in prior periods for potential state income tax obligations. Interest expense for 1994 includes a benefit of $2.4 million reflecting adjustments to provisions made in prior periods with respect to interest on certain potential federal income tax audit adjustments and a benefit of $11.5 million reflecting adjustments to provisions made in prior periods for potential state income tax obligations.
Other income (expense) for 1995 includes a $2.5 million gain on the sale of Cherokee Resources Incorporated, a privately-held oil and gas company, and a $1.8 million loss on the sale of the Company's investment in Hadson. Other income (expense) for 1994 includes (i) a $2.4 million gain on the sale of the Company's interest in a company which was acquired in the Adobe merger in 1992; (ii) a net $1.6 million charge with respect to the Company's investment in Hadson; and (iii) a $5.0 million charge with respect to certain litigation.
Income taxes for 1996 include a $8.3 million deferred tax benefit related to certain foreign expenditures incurred in prior periods. Income taxes for 1995 include a $5.0 million benefit related to the previously discussed federal tax audit refunds and a $1.3 million benefit related to adjustments to provisions in prior periods for potential state income tax obligations. Income taxes for 1994 include a $3.0 million credit reflecting the benefit of adjustments to provisions made in prior periods with respect to certain potential federal income tax audit adjustments and a $2.6 million credit reflecting the benefit of adjustments to provisions made in prior periods for potential state income tax obligations.
The extraordinary item reported in 1996 represents costs and expenses associated with the retirement of certain of the Company's debt in association with the IPO. See Note 2 to the Consolidated Financial Statements.
The Company's preferred dividend requirement for 1996 includes a $33.7 million premium related to the purchase of 3.8 million shares of the Company's Convertible Preferred Stock, 7% Series. The increase in the Company's preferred dividend requirement in 1994 reflects the issuance of 10.7 million shares of $0.732 Series A Convertible Preferred Stock in the second quarter of 1994.
In October 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"), which established financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 encourages companies to adopt a fair value based method of accounting for such plans but continues to allow the use of the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("Opinion 25"). Companies electing to continue accounting in accordance with Opinion 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method defined in FAS 123 had been applied. The Company has elected to continue to account for stock-based compensation in accordance with
Opinion 25 and the pro forma disclosures in accordance with the provisions of FAS 123 are included in Note 12 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities is a function of the volumes of oil and gas produced from the Company's properties and the sales prices received therefor. Since crude oil and natural gas are depleting assets, unless the Company replaces the oil and gas produced from its properties, the Company's assets will be depleted over time and its ability to incur debt at constant or declining prices will be reduced. The Company increased its proved reserves (net of production and sales) by approximately 33% over the five years ended December 31, 1996; however, no assurances can be given that such increase will occur in the future. Historically, the Company has generally funded development and exploration expenditures and working capital requirements from cash provided by operating activities. Depending upon the future levels of operating cash flows, which are significantly affected by oil and gas prices, the restrictions on additional borrowings included in certain of the Company's debt agreements, together with debt service requirements and dividends, may limit the cash available for future exploration, development and acquisition activities. Net cash provided by operating activities and net proceeds from sales of properties totalled $244.3 million in 1996; net cash used for capital expenditures and producing property acquisitions in such period totalled $223.5 million.
The increase in accounts receivable in 1996 primarily reflects the effect of higher sales prices and an increase in crude oil blending activity, partially offset by the collection of the income tax refund discussed below. The increase in other current assets primarily reflects an increase in advances to the operators of joint interest oil and gas properties due to higher capital spending and the note receivable associated with the sale of certain surface property. Other assets at December 31, 1996 includes $24.2 million in escrowed funds related to a producing property acquisition the Company completed in January 1997. The increase in accounts payable at year end 1996 primarily reflects an increase in capital projects in progress and increased crude oil blending activity. The increase in income taxes payable in 1996 primarily reflects current taxes associated with the contribution of assets to Monterey and the Proposed Spin Off. The increase in other current liabilities reflects higher advances received from joint interest partners.
The increase in accounts receivable from $76.2 million at December 31, 1994 to $89.0 million at December 31, 1995 primarily reflects a $12.0 million receivable at December 31, 1995 related to a refund with respect to the audit of the Company's federal income tax returns for 1981 through 1985. The decrease in accounts payable from $84.1 million at December 31, 1994 to $73.1 million at December 31, 1995 primarily reflects lower amounts payable with respect to capital projects in progress.
Monterey intends to pay its shareholders a quarterly dividend of $0.15 per share. The first dividend has been declared and will be paid in April 1997 consisting of a prorated dividend of $0.22 per share in respect of Monterey's first partial quarter which ended December 31, 1996 and its first full quarter ending March 31, 1997. Santa Fe will receive a total of approximately $10.0 million with respect to the 45.4 million shares that it currently holds. To the extent Monterey continues to pay such dividends, Santa Fe will receive dividends of approximately $6.8 million per quarter (assuming a quarterly dividend of $0.15 per share) until the Proposed Spin Off is consummated. Such amounts would be available to fund the Company's operations, other than those conducted by Monterey.
Effective November 13, 1996 Santa Fe entered into a revolving credit agreement (the "Santa Fe Credit Agreement") which matures November 13, 2001. The Santa Fe Credit Agreement permits the Company to obtain revolving credit loans and issue letters of credit up to an aggregate amount of up to $150.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $30.0 million. Borrowings under the Santa Fe Credit Agreement are unsecured and interest rates are tied to
the bank's prime rate or eurodollar offering rate, at the option of the Company. At December 31, 1996, no loans or letters of credit were outstanding under the terms of the Santa Fe Credit Agreement.
Effective November 13, 1996 Monterey entered into the Monterey Credit Agreement which matures November 13, 2000. The Monterey Credit Agreement permits Monterey to obtain revolving credit loans and issue letters of credit up to an aggregate amount of up to $75.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $15.0 million. Borrowings under the Monterey Credit Agreement are unsecured and interest rates are tied to the bank's prime rate or eurodollar offering rate, at the option of Monterey. At December 31, 1996 no loans or letters of credit were outstanding under the terms of the Monterey Credit Agreement.
In November 1996 Monterey issued the Monterey Senior Notes which were exchanged for $175.0 million of senior notes previously issued by Santa Fe. The Monterey Senior Notes bear interest at 10.61% per annum and are payable in full in 2005. Monterey is required to repay, without premium, $25.0 million of the principal amount each year from 1999 through 2005.
Certain of the credit agreements and the indenture for the Debentures include covenants that restrict Santa Fe and Monterey's ability to take certain actions, including the ability to incur additional indebtedness and to pay dividends on capital stock. Under the most restrictive of these covenants, at December 31, 1996 Santa Fe could incur up to $417.7 million of additional indebtedness and pay dividends of up to $36.8 million on its aggregate capital stock (including its common stock, 7% Convertible Preferred Stock and Series A Preferred). At December 31, 1996, under the most restrictive of these covenants, Monterey could incur up to $253.4 million of additional indebtedness and pay dividends of $61.7 million on its common stock. Monterey is prohibited from paying more than $31.0 million in dividends to Santa Fe in any fiscal year prior to the consummation of the Proposed Spin Off.
The Company has three short-term uncommitted lines of credit totalling $60.0 million which are used to meet short-term cash needs. Interest rates on borrowings under these lines of credit are typically lower than rates paid under the Bank Facility. At December 31, 1996 $4.0 million was outstanding under these lines of credit.
At December 31, 1996 the Company had outstanding letters of credit totalling $6.0 million, $2.3 million of which related to the operations of Monterey.
INITIAL PUBLIC OFFERING AND PROPOSED SPINOFF
In the third quarter of 1996 the Company announced its intention to separate its operations in the State of California from the rest of its domestic and international operations. In November such operations were assumed by Monterey which subsequently issued 9.3 million shares of its common stock in an initial public offering. The proceeds from the offering were primarily used to retire certain of the Company's then outstanding long-term debt. See Items 1 and 2. Business and Properties -- MONTEREY RESOURCES, INC.
The Company has announced that it intends to distribute pro rata to its common shareholders all of its remaining ownership interest in Monterey by means of a tax-free distribution. The Proposed Spin Off is subject to certain conditions including, the receipt of a ruling from the Internal Revenue Service that such a distribution would be tax-free, the approval of such distribution by the Company's common shareholders, the absence of any future change in the market or economic conditions (including developments in the capital markets) or the Company's or Monterey's business or financial condition that causes the Company's Board of Directors to conclude that the Proposed Spin Off is not in its shareholders' best interests and the final declaration of the Proposed Spin Off by the Company's Board of Directors. The Proposed Spin Off is not expected to occur prior to July 1997.
The Company is taking these actions because of its belief that its oil and gas operations have developed over time into separate businesses that operate independently and have diverging capital requirements and risk profiles. In addition, the Board of Directors believes that dividing the Company's operations into two independent companies will allow each to more efficiently develop its
distinct resource base and pursue separate business opportunities while providing each with improved access to capital markets. The Board of Directors also believes that the IPO and the Proposed Spin Off will allow investors to better evaluate each business, enhancing the likelihood that each would achieve appropriate market recognition for its performance. If the Proposed Spin Off occurs, the market price of the Company's common stock will decline to reflect the distribution of the Monterey common stock and the increased shares available in the market may have an adverse effect on the market price of Monterey's common stock.
Also in November, the Company completed the purchase of 3.8 million of the 5.0 million outstanding shares of its Convertible Preferred Stock, 7% Series, for $24.50 per share, net to the seller in cash. The Company made the offer because it believes that the goals of the Proposed Spin Off can be better achieved by reducing the number of preferred shares outstanding and simplifying the Company's capital structure.
ENVIRONMENTAL MATTERS
Almost all phases of the Company's oil and gas operations are subject to stringent environmental regulation by governmental authorities. Such regulation has increased the costs of planning, designing, drilling, installing, operating and abandoning oil and gas wells and other facilities. The Company has expended significant financial and managerial resources to comply with such regulations. Although the Company believes its operations and facilities are in general compliance with applicable environmental regulations, risks of substantial costs and liabilities are inherent in oil and gas operations. It is possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies or claims for damages to property, employees, other persons and the environment resulting from the Company's operations, could result in significant costs and liabilities in the future. As it has done in the past, the Company intends to fund its cost of environmental compliance from operating cash flows. See Items 1 and 2. "Business and Properties -- SANTA FE CONSOLIDATED -- Other Business Matters -- Environmental Regulation" and Note 14 to the Consolidated Financial Statements.
DIVIDENDS
Dividends on the Company's 7% Convertible Preferred Stock and Series A Preferred Stock are cumulative at an annual rate of $1.40 per share and $0.732 per share, respectively. No dividends may be declared or paid with respect to the Company's common stock if any dividends with respect to the 7% Convertible Preferred Stock or Series A Preferred Stock are in arrears. None of the dividends with respect to the Company's 7% Convertible Preferred Stock and Series A Preferred Stock are in arrears. The determination of the amount of future cash dividends, if any, to be declared and paid on the Company's common stock is in the sole discretion of the Company's Board of Directors and will depend on dividend requirements with respect to the preferred stock, the Company's financial condition, earnings and funds from operations, the level of capital and exploration expenditures, dividend restrictions in financing agreements, future business prospects and other matters the Board of Directors deems relevant.
FORWARD LOOKING STATEMENTS
In its discussion and analysis of financial condition and results of operations, the Company has included certain statements (other than statements of historical fact) that constitute 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. When used herein, the words "budget," "budgeted," "anticipate," "expects," "believes," "seeks," "goals," "intends" or "projects" and similar expressions are intended to identify forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable and such forward-looking statements are based upon the best data available at the time this report is
filed with the Securities and Exchange Commission, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements include, but are not limited to, the following: production variances from expectations, volatility of oil and gas prices, the need to develop and replace its reserves, the substantial capital expenditures required to fund its operations, exploration risks, environmental risks, uncertainties about estimates of reserves, competition, government regulation and political risks, and the ability of the Company to implement its business strategy. All such forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Audited Financial Statements Report of Independent Accountants ............................................................... 63 Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994 ............................................................. 64 Consolidated Balance Sheet - -- December 31, 1996 and 1995 ...................................................................... 65 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ............................................................. 66 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 ................................................... 67 Notes to Consolidated Financial Statements ...................................................... 68
Unaudited Financial Information Supplemental Information to Consolidated Financial Statements ................................................................ 91
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
EXECUTIVE OFFICERS OF SANTA FE
Listed below are the names, ages (as of February 1, 1997) and positions of all executive officers of Santa Fe (excluding executive officers who are also directors of Santa Fe) and their business experience during the past five years. Unless otherwise stated, all offices were held with Santa Fe Energy Company prior to its merger with Santa Fe. Each executive officer holds office until his or her successor is elected or appointed or until his or her earlier death, resignation or removal.
HUGH L. BOYT, 51 Senior Vice President -- Production since March 1, 1990. From 1989 until March 1990, Mr. Boyt served as Corporate Production Manager.
JERRY L. BRIDWELL, 53 Senior Vice President -- Exploration and Land since 1986.
JANET F. CLARK, 42 Vice President and Chief Financial Officer since January 1997. Ms. Clark was with Southcoast Capital Corporation from January 1994 until she joined Santa Fe. While with Southcoast Capital Ms. Clark served as Vice President from January 1994 to June 1996 and as Director, Corporate Finance, from June 1996 to December 1996. From December 1992 to January 1994 Ms. Clark served as Senior Vice President with Williams MacKay Jordan & Company. Prior to December 1992 Ms. Clark was an independent financial consultant.
E. EVERETT DESCHNER, 56 Vice President -- Engineering and Evaluation since April 1990.
KATHY E. HAGER, 45 Vice President -- Public Affairs since January 1997. From January 1994 to January 1997 Ms. Hager served as Director, Investor Relations and from September 1990 to January 1994 as Manager, Investor Relations.
CHARLES G. HAIN, JR., 50 Vice President -- Human and Data Resources since 1994. Vice President -- Employee Relations from 1988 until 1994.
DAVID L. HICKS, 47 Vice President -- Law and General Counsel since March 1991.
DIRECTORS
CURRENT DIRECTORS. Listed below are the names and ages (as of February 1, 1997) of, and certain other information about, all the current directors of the Company. The indicated periods of service as a director of the Company include service during the time the Company was a wholly owned subsidiary of Santa Fe Pacific Corporation.
FIRST ELECTED NAME, AGE AND BUSINESS EXPERIENCE A DIRECTOR - ------------------------------------- -------------
DIRECTORS CONTINUING IN OFFICE UNTIL 1997
Marc J. Shapiro, 49 ............................................. 1990 Chairman and Chief Executive Officer of Texas Commerce Bank National Association ("Texas Commerce Bank") (banking) since 1987, and a member of the Policy Council of Chase Manhattan Corporation, (successor to the Management Committee of Chemical Banking Corporation) since December 1991. Mr. Shapiro is also a director of Browning-Ferris Industries, Burlington Northern Santa Fe Corporation and a trustee of Weingarten Realty Investors
William E. Greehey, 60 .......................................... 1991 Chairman of the Board, Chief Executive Officer and director of Valero Energy Corporation (refining and marketing, gas transmission and processing) since 1983. Mr. Greehey is also a director of Weatherford-Enterra
DIRECTORS CONTINUING IN OFFICE UNTIL 1998
Melvyn N. Klein, 55 ............................................. 1993 Attorney and Counselor at Law; private investor; the sole stockholder of a general partner in GKH Partners, L.P. Mr. Klein is also a principal of Questor Management Company, and director of Anixter International and Bayou Steel Corporation (specialty steel manufacturer)
James L. Payne, 59 .............................................. 1986 Chairman of the Board, President and Chief Executive Officer of the Company since June 1990. Mr. Payne was President of Santa Fe Energy Company, a predecessor in interest of the Company from January 1986 to January 1990 when he became President of the Company. From 1982 to January 1986 Mr. Payne was Senior Vice President--Exploration and Land of Santa Fe Energy Company. Mr. Payne is also a director of Pool Energy Services Co. (oilfield services), and Monterey Resources, Inc.
DIRECTORS CONTINUING IN OFFICE UNTIL 1999
Allan V. Martini, 69 ............................................ 1990 Retired Vice President Exploration/Production and director of Chevron Corporation (petroleum operations) since August 1988. Mr. Martini served in that position from July 1986 until his retirement
(TABLE CONTINUED ON FOLLOWING PAGE)
FIRST ELECTED NAME, AGE AND BUSINESS EXPERIENCE A DIRECTOR - ------------------------------------- -------------
Reuben F. Richards, 67........................................... 1992 Chairman of the Board, Terra Industries Inc. (argibusiness) from December 1982 until retirement in March 1996. Chief Executive Officer thereof from December 1982 to May 1991 and President thereof from July 1983 to May 1991; Chairman of the Board, Engelhard Corporation (specialty chemicals, engineered materials and precious metals management services) from May 1985 to December 1994 and director thereof since prior to 1990; Chairman of the Board, Minorco (U.S.A.) Inc. ("Minorco (USA)"), from May 1990 to March 1996 and Chief Executive Officer and President from February 1994 to March 1996. Mr. Richards is also a director of Ecolab, Inc. (cleaning and sanitizing products), Engelhard Corporation, Potlatch Corporation (forest products), and Minorco.
Kathryn D. Wriston, 57........................................... 1990 For the past five years, director of various corporations and organizations, including Northwestern Mutual Life Insurance Company and the Stanley Works and a Trustee of the Financial Accounting Foundation.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Since July 1, 1990, the Company has entered into agreements with Texas Commerce Bank or affiliates thereof providing for cash management, lending, depository and other banking services in the normal course of business. Texas Commerce Bank also issued standby letters of credit with various expiration dates for security and environmental requirements totaling $4,206,854 as of December 31, 1996. Texas Commerce Bank is also the Trustee of the Company's Retirement Income Plan. Finally, effective November 19, 1992, the Company in return for cash contributed certain oil and gas interests to the Santa Fe Energy Trust which in turn issued Secure Principal Energy Receipts evidencing an interest in the Trust and a United States Treasury Obligation. Texas Commerce Bank is the Trustee of the Trust and acts as registrar and transfer agent of the Secure Principal Energy Receipts. During 1996 the Company paid Texas Commerce Bank interest in the amount of $76,144 for loans to the Corporation and fees for various services in the amount of $320,798 (which does not include $34,274 paid from the Retirement Income Plan Trust). In addition, Mr. Shapiro, a director of the Company, is Chairman and Chief Executive Officer of Texas Commerce Bank. Mr. Shapiro has no direct or personal interest in these banking arrangements. His interest arises only because of his positions as an officer of Texas Commerce Bank and a director of the Company. Mr. Shapiro has abstained from voting on any issues involving the relationships between the Company and Texas Commerce Bank.
In the opinion of the Company, the fees paid to Texas Commerce Bank for the services performed are normal and customary.
Mr. Shapiro is also a director of Burlington Northern Santa Fe Corporation which, as a result of a business combination in September 1995, became the successor in interest to SFP. In connection with the distribution of shares of the Company's common stock by SFP (and the initial distribution in December 1989 to SFP by one of SFP's wholly owned subsidiaries of such shares) (collectively the "SFP Spin Off"), the Company and SFP entered into an agreement to protect SFP from federal and state income taxes, penalties and interest that would be incurred by SFP if the SFP Spin Off was determined to be a taxable event resulting primarily from actions taken by the Company during a one year period that ended on December 4, 1991. If the Company were required to make payments pursuant to the agreement, such payments could have a material adverse effect on its financial condition; however, the Company does not believe that it took any actions during such one-year period that would have such an effect on the SFP Spin Off.
For periods prior to the date of the SFP Spin Off, the Company was included in the consolidated federal income tax return filed by SFP as the common parent for itself and its subsidiaries. Pursuant to the Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of the SFP Affiliated Group and various state agreements for the allocation of tax liability among the SFP Group (the "Tax Agreements") between SFP and its subsidiaries, the Company paid
to SFP an amount approximating the federal income tax liability and for years 1989 and 1990 the state income tax liability it would have paid if it and its subsidiaries were members of separate consolidated groups. These amounts were payable regardless of whether the SFP consolidated group, as a whole, had any current federal or state income tax liability. Pursuant to the Agreement Concerning Taxes between SFP and the Company, after the SFP Spin Off additional payments to or refunds from SFP may be made if there is an audit, carryover or similar adjustment subsequently made that impacts the computation of amounts paid SFP as described above.
Mr. Shapiro has no direct or personal interest in the above described transaction. His interest arose only because of his position as a director of Burlington Northern Santa Fe Corporation and as a director of the Company.
Mr. Payne is also a director of Pool Energy Services Co. ("Pool") which provides various oilfield services. During 1996 the Company and Monterey paid Pool subsidiaries $7,094,573 for services performed on properties operated by the Company or Monterey. Mr. Payne has no direct or personal interest in these services. His interest arises only because of his position as an officer of the Company and a director of Pool. In the opinion of the Company, the amounts paid for services performed by Pool were competitive and were normal and customary in the industry.
The Company entered into an Agreement Regarding Shelf Registration dated March 24, 1995, with HC Associates ("HC") which owns more than 5% of the Company's common stock whereby the Company agreed that upon written demand (which demand may be submitted to the Company once, provided such registration is effected and the registration statement is declared effective) from HC, GKH Partners, L.P. ("GKH"), GKH Investments, L.P., Ernest H. Cockrell Texas Testamentary Trust or Carol Cockrell Jennings Texas Testamentary (collectively, the "Selling Stockholders") at any time prior to March 27, 2000 to file with the Securities and Exchange Commission a registration statement to register the offer and sale, from time to time, by the Selling Stockholders of up to 5,203,091 shares of the Company's common stock beneficially owned by them as of March 24, 1995, subject to certain specified restrictions. The Company is obligated to pay all expenses incidental to such registration, excluding underwriting discounts, commissions, fees or disbursements of legal counsel for the Selling Stockholders.
See also Report of the Compensation and Benefits Committee -- Compensation Committee Interlocks and Insider Participation at page 53 and Security Ownership of Certain Beneficial Owners at page 47.
With respect to certain fees which will be payable to affiliates of Texas Commerce Bank and to GKH upon consummation of the Proposed Spin Off, see Note 2 to the Consolidated Financial Statements.
OTHER INFORMATION CONCERNING DIRECTORS. In 1996, the Board met eight times, and each member of the Board as it was composed at the time attended at least 75% of the total number of meetings of the Board and the total number of meetings held by all committees of the Board on which he or she served.
DIRECTORS COMPENSATION. Directors who are not employees of the Company or its subsidiaries receive an annual cash retainer fee of $10,000, a fee of $1,000 for each meeting of the Board attended, and a fee of $1,000 (an additional $2,000 annual retainer for the committee Chairman) for each committee meeting attended plus expenses for each Board or committee meeting attended. In addition, on May 8, 1996, the shareholders of the Company approved an amendment to the 1990 Incentive Stock Compensation Plan, as amended (the "Stock Plan") whereby a portion of the annual retainer is paid in shares of the Company's common stock as well as a grant of Non-Qualified Stock Options ("NQSOs). Pursuant to this amendment non-employee directors receive as a portion of their retainer 1,000 shares of common stock with a six-month restriction period during which it may not be transferred and 5,000 NQSOs issued at Fair Market Value (as defined in the Stock Plan) as of the date of the Annual Meeting of Shareholders. Further, all newly elected directors receive a one-time grant of 10,000 NQSOs with a
strike price of the Fair Market Value on the date the director is first elected. Current directors received a similar one-time grant effective February 1, 1996, the date the amendment to the Stock Plan was approved by the Board. Additional terms and conditions relating to the NQSOs are described on page 52.
BOARD COMMITTEES. In 1996, the Board maintained Audit, Compensation and Benefits, Executive, Nominating and Pension Committees. Following are the members of each committee and brief descriptions of their functions. All chairman of the committees are non-employee directors.
The members of the Audit Committee are Kathryn D. Wriston (Chairman), Marc J. Shapiro and Melvyn N. Klein. The principal functions of the Audit Committee, which met three times in 1996, include overseeing the performance and reviewing the scope of the audit function of independent accountants. The Audit Committee also reviews, among other things, audit plans and procedures, the Company's policies with respect to conflicts of interest and the prohibition on the use of corporate funds or assets for improper purposes, changes in accounting policies, and the use of independent accountants for non-audit services.
The members of the Compensation and Benefits Committee are William E. Greehey (Chairman), Kathryn D. Wriston and Reuben F. Richards. The principal function of the Compensation and Benefits Committee, which met five times in 1996, is to administer all executive compensation and benefit plans of the Company. Members of the Compensation and Benefits Committee are not eligible to participate in any benefit plans of the Company that they administer except the Stock Plan pursuant to which grants may be made only as described above. In December 1996 the Pension Committee was abolished and its duties described below were assumed by the Compensation and Benefits Committee.
The members of the Nominating Committee are Allan V. Martini (Chairman), Kathryn D. Wriston and James L. Payne. The Nominating Committee, which met twice in 1996, receives recommendations for review and evaluates the qualifications of and selects and recommends to the Board of Directors, nominees for election as Directors. The Nominating Committee will consider nominees recommended by stockholders. Any such recommendation, together with the nominee's qualifications and consent to be considered as a nominee, should be sent in writing to the Secretary of the Company not less than 30 days nor more than 60 days prior to the annual meeting.
The members of the Executive Committee are Melvyn N. Klein (Chairman), William E. Greehey, James L. Payne, Allan V. Martini and Reuben F. Richards. The Committee, which met twice in 1996, may exercise during periods between meetings of the Board of Directors, all powers of the Board in the management and business of the Company subject to limitations imposed by the Bylaws, Certificate of Incorporation or applicable law.
The members of the Pension Committee were a former director as Chairman, James L. Payne and Allan V. Martini. The duties of the Pension Committee which met once in 1996, included reviewing the actions of the Pension Administration and Pension Investment Committees which are composed of Company employees, making recommendations to the Board of Directors concerning future memberships of such committees and such other recommendations as may be necessary or appropriate, and recommending to the Board of Directors substantial amendments to the Company's retirement plan which do not change benefit levels. The duties of the Pension Committee were assumed by the Compensation and Benefits Committee in December 1996.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the best of the Company's knowledge, the following persons are the only persons who are beneficial owners of more than five percent of the Company's common stock, Convertible Preferred Stock, 7% Series, or $.732 Series A Convertible Preferred Stock based upon the number of shares outstanding on December 31, 1996:
The holders of Convertible Preferred Stock, 7% Series, of which there are 1,229,890 shares outstanding, may, at their option, convert any or all such shares into 1.3913 shares of the Corporation's common stock. Each share of $.732 Series A Convertible Preferred Stock, of which there are 10,700,000 shares outstanding, is convertible at the option of the holder into 0.8474 shares of the Corporation's common stock at any time prior to May 15, 1998. - ------------
(a) Each holder has claimed sole voting and investment power concerning these shares except as noted below. The number of shares of common stock does not include shares issuable upon conversion of preferred stock.
(b) As reported at May 31, 1995, HC Associates, a Delaware general partnership ("HC") is the owner of 5,203,091 shares (approximately 5.7 percent) of the common stock of the Corporation. HC was organized in December 1992 for the purpose of, among other things, acquiring, holding, selling, exchanging and otherwise dealing with shares of the Corporation's common stock. The partners of HC (and their respective percentage interests in HC) are GKH Investments, L.P. (the "Fund") (92.743659 percent), GKH Partners, L.P., as nominee for GKH Private Limited (3.506491 percent), Ernest H. Cockrell Texas Testamentary Trust (1.874963 percent) and Carol Cockrell Jennings Texas Testamentary Trust (1.874965 percent). The sole general partner of the Fund, a Delaware limited partnership is GKH Partners, L.P. ("GKH"), a Delaware limited partnership. Pursuant to a management agreement, GKH manages assets on behalf of GKH Private Limited ("GKHPL"). The number of shares described above do not include 39,100 shares of common stock acquired in September 1994 by GKH on behalf of GKHLP and the Fund. The general partners of GKH are JAKK Holding Corp., a Nevada corporation ("JAKK"), DWL Lumber Corporation, a Delaware corporation ("DWL"); and HGM Associates Limited Partnership, an Illinois limited partnership ("HGMLP"). The sole general partner of HGMLP is HGM Corporation, a Nevada corporation ("HGM"). Melvyn N. Klein is the sole director and stockholder of JAKK and serves as its president, treasurer and secretary. Mr. Klein disclaims beneficial ownership of the shares of common stock owned by HC, GKH, GKHLP and the Fund. Dan W. Lufkin is
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
president, director and sole stockholder, Craigh Leonard is secretary and a director and Douglas J. McBride is assistant secretary and a director of DWL. Jay A. Pritzker is a director and Chairman of the Board, Thomas J. Pritzker is president and a director, Glen Miller is vice president and treasurer and Harold S. Handelsman is vice president and secretary of HGM.
(c) As reported at February 13, 1997, Neuberger & Berman LLC is deemed to be a beneficial owner of these shares for the purpose of Rule 13(d) since it has shared power to make decisions whether to retain or dispose of the securities of many unrelated clients. Neuberger & Berman, LLC does not however have any economic interest in the securities of these clients. The clients are the actual owners of the securities and have the sole right to receive and the power to direct the receipt of dividends from or proceeds from the sale of such securities.
Principals of Neuberger & Berman, LLC own 438,700 shares of the Company's common stock. The principals own these shares in their own personal securities accounts, Neuberger & Berman, LLC disclaims beneficial ownership of these shares since they were purchased with each principals' personal funds and each principal has exclusive dispositive and voting power over the shares held in their respective accounts.
Neuberger & Berman Profit Sharing Retirement Plan owns 290,100 shares. Such shares are held in a securities account in the name of the Plan with Neuberger & Berman, LLC and are held in street name. The Plan's sole beneficial owners are current and former Neuberger & Berman, LLC employees and Principals who are Plan participants. Neuberger & Berman Trust Company (a wholly owned affiliate of Neuberger & Berman, LLC) is trustee of the Plan. One Principal of Neuberger & Berman, LLC makes day to day investment decisions for the Plan. Neuberger & Berman, LLC disclaims beneficial ownership of these shares.
(d) As reported at February 11, 1997, Merrill Lynch & Co., Inc., a Delaware corporation ("ML & Co."), Merrill Lynch Group, Inc., a Delaware corporation ("ML Group"), whose address is World Financial Center, North Tower, 250 Vesey Street, New York, N.Y. 10281, and Princeton Services, Inc., a Delaware corporation ("PSI"), whose address is 800 Scudders Mill Road, Plainsboro, N.J. 08536, are parent holding companies pursuant to Section 240, 13d-1 (b)(1)(ii)(G) of the Securities Exchange Act of 1934 (the "Exchange Act"). The relevant subsidiaries of ML & Co. are Merrill Lynch Pierce, Fenner & Smith Incorporated, a Delaware corporation with its principal place of business at 250 Vesey Street, New York, N.Y. ("MLPF&S"), ML Group and PSI, which is the general partner of Merrill Lynch Asset Management, L. P. (d/b/a) Merrill Lynch Asset Management ("MLAM"). The relevant subsidiaries of Merrill Lynch Group are PSI and certain Merrill Lynch trust companies.
ML & Co. may be deemed to be the beneficial owner of the reported securities of the Company as set forth by virtue of its control of its wholly-owned subsidiaries, ML Group and MLPF&S.
MLPF&S, a wholly owned direct subsidiary of ML & Co. and a broker-dealer registered pursuant to the Exchange Act holds certain of the reported securities in proprietary trading accounts and may be deemed to be the beneficial owner of securities held in customer accounts over which MLPF&S has discretionary power and in unit investment trusts for which MLPF&S is the sponsor.
ML Group, a wholly owned direct subsidiary of ML & Co., may be deemed to be the beneficial owner of the reported securities of the Corporation as set forth by virtue of its control of (i) its wholly-owned subsidiary, PSI, and (ii) certain Merrill Lynch trust companies, each of which is a wholly-owned subsidiary of ML Group and a bank as defined in Section 3(a)(6) of the Exchange Act.
One or more Merrill Lynch trust companies or institutions, each of which is a bank as defined in Section 3(a)(6) of the Exchange Act, may be deemed the beneficial owner of certain of the reported securities of the Company held by customers in accounts over which such trust companies or institutions have discretionary authority.
PSI, a wholly owned direct subsidiary of ML Group, may be deemed to be the beneficial owner of certain of the reported securities of the Company as set forth by virtue of its being the general partner of MLAM. MLAM, a Delaware limited partnership with its principal place of business at 800 Scudders Mill Road, Plainsboro, New Jersey, is an investment advisor registered under Section 203 of the Investment Advisors Act of 1940. MLAM may be deemed to be the beneficial owner of certain of the reported securities of the Company as set forth by virtue of its acting as investment advisor to one or more investment companies registered under Section 8 of the Investment Company Act of 1940, and/or to one or more private accounts.
A registered investment company advised by MLAM, Merrill Lynch Growth Fund for Investment for Retirement is the beneficial owner of 9,000,000 shares of the Company's common stock as reported and is a reporting person hereunder.
Pursuant to Section 240.13d-4 of the Exchange Act, ML&Co., ML Group and PSI disclaim beneficial ownership of the securities of the Corporation reported, and the filing of a Schedule 13G shall not be construed as an admission that such entity is, for purposes of Section 13(d) or 13(g) of the Exchange Act, the beneficial owner of any of the securities of the Company.
(e) As reported at February 10, 1997, the Board of Directors or Trustees of the registered investment companies managed by Oppenheimer Funds, Inc. ("OFI") and owning the shares of the Corporation's $.732 Series A Convertible Preferred Stock shown can direct the disposition of dividends received by OEIF and can dispose of such securities. Additionally, OFI shares the power to dispose of such securities with the Board of Directors or Trustees of such funds; however, the Board of Trustees of such funds have delegated these responsibilities to OFI as the fund's investment advisor under its investment advisory agreement. OFI has an interest relating to 7.5% of the securities noted by virtue of the interest of 7.5% of such securities owned by OEIF. OFI disclaims ownership of such securities except as expressly stated above.
(f) As reported at February 14, 1997, as of December 31, 1996, Fidelity Management & Research Company ("Fidelity"), 82 Devonshire Street, Boston, Massachusetts 02109, a wholly-owned subsidiary of FMR Corp. and an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, is the beneficial owner of 8,980,198 or 9.9% of the common stock and 1,879,600 shares or 17.6% of the $.732 Series A Convertible Preferred Stock of the Company as a result of acting as an investment advisor to various investment companies registered under Section 8 of the Investment Company Act of 1940.
Edward C. Johnson 3d, FMR Corp., through its control of Fidelity, and the funds each has sole power to dispose of the 8,980,198 shares of common stock and 1,879,600 shares of Preferred Stock owned by the funds. Neither FMR Corp. nor Edward C. Johnson 3d, Chairman of FMR Corp., has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds' Board of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the Funds' Boards of Trustees.
Fidelity Management Trust Company, 82 Devonshire Street, Boston, Massachusetts 02109, a wholly-owned subsidiary of FMR Corp., and a bank as defined in Section 3(a)(6) of the Securities Exchange Act of 1934, is the beneficial owner of 408,123 shares or less than 1% of the common stock and 619,200 shares or 5.8% of the $.732 Series A Convertible Preferred Stock of the Company as a result of its serving as an investment manager of the institutional accounts. Edward C. Johnson 3d and FMR Corp., through its control of Fidelity Management Trust Company, each has sole dispositive power over these shares, the sole power to vote or direct the vote over a portion of the shares and no power to vote or direct the voting of the balance of such shares.
Members of the Edward C. Johnson 3d family and trusts for their benefit are the predominant owners of Class B shares of common stock of FMR corp., representing approximately 49% of the voting power of FMR Corp. Mr. Johnson 3d owns 12.0% and Abigail Johnson owns 24.5% of the aggregate outstanding voting stock of FMR Corp. Mr. Johnson 3d is Chairman of FMR Corp. and Abigail P. Johnson is a Director of FMR Corp. The Johnson family group and all other Class B shareholders have entered into a shareholders' voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Accordingly, through their ownership of voting common stock and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR Corp.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the amount of common stock beneficially owned as of February 1, 1997 by each of the directors, by each of the executive officers, and by all directors and executive officers as a group. Unless otherwise noted, each of the named persons and members of the group has sole voting and investment power with respect to the shares shown. No individual listed below, except Mr. Payne, beneficially owns one percent or more of the Company's outstanding common stock. In addition, no individual listed below beneficially owns any shares of Convertible Preferred Stock, 7% Series. With the exception of Mr. Payne, no individual listed below owns any $.732 Series A Convertible Preferred Stock.
SHARES NAME OF DIRECTOR, OWNED PERCENT EXECUTIVE OFFICER OR GROUP BENEFICIALLY OF CLASS - ------------------------------------- ------------ -------- William E. Greehey................... 49,726 -- Melvyn N. Klein(a)................... 5,063,203 5.6% Allan V. Martini..................... 22,907 -- Reuben F. Richards................... 21,387 -- Marc J. Shapiro...................... 26,707 -- Kathryn D. Wriston................... 21,629 -- James L. Payne(b).................... 946,277 1.0% Jerry L. Bridwell(c)................. 366,985 -- Hugh L. Boyt(d)...................... 280,314 -- R. Graham Whaling(e)................. 20,627 -- Directors and Executive Officers as a Group(f)........................... 7,269,102 7.8%
- ------------
(a) Includes 5,048,083 shares of common stock which may be deemed to be owned by GKH primarily through its participation in HC Associates. See "Security Ownership of Certain Beneficial Owners" for a description of ownership of the Corporation's common stock by HC Associates. Mr. Klein is the sole stockholder of one of the general partners in GKH Partners, L. P., the general partner of GKH Investments, L. P. and the nominee for GKH Private Limited and disclaims beneficial ownership of the shares held by HC Associates. Also includes 15,000 shares which could be received upon the exercise of options within 60 days. The weighted average exercise price of such options is $10.2292.
(b) Mr. Payne's common stock ownership includes 47,906 shares arising from participation in the Corporation's Savings Investment Plan and 722,890 shares which could be received upon the exercise of options within 60 days. The weighted average exercise price of such options is $12.7344. In addition, Mr. Payne owns 3,000 shares of $.732 Series A Convertible Preferred Stock.
(c) Mr. Bridwell's common stock ownership includes 36,676 shares arising from participation in the Corporation's Savings Investment Plan and 273,839 shares which could be received upon the exercise of options within 60 days. The weighted average exercise price of such options is $13.5447.
(d) Mr. Boyt's common stock ownership includes 6,455 shares arising from participation in the Company's Savings Investment Plan and 225,245 shares which could be received upon the exercise of options within 60 days. The weighted average exercise price of such options is $11.5275.
(e) Mr. Whaling's common stock ownership includes 1,459 shares arising from participation in the Corporation's Savings Investment Plan.
(f) The common stock ownership described includes 115,977 shares arising from participation in the Company's Savings Investment Plan as of February 1, 1997 and 1,649,805 shares which could be received upon the exercise of options within 60 days.
REPORT OF THE COMPENSATION AND BENEFITS COMMITTEE
The Compensation and Benefits Committee (the "Committee") has been chartered by the Board to review salaries and other compensation of officers, including Mr. Payne, the Company's Chief Executive Officer, and key employees on an annual basis. Following review, the Committee submits recommendations to the Board regarding such salaries and compensation. In addition, the Committee selects officers and key employees for participation in incentive compensation plans, establishes performance goals for those officers and key employees who participate in such plans and reviews and monitors benefits under all employee plans of the Company.
Although Mrs. Wriston appears below as a member of the Committee, she was appointed as such in December 1996 and did not participate as a member in any meetings held during 1996.
COMPENSATION POLICIES FOR EXECUTIVE OFFICERS
As a result of an extensive review undertaken in 1995 with the assistance of Hay Management Consultants, a performance-based executive compensation program was developed. The Committee believes the program is competitive, reinforces the Company's business strategy and supports objectives for enhanced shareholder value. It is designed to attract, retain and motivate key employees by providing total compensation opportunities consistent with those maintained by the Company's peer group. The group used for this purpose includes companies from the peer graph on page 58 which the Committee believes approximate the Company's size and asset mix. The program allows compensation to vary significantly based on performance results, balance objectives for short-term operating performance with longer term performance, and encourage stock ownership among key employees.
Base salaries for the executive group are maintained near the median competitive position for comparable positions among the peer group. Annual incentive opportunities are targeted to provide compensation between a median and upper quartile of the Company's peer group described above. Long-Term incentive opportunities are provided through grants of stock options and Phantom Units made pursuant to the Stock Plan and are targeted between median and upper quartile award levels with upside opportunities based on sustained performance and creation of shareholder value.
As a result of the review of the peer group undertaken in 1996 and in light of the proposed Spin-Off to Monterey Resources it was determined that no salary increases be given to the executive officers in 1996. Mr. Whaling's salary was increased in November 1996 by action of the Monterey Resources board in recognition of his assumption of the duties of the Chairman of the Board and Chief Executive Officer of that company.
Annual incentives are provided through the Incentive Compensation Plan (the "ICP Plan"). Goals are established which, if met at the target objective, will result in the executive officer being paid 50 percent of the maximum amount for which the individual is eligible. All executive officers participate in the ICP Plan with maximum payout percentages in 1996 (before the possible adjustments discussed below) of base salary ranging from 100 percent for Mr. Payne through 50 percent for all other executive officers. The Committee may increase or decrease the ultimate award by 25 percent at its discretion. In addition, by electing to forgo all or a portion of the cash segment of the award a participant may elect to receive an amount of Restricted Stock under the Stock Plan equal to an additional $1 in value for each $2 of cash given up.
The goals established for 1996 were based upon discretionary cash flow per share, production, reserve replacement, the performance of the Company's common stock as compared to the peer group shown in the table on page 58, general and administrative expense and a discretionary award. The awards were subject to reduction by 50 percent in the event the Company failed to achieve net income to common shareholders. Discretionary cash flow per share is defined as net cash provided by operating activities before changes in operating assets and liabilities minus exploration dry hole costs plus total exploration expense minus capitalized interest minus preferred dividends by the average number of common shares outstanding. Each goal was weighted equally with the exception of general
and administrative expense and the discretionary award and with the exception of the stock performance goal and discretionary award were compared against profit plan projections. The discretionary cash flow, reserve replacement, production and stock price performance goals were met in full. After deducting expenses relating to the reconfiguration program undertaken in 1996 the general and administrative expense goal was met in full and the entire amount of the discretionary award was granted. Although the Company did not achieve net income to common shareholders the Committee decided not to reduce the ultimate payout since a positive net income would have resulted but for non-recurring expenses relating to the reconfiguration program.
The payout of the awards under the ICP Plan were initially set to be made 75 percent in cash and 25 percent in Bonus Stock granted pursuant to the Stock Plan. Participants were allowed to elect prior to the beginning of the 1996 Plan year to forgo all or a portion of the cash payment in return for the receipt of Restricted Stock on the basis of an additional $1 in value for each $2 of cash given up. These shares are subject to forfeiture in certain events and will vest one-third per year over a three-year period. The number of shares of Restricted Stock granted to Mr. Payne and other executive officers listed in the Summary Compensation Table on page 54 are described in a footnote to that table.
In addition to the above described cash and stock payments, the executive officers and key employees are eligible to participate in other grants made under the Stock Plan. In order to further the identity of interest of employees with that of its stockholders, all forms of compensation under the Stock Plan relate to the Company's common stock.
Prior to the Initial Public Offering of Monterey the Committee took action to cause the acceleration of vesting of certain outstanding Non-Qualified Stock Options ("NQSO's") and the payout of Phantom Units. NQSO's granted to executive officers and key employees under the 1990 Incentive Stock Compensation Plan prior to the July 1996 grant described below vested in full in September 1996. In addition, the Performance Units granted in 1996 paid out in shares of the Company's common stock at the target level in November 1996.
As a result of this acceleration Mr. Payne received early vesting on 300,000 NQSO's with a strike price of $9.5625. The other executive officers received early vesting on NQSO's ranging in amounts from 62,500 with a strike price of $8.00 in the case of Mr. Whaling, 100,000 each with a strike price of $9.5625 to several other executive officers to 12,666 each with a strike price of $7.875 to several other executive officers. The early payout of the Phantom Units resulted in the receipt by Mr. Payne of 34,355 shares of the Company's common stock with the other individuals listed in the Summary Compensation Table on page 54 receiving 9,375 shares of stock and the remaining individuals participating in the grant receiving amounts ranging from 9,375 to 5,833.
In July 1996, as part of the strategy discussed above the Committee granted Mr. Payne, the executive officers and other key employees NQSO's as noted in the table located on page 56. In December 1996 the Company granted additional NQSO's to Mr. Payne, selected executive officers and key employees in the amounts noted in the table. All grants were made at fair market value and vest as to one-third of the grant per year over a three-year period. The Committee did not accelerate the vesting of these grants and the Proposed Spin Off of Monterey will not do so.
Finally, also as part of the strategy discussed above in December 1996 the Committee granted a total of 81,787 Performance Units to seventeen individuals including Mr. Payne and the executive officers. Mr. Payne received 23,679 Phantom Units, the executive officers listed in the Summary Compensation Table on page 54 (other than Messrs. Whaling and Rosinski) received 6,610 and the remaining individuals participating in the grant received Units in amounts ranging from 6,610 to 2,414. The Units are earned over a three-year period commencing January 1, 1997 with ultimate payout if any to be made in an equivalent number of shares of the Company's common stock. The Committee established four equally weighted goals which must be attained over this three-year period. Full payout will result if discretionary cash flow (as described above) and production volumes equal the three-year projected levels established by the 1997 profit plan, the Company's common stock price performance (after deletion at the outset of the implied value of Monterey) equals the S&P 500 Index over the three-
year period and the Company's common stock price at the end of the three years equals an established target. If the above goals are substantially exceeded possible payouts may increase by 100 percent. Failure to meet a threshold goal level will result in the reduction or total elimination of a payout.
CHIEF EXECUTIVE COMPENSATION
The review of executive compensation discussed above included a review of Mr. Payne's compensation. As in the case of the executive officers as a result of the review of the peer group and in light of the Proposed Spin Off of Monterey it was determined that Mr. Payne's salary not be increased in 1996. Mr. Payne did receive a grant of 100,000 NQSOs with a strike price of $11.625 in July and another grant of 125,000 NQSOs with a strike price of $13.75 in December. Further as a result of the Committee action described above, the vesting on 300,000 NQSOs with a strike price of $9.5625 was accelerated in September and 34,355 Performance Units paid out early in the amount of an equal number of shares of the Company's common stock.
SECTION 162 (M) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
The Committee continues to review implications of the $1 million pay cap rules set forth in Section 162 (m) of the Internal Revenue Code of 1986, as amended, and takes this into account when establishing and reviewing compensation policies.
COMPENSATION AND BENEFITS COMMITTEE
William E. Greehey, Chairman Reuben F. Richards Kathryn D. Wriston
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation and Benefits Committee was an officer or employee of the Company in 1994, 1995 or 1996. Mr. Greehey is Chairman of the Board and Chief Executive Officer of Valero Energy Corporation. During 1996, an affiliate of Valero paid the Company $635,841 for compression of natural gas. These fees were determined on an arm's length basis. Mr. Greehey did not have a direct or personal interest in the above transactions and his interest in the above transactions and his interest arises only because of his position as an officer and director of Valero and as a director of the Company.
Mr. Richards is the retired Chairman of the Board, Chief Executive Officer and President of Minorco (USA) and is a director of its parent Minorco. On March 8, 1996, Minorco (USA) disposed of 8,712,327 shares of the Company's common stock which it held. Pursuant to the terms of a registration rights agreement dated December 10, 1991, and effective as of May 19, 1992, the Company paid substantially all expenses incidental to the registration of these shares, excluding underwriting discounts and commissions. Mr. Richards did not have a direct or personal interest in this transaction and his interest arises only because of his former position as an officer and director of Minorco (USA) and a director of Minorco and the Company.
SUMMARY COMPENSATION TABLE
- ------------
(a) The bonus amounts shown, while determined on a cash basis, were actually paid partially in shares of the Company's common stock pursuant to the Stock Plan. For 1994 Messrs. Payne, Boyt, Bridwell and Rosinski received 17,911; 6,148; 6,002 and 5,805 shares, respectively. For 1995, Messrs. Payne, Whaling, Boyt, Bridwell and Rosinski received 14,898; 1,818; 5,435; 5,595 and 4,769 shares, respectively. For 1996, participants in the ICP Plan, pursuant to which these bonuses were paid, received 25 percent of the bonus earned in Bonus Stock under the Stock Plan and had the right to receive the balance in cash. Alternatively participants could elect to forgo all or a portion of the cash payment in return for the receipt of Restricted Stock on the basis of an additional $1 in value for each $2 of cash given up. These shares are subject to forfeiture in certain events and will vest one-third per year over a three year period. The bonus amounts for 1996 reflect that additional value received as a result of such elections. Messrs. Payne, Whaling, Bridwell and Boyt received 6,460, 1,836, 3,067, and 2,084 shares of Bonus Stock and 41,200, 14,192, 0, and 9,200 shares of Restricted Stock, respectively. Mr. Rosinski, whose employment with the Company terminated on December 31, 1996, received all cash.
(b) The amounts shown reflect the value the Company's common stock received as a result of the accelerated payout of Performance Units granted as of January 1, 1996. See the Report of the Compensation and Benefits Committee.
(c) Amounts shown reflect matches made by the Company for employee contributions to the Santa Fe Energy Resources, Inc. Savings Investment Plan as well as the performance match. (See "Benefit Plans -- Savings Plan" for a description of the Savings Investment Plan as well as the performance match.) The performance match is contributed in the year following the performance and therefore total amounts shown for 1994, 1995 and 1996 include the match made for 1993, 1994 and 1995 results, respectively. The Company made a performance match in February 1997 for 1996 results for Messrs. Payne, Whaling, Boyt, Bridwell and Rosinski in the amount of $3,000 for each individual. In addition, amounts shown for 1996 also include the match made by the Corporation relating to deferrals under the Deferred Compensation Plan. (See "Benefit Plans -- Savings Plan" for a description of the Deferred Compensation Plan.) These amounts are also subject to the performance match outlined in the Savings Investment Plan. In February 1997 the Company allocated to accounts maintained by Messrs. Payne, Whaling, Boyt, Bridwell and Rosinski $7,300, $1,750, $1,600, $1,140 and $1,000, respectively as a performance match.
Amounts shown for 1996 for Mr. Whaling also include grossed up tax payments made to him relating to his relocation from Houston, Texas to Bakersfield, California.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
Finally, the amounts shown in 1996 for Mr. Rosinski also include $443,750 which he will receive pursuant to the terms of a severance arrangement.
(d) Mr. Whaling served as Senior Vice President and Chief Financial Officer until November 1996 when he resigned to assume the position of Chairman of the Board and Chief Executive Officer of Monterey Resources.
AGGREGATED OPTION/SAR EXERCISES IN 1996 AND 1996 YEAR-END OPTION/SAR VALUES
- ------------
(a) The closing price of the Company's common stock on December 31, 1996 was $13.875.
(b) See footnote (1) under OPTION/SAR GRANTS IN LAST FISCAL YEAR for information concerning the cancellation of these options by the Company in return for the grant of options to Mr. Whaling by Monterey Resources.
(c) Mr. Rosinski's employment with the Company terminated on December 31, 1996. Pursuant to the terms of a severance arrangement Mr. Rosinski received $43,750 (the difference between the average of the high and low sales prices of the Company's common stock on December 31, 1996 and the strike price of $11.625 per share multiplied by his unexercisable options) in return for the cancellation of his unexercised options.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
All options described above are NQSOs granted pursuant to the 1990 Incentive Stock Compensation Plan, as amended (the "Stock Plan"). The NQSOs were granted at market on the date of grant and vest one-third per year over a three year period. These options were not accelerated by the IPO. - ------------
(a) Mr. Whaling resigned his position as Senior Vice President and Chief Financial Officer in November 1996 and assumed the position of Chairman of the Board and Chief Executive Officer of Monterey. Upon the closing of the IPO Mr. Whaling received 112,500 NQSOs pursuant to the Monterey Resources 1996 Incentive Stock Compensation Plan (the "Monterey Stock Plan") with a strike price of $14.50. These options vest one-fifth per year over a five year period but may not be exercised until one year following the consummation of the Proposed Spin Off. In addition, in December 1996 Monterey offered to replace NQSOs granted pursuant to the Company's Stock Plans with NQSOs granted pursuant to the Monterey Stock Plans. Mr. Whaling accepted the offer and effective January 17, 1997, the options described above were cancelled in return for a grant of 31,496 Monterey NQSO's with a strike price of $12.9185. In addition, 250,000 NQSOs granted in January 1995 with a strike price of $8.00 were cancelled in return for a grant of 224,969 NQSOs issued pursuant to the Monterey Stock Plan with a strike price of $8.8901. The newly granted NQSOs contain the same vesting schedule as the Company NQSOs they replaced but may not be exercised until one year following the consummation of the Proposed Spin Off even if fully or partial vested prior to that time.
(b) Mr. Rosinski's employment with the Company terminated on December 31, 1996. Pursuant to the terms of a severance arrangement these options were cancelled. See -- Aggregated Option/SAR Exercises in 1996 and 1996 Year-End Option/SAR Values.
LONG-TERM INCENTIVE PLANS AWARDS IN 1996
In December 1996, the individuals described above (as well as 14 other executive officers and key employees) received grants of Phantom Units pursuant to the Stock Plan in the amounts indicated. The grant was effective January 1, 1997 with the Units being earned over a three-year period. Ultimate payout, if any, is to be made in an equivalent number of shares of the Company's common stock. Four equally weighted goals have been established which must be attained over the three year performance period. Full payout at the target level will result if discretionary cash flow (as described on page 51) and production volumes equal the three year projected levels established by the 1997 profit plan, the Company's common stock price performance equals the S&P 500 Index over the three year period and the Company's common stock price at the end of the three years equals an established target. If the above goals are substantially exceeded possible payouts may increase to the maximum shown. Failure to meet a threshold level, shown above as the combined threshold level of all four goals, will result in a reduction or total elimination of a payout.
Mr. Whaling did not receive a grant of Phantom Units but did receive 37,500 shares of Monterey Resources, Inc. Restricted Stock pursuant to the Monterey Resources Stock Plan. These shares vest as to one-fifth of the grant per year over a five year period. The grant is not contingent upon the attainment of goals but is subject to forfeiture in the event of termination of employment under certain circumstances.
PERFORMANCE GRAPH
The following performance graph compares the performance of the Corporation's common stock to the S&P 500 Index and to an index composed of 21 Independent Oil and Gas Companies selected by Goldman, Sachs & Co. from time to time.(a) Although Goldman, Sachs & Co. does not represent that these companies comprise a "peer group," the Corporation believes that its asset base and operations are best compared to this group and that they are its peers.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG SANTA FE ENERGY RESOURCES INC., THE S & P 500 INDEX AND A PEER GROUP
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
12/91 12/92 12/93 12/94 12/95 12/96 ----- ----- ----- ----- ----- ----- SANTA FE ENERGY RESOURCES INC. 100 98 106 92 110 159 PEER GROUP 100 117 141 127 152 202 THE S & P 500 100 108 118 120 165 203
* $100 invested on 12/31/91 in stock or index -- including reinvestment of dividends. Fiscal year ending December 31.
(a) This group of companies, which includes the Corporation, also currently includes Anadarko Petroleum Corp., Apache Corp., Barrett Resources Corp., Burlington Resources, Cabot Oil & Gas, Cross Timbers Oil Co., Devon Energy, Enron Oil & Gas, Louisiana Land & Exploration, Mitchell Energy & Development, Noble Affiliates, Inc., Oryx Energy Co., Parker & Parsley Petroleum, Pennzoil Co., Pogo Producing Company, Seagull Energy Corp., Union Texas Petroleum Holdings, Inc., Vastar Resources, Inc., Vintage Petroleum and United Meridian Corp. Due to activities such as reorganizations and mergers, additions and deletions were made to the group from time to time. Goldman Sachs & Co. has discontinued its past practice of selecting this group.
BENEFIT PLANS
The Company maintains a 401(k) savings plan and a retirement income plan. In addition, the Company has entered into employment agreements with certain officers and key employees and maintains a severance program for all full-time salaried employees. These plans and agreements are briefly described below.
SAVINGS PLAN. The Company has adopted the Santa Fe Energy Resources Retirement and Savings Plan, which became operative and was restated and renamed the Santa Fe Energy Resources Savings Investment Plan, effective November 1, 1990 (the "Savings Investment Plan"). The Savings Investment Plan offers eligible employees an opportunity to make long-term investments on a regular basis through salary contributions, which are supplemented by matching employer contributions. Substantially all salaried employees are eligible to participate on the first day of the month after their date of hire. The Company will match up to 4% of an employee's compensation and the employee's contribution could not exceed $9,500 in 1996. The limit amount is indexed each year to reflect cost-of- living increases.
In addition to the employer match described above, at the end of each fiscal year, the Company's performance is evaluated using the same performance measures used in the ICP Plan. If the performance meets or exceeds the goals for that year, participants will receive up to another fifty cents on each regular matching dollar contributed by the Company. The regular employer matching contributions as well as the performance match are made in the Company's common stock. The goals were 100 percent met in 1996 and a performance match was made in March 1997.
The Savings Investment Plan is intended to qualify as a Section 401(k) cash or deferred compensation arrangement whereby an employee's contributions and the employer's matching contributions are not subject to federal income taxes at the time of the contribution to the Savings Investment Plan, and the Savings Investment Plan is subject to the restrictions imposed by the Code. Investment alternatives to which contributions may be allocated by the participants include a fixed income fund, an equities fund, a balanced fund, a growth equity fund and a fund which is invested in the Company's common stock.
The Company also maintains a supplemental deferred compensation arrangement whereby employees earning in excess of $95,000 per year are allowed to defer all or a portion of their salary until any future year or retirement. These amounts are not matched by the Company. Employees earning in excess of $160,000 per year may also defer up to 4 percent of such excess and the amount will be matched by the Company. The amount contributed is also subject to the performance match described above in the Savings Investment Plan. All amounts are contributed in cash and earn interest at the rate paid on the fixed income fund of the Savings Investment Plan.
RETIREMENT PLANS. The Company has adopted the Santa Fe Energy Resources Retirement Income Plan, a qualified defined benefit plan for substantially all salaried employees (the "Retirement Plan"), and the Santa Fe Energy Resources Supplemental Retirement Plan (the "Nonqualified Plan"). The Nonqualified Plan will pay benefits to Retirement Plan participants where the Retirement Plan formula produces a benefit to members in excess of limits imposed by ERISA and applicable government regulations. It also includes amounts deferred under the Santa Fe Energy Resources, Inc. Deferred Compensation Plan as pensionable compensation. Benefits which have accrued to the Corporation's participants under the Santa Fe Pacific Retirement Plan ("SFP Retirement Plan") are protected under the Retirement Plan. Total approximate benefits under both the Retirement Plan and supplemental plan are shown below for selected compensation levels and years of service. As of December 31, 1996, Payne, Whaling, Bridwell, Boyt, and Rosinski were credited with 14.8, 2.0, 22.8, 13.2 and 4.3 years of service under the plans, respectively.
PENSION PLAN TABLE
AVERAGE YEARS OF SERVICE YEARLY --------------------------------------------------------------- COMPENSATION 15 20 25 30 35 - ------------ ----------- ----------- ----------- ----------- ----------- $125,000 $ 22,000 $ 29,000 $ 36,000 $ 54,000 $ 63,000 $150,000 $ 26,000 $ 35,000 $ 44,000 $ 66,000 $ 77,000 $175,000 $ 31,000 $ 41,000 $ 52,000 $ 77,000 $ 90,000 $200,000 $ 36,000 $ 48,000 $ 59,000 $ 89,000 $ 104,000 $225,000 $ 40,000 $ 54,000 $ 67,000 $ 101,000 $ 118,000 $250,000 $ 45,000 $ 60,000 $ 75,000 $ 112,000 $ 131,000 $300,000 $ 54,000 $ 72,000 $ 90,000 $ 136,000 $ 158,000 $400,000 $ 73,000 $ 97,000 $ 121,000 $ 182,000 $ 212,000 $450,000 $ 82,000 $ 110,000 $ 137,000 $ 205,000 $ 240,000 $500,000 $ 91,000 $ 122,000 $ 152,000 $ 229,000 $ 267,000 $600,000 $ 110,000 $ 147,000 $ 183,000 $ 275,000 $ 321,000 $650,000 $ 119,000 $ 159,000 $ 199,000 $ 298,000 $ 348,000
Benefit figures shown are amounts payable based on a straight life annuity assuming retirement by the participant at age 62 in 1996 without a joint survivorship provision. The benefits listed in the above table are not subject to any deduction for social security or other offset amounts.
Benefits under the plans are computed based on a participant's total compensation during this period of covered employment, for the 60 consecutive months during the ten-year period immediately prior to the termination of his covered employment for which his total compensation is the highest, divided by 60. If a participant has not received compensation for 60 consecutive months during such ten-year period, his compensation shall equal the total of his compensation for the longest period of consecutive months during such ten-year period divided by the total number of months of compensation so considered.
Compensation recognized under the plans is the total basic compensation, including any elective salary deferral amounts excluded from income pursuant to Section 125 or 402 of the code, plus overtime, shift differentials and bonuses (whether cash or stock) paid pursuant to recurring bonus programs, including compensation deferred under the Santa Fe Energy Resources, Inc. Deferred Compensation Plan, but excluding any special or extraordinary bonuses and any other items of compensation. A participant's basic compensation is the regular rate of pay specified for his position and does not include automobile allowances, imputed income under any group term life insurance program, moving expense or other reimbursements, fringe benefits, or similar items.
The pension compensation therefore differs from the compensation listed in the Summary Compensation Table in several respects. Pension compensation is based on average compensation as explained above. It does not include restricted stock awards, stock options, and other compensation in the "All Other Compensation" column (i.e., employer matching contributions to the Savings Investment Plan and the performance match). It also does not include special or extraordinary bonuses.
The pension compensation of officers whose pension compensation differs from the compensation contained in the Summary Compensation Table is listed below:
PENSION COMPENSATION NAME (FINAL AVERAGE PAY) - --------------------------------------------------------- James L. Payne....................... $662,206 R. Graham Whaling.................... $302,058 Jerry L. Bridwell.................... $313,165 Hugh L. Boyt......................... $293,705 Michael J. Rosinski.................. $305,591
EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements ("Employment Agreements") covering 11 employees of the Company (including each of the individuals named in the Cash Compensation Table except Messrs. Whaling and Rosinski. Mr. Whaling has entered into an employment agreement with Monterey Resources similar to Mr. Payne's Employment Agreement. Mr. Rosinski's employment with the Company terminated on December 31, 1996.) The Employment Agreements, which replaced similar agreements with several of these employees originally entered into in 1990, are intended to encourage such employees to remain in the employ of the Company. The initial term of each Employment Agreement, with the exception of Messrs. Payne's and Whaling's expires on December 31, 1998; however, beginning January 1, 1998 and on each January thereafter the term of the Employment Agreements will automatically be extended for additional one-year periods, unless by September 30 of the preceding year the Company gives notice that the Employment Agreements will not be so extended. The term of each Employment Agreement, with the exception of Messrs. Payne's and Whaling's is automatically extended for a period of two years following a Change in Control (as defined herein). Messrs. Payne's and Whaling's Employment Agreement have an initial term which expires on December 31, 1999, are automatically extended for one-year periods beginning January 1, 1999 and are automatically extended for a three-year period following a Change in Control.
In the event following a Change in Control employment is terminated by the employee for "Good Reason" or the employee is involuntarily terminated by the Company other than for "Cause" (as those terms are defined in the Employment Agreements), or if during the six months preceding a Change in Control, the employee's employment is terminated by the employee for Good Reason or by the Company other than for Cause, and such termination is demonstrated to be connected with the Change in Control, the Employment Agreements provide for payment of certain amounts to the employee based on the employee's salary and bonus under the Company's Incentive Compensation Plan; payout of non-vested restricted stock, phantom units, stock options, if any, and continuation of certain insurance benefits on a tax neutral basis for the Company employees for a period of up to 24 months (36 months in the case of Messrs. Payne and Whaling). The payments and benefits are payable pursuant to the Employment Agreements only to the extent they are not paid out under the terms of any other plan of the Company. The payments and benefits provided by the Employment Agreements for all individuals except Messrs. Payne and Whaling may be further limited by the Parachute Payment Limit described in the discussion of the Company's Stock Plan below. In the event Messrs. Payne's or Whaling's payments would exceed the Parachute Payment Limit, they will be made "whole" on a net after-tax basis for any excise tax incurred. Without giving effect to such limitation, the estimated value of the payments and benefits that Messrs. Payne, Whaling, Boyt and Bridwell and all executive officers as a group would be entitled to receive if any qualifying termination occurred on February 1, 1997 would be $2,694,711, $1,300,000, $743,326, $734,492 and $6,319,817, respectively.
SEVERANCE PROGRAM. The Company has adopted a Severance Program for all full-time, salaried employees who are terminated by the Company or terminated or constructively terminated by an acquiring company, other than for Cause (as defined in the Severance Program). However, following a Change in Control (defined substantially the same as in the Stock Compensation Plan), an executive officer or key employee who has entered into an Employment Agreement is not eligible to receive duplicate benefits under the Employment Agreement and the Severance Program. As noted above, the merger of Adobe with the Company constituted a Change of Control. A participant in the Severance Program is generally entitled to an amount of up to one year's pay based upon a participant's age, length of service and highest rate of base salary in effect during the 24-month period preceding his termination, provided that the aggregate of such payment does not exceed two times the participant's actual salary for the 12-month period preceding the date of termination. In addition, a participant is entitled to continuation of health and life insurance benefits for up to a period of two years.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
PAGE 1. Financial Statements: Report of Independent Accountants ..................................... 63
Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994 ............................................... 64
Consolidated Balance Sheet -- December 31, 1996 and 1995 ......................................................... 65
Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ......................................................... 66
Consolidated Statement of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 ................................................... 67
Notes to Consolidated Financial Statements ............................ 68
2. Financial Statement Schedules:
Schedule VIII -- Valuation and Qualifying Accounts .............................................................. 100
All other schedules have been omitted because they are not applicable or the required information is presented in the financial statements or the notes to financial statements.
3. Exhibits:
See Index of Exhibits on page 101 for a description of the exhibits filed as a part of this report.
(b) Reports on Form 8-K
DATE ITEM ----------------- ---- February 28, 1997 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Santa Fe Energy Resources, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 62 present fairly, in all material respects, the financial position of Santa Fe Energy Resources, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas February 21, 1997
SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Revenues Sales of crude oil and liquids produced...................... $ 455.4 $ 352.4 $ 305.2 Sales of natural gas produced... 105.8 77.1 83.4 Sales of crude oil purchased.... 21.1 6.7 11.9 Other........................... 1.0 13.2 3.7 --------- --------- --------- 583.3 449.4 404.2 --------- --------- --------- Costs and Expenses Production and operating........ 188.4 155.8 151.1 Cost of crude oil purchased..... 20.8 6.5 11.7 Exploration, including dry hole costs......................... 34.5 23.4 20.4 Depletion, depreciation and amortization.................. 148.2 133.2 121.3 Impairment of oil and gas properties.................... 57.4 30.2 -- General and administrative...... 30.1 26.9 27.3 Taxes (other than income)....... 26.5 19.2 25.8 Restructuring charges........... -- -- 7.0 Loss (gain) on disposition of assets........................ (12.1) 0.3 (8.6) --------- --------- --------- 493.8 395.5 356.0 --------- --------- --------- Income from Operations............... 89.5 53.9 48.2 Interest income................. 1.9 10.7 2.8 Interest expense................ (37.6) (32.5) (27.5) Interest capitalized............ 5.2 5.8 3.6 Other income (expense).......... (1.0) (1.6) (4.0) --------- --------- --------- Income Before Income Taxes, Minority Interest and Extraordinary Items... 58.0 36.3 23.1 Income taxes.................... (14.3) (9.7) (6.0) --------- --------- --------- Income Before Minority Interest and Extraordinary Items................ 43.7 26.6 17.1 Minority Interest in Monterey Resources, Inc................ (1.3) -- -- --------- --------- --------- Income Before Extraordinary Items.... 42.4 26.6 17.1 Extraordinary item -- debt extinguishment costs............ (6.0) -- -- --------- --------- --------- Net Income........................... 36.4 26.6 17.1 Preferred dividend requirement................... (13.5) (14.8) (11.7) Convertible preferred repurchase premium....................... (33.7) -- -- --------- --------- --------- Earnings (Loss) Attributable to Common Shares...................... $ (10.8) $ 11.8 $ 5.4 ========= ========= ========= Earnings (Loss) Attributable to Common Shares Per Share Earnings (loss) before extraordinary items........... $ (0.05) $ 0.13 $ 0.06 Extraordinary items -- debt extinguishment costs.......... (0.07) -- -- --------- --------- --------- Earnings (loss) to common shares........................ $ (0.12) $ 0.13 $ 0.06 ========= ========= ========= Weighted Average Number of Common Shares Outstanding (in millions)...................... 90.6 90.2 89.9 ========= ========= =========
The accompanying notes are an integral part of these financial statements.
SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS)
DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- ASSETS Current Assets Cash and cash equivalents....... $ 14.6 $ 42.6 Accounts receivable............. 109.1 89.0 Inventories..................... 13.6 10.5 Other current assets............ 35.2 17.2 ----------- ----------- 172.5 159.3 ----------- ----------- Properties and Equipment, at cost Oil and gas (on the basis of successful efforts accounting)................... 2,539.8 2,336.3 Other........................... 34.4 35.6 ----------- ----------- 2,574.2 2,371.9 Accumulated depletion, depreciation, amortization and impairment.................... (1,664.4) (1,482.4) ----------- ----------- 909.8 889.5 ----------- ----------- Other Assets Receivable under gas balancing arrangements.................. 4.5 5.8 Other........................... 33.2 10.2 ----------- ----------- 37.7 16.0 ----------- ----------- $ 1,120.0 $ 1,064.8 =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable................ $ 115.4 $ 73.1 Income taxes payable............ 21.4 3.0 Interest payable................ 6.0 7.9 Other current liabilities....... 36.6 25.6 ----------- ----------- 179.4 109.6 ----------- ----------- Long-Term Debt....................... 278.5 344.4 ----------- ----------- Deferred Revenues.................... 4.0 4.9 ----------- ----------- Other Long-Term Obligations.......... 27.5 24.2 ----------- ----------- Deferred Income Taxes................ 53.8 64.0 ----------- ----------- Minority Interest in Monterey Resources, Inc..................... 30.3 -- ----------- ----------- Commitments and Contingencies (Note 14)................................ -- -- ----------- ----------- Convertible Preferred Stock, 7% Series, $0.01 par value, 5.0 million shares authorized and issued; 1.2 million and 5.0 million outstanding at December 31, 1996 and 1995, respectively....................... 19.7 80.0 ----------- ----------- Shareholders' Equity Preferred stock, $0.01 par value, 38.1 million shares authorized, none issued....... -- -- $.732 Series A preferred stock, $0.01 par value, 10.7 million shares authorized, issued and outstanding................... 91.4 91.4 Common stock, $0.01 par value, 200.0 million shares authorized.................... 0.9 0.9 Paid-in capital................. 601.3 501.4 Accumulated deficit............. (166.5) (155.7) Foreign currency translation adjustment.................... (0.3) (0.3) ----------- ----------- 526.8 437.7 ----------- ----------- $ 1,120.0 $ 1,064.8 =========== ===========
The accompanying notes are an integral part of these financial statements.
SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF DOLLARS)
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Operating Activities: Net income...................... $ 36.4 $ 26.6 $ 17.1 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization............. 148.2 133.2 121.3 Impairment of oil and gas properties............... 57.4 30.2 -- Restructuring charges...... -- -- 1.0 Deferred income taxes...... (11.2) 7.7 11.3 Loss (gain) on disposition of assets................ (12.1) 0.3 (8.6) Exploratory dry hole costs.................... 11.2 5.5 6.5 Minority interest in Monterey Resources, Inc...................... 1.3 -- -- Equity in losses and adjustment to valuation of investment in Hadson Corporation.............. -- -- 6.1 Hadson Corporation preferred dividends received in-kind......... -- -- (4.5) Other...................... 6.7 2.4 3.0 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable...... (20.1) (12.8) 1.3 Decrease (increase) in inventories.............. (3.1) (1.3) (0.5) Increase (decrease) in accounts payable......... 20.0 (4.5) (8.6) Increase (decrease) in interest payable......... (1.9) (0.6) (1.7) Increase (decrease) in income taxes payable..... 18.4 1.5 0.2 Net change in other assets and liabilities.......... (23.6) (13.7) (19.4) --------- --------- --------- Net Cash Provided by Operating Activities......................... 227.6 174.5 124.5 --------- --------- --------- Investing Activities: Capital expenditures, including exploratory dry hole costs.... (185.7) (189.4) (136.6) Acquisitions of producing properties, net of related debt.......................... (37.8) (33.8) (2.2) Proceeds from sale of investment in Hadson Corporation......... -- 55.2 -- Net proceeds from sales of properties.................... 16.7 7.2 81.1 --------- --------- --------- Net Cash Used in Investing Activities......................... (206.8) (160.8) (57.7) --------- --------- --------- Financing Activities: Issuance of Monterey Resources, Inc. common stock............. 123.6 -- -- Issuance of Santa Fe Energy Resources, Inc. common stock......................... 2.4 -- -- Purchase of 7% Series convertible preferred stock... (94.0) -- -- Principal payments on long-term borrowings.................... (70.0) (10.0) (144.7) Net change in revolving credit agreement..................... 4.0 -- (50.0) Issuance of 11% senior subordinated debentures....... -- -- 96.1 Issuance of $.732 Series A convertible preferred stock... -- -- 91.4 Cash dividends paid............. (14.8) (14.8) (10.7) --------- --------- --------- Net Cash Used in Financing Activities......................... (48.8) (24.8) (17.9) --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents................... (28.0) (11.1) 48.9 Cash and Cash Equivalents at Beginning of Year.................. 42.6 53.7 4.8 --------- --------- --------- Cash and Cash Equivalents at End of Year............................... $ 14.6 $ 42.6 $ 53.7 ========= ========= =========
The accompanying notes are an integral part of these financial statements.
SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (SHARES AND DOLLARS IN MILLIONS)
TOTAL SHAREHOLDERS' EQUITY -------------- Balance at December 31, 1993......... $323.6 Issuance of common stock Employee stock compensation and savings plans.................. 2.0 Issuance of preferred stock........ 91.4 Amortization of restricted stock awards........................... 0.1 Pension liability adjustment....... 0.9 Foreign currency transaction adjustments...................... (0.1) Net income......................... 17.1 Dividends declared................. (11.7) -------------- Balance at December 31, 1994......... 423.3 Issuance of common stock Employee stock compensation and savings plans.................. 2.5 Foreign currency translation adjustments...................... 0.1 Net income......................... 26.6 Dividends declared................. (14.8) -------------- Balance at December 31, 1995......... 437.7 Issuance of common stock Employee stock compensation and savings plans.................. 6.4 Issuance of Monterey Resources, Inc. common stock................ 93.5 Purchase of 7% Series convertible preferred stock.................. (33.7) Net income......................... 36.4 Dividends declared................. (13.5) -------------- Balance at December 31, 1996......... $526.8 ==============
The accompanying notes are an integral part of these financial statements.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Santa Fe Energy Resources, Inc. ("Santa Fe" or the "Company") and its subsidiaries include the accounts of all wholly owned subsidiaries and Monterey Resources, Inc. ("Monterey"). Prior to its initial public offering in November 1996, the Company owned 100% of the outstanding common stock of Monterey. At December 31, 1996, the Company owned 82.8% of the outstanding common stock of Monterey (See Note 2). References herein to the "Company" or "Santa Fe" relate to Santa Fe Energy Resources, Inc., individually or together with its consolidated subsidiaries.
All significant intercompany accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current presentation.
OIL AND GAS OPERATIONS
The Company follows the successful efforts method of accounting for its oil and gas exploration and production activities. Costs (both tangible and intangible) of productive wells and development dry holes, as well as the cost of prospective acreage, are capitalized. The costs of drilling and equipping exploratory wells which do not find proved reserves are expensed upon determination that the well does not justify commercial development. Other exploratory costs, including geological and geophysical costs and delay rentals, are charged to expense as incurred.
Depletion and depreciation of proved properties are computed on an individual field basis using the unit-of-production method based upon proved oil and gas reserves attributable to the field. Certain other oil and gas properties are depreciated or amortized on a straight-line basis.
In the fourth quarter of 1995 the Company changed its impairment policy to conform to the provisions of Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). In accordance with the provisions of FAS 121, proved properties are reviewed to determine if the carrying value of the property exceeds the expected undiscounted future net cash flows from the operation of the property. Based on this review and the continuing evaluation of development plans, production data, economics and other factors, as appropriate, the Company records impairment (additional depletion and depreciation) to the extent that the carrying value of the property exceeds the fair value of the property based on discounted future net cash flows. In accordance with its policy, the Company recorded impairments of $57.4 million in 1996 and $30.2 million in 1995. With respect to the impairments recorded in 1995, approximately $22.1 million was due to the adoption of FAS 121.
The Company provides for future abandonment and site restoration costs with respect to certain of its oil and gas properties. The Company estimates that with respect to these properties such future costs total approximately $39.0 million and such amount is being accrued over the expected life of the properties. At December 31, 1996 and 1995 Accumulated Depletion, Depreciation, Amortization and Impairment includes $16.6 million and $15.5 million, respectively, with respect to such costs.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The value of undeveloped acreage is aggregated and the portion of such costs estimated to be nonproductive, based on historical experience, is amortized to expense over the average holding period. Additional amortization may be recognized based upon periodic assessment of prospect evaluation results. The cost of properties determined to be productive is transferred to proved properties; the cost of properties determined to be nonproductive is charged to accumulated amortization.
Maintenance and repairs are expensed as incurred; major renewals and improvements are capitalized. Gains and losses arising from sales of properties are included in income currently.
REVENUE RECOGNITION
Revenues from the sale of crude oil and liquids produced are generally recognized upon the passage of title, net of royalties and net profits interests.
Revenues from natural gas production are generally recorded using the entitlement method, net of royalties and net profits interests. Sales proceeds in excess of the Company's entitlement are included in Deferred Revenues and the Company's share of sales taken by others is included in Other Assets. At December 31, 1996 the Company's deferred revenues for sales proceeds received in excess of the Company's entitlement was $3.2 million with respect to 2.5 MMcf and the asset related to the Company's share of sales taken by others was $4.5 million with respect to 3.2 MMcf.
The Company hedges a portion of its oil and gas sales. See Note 14 -- Commitments and Contingencies -- Oil and Gas Hedging.
Revenues from sales of crude oil purchased relate to the sales of low viscosity crude oil purchased and blended with certain of the Company's high viscosity, low gravity crude oil production, either to facilitate pipeline transportation or to realize higher margins. The cost to purchase such crude oil is reflected as an expense.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and common equivalent shares outstanding during the year.
ACCOUNTS RECEIVABLE
Accounts Receivable relates primarily to sales of oil and gas and amounts due from joint interest partners for expenditures made by the Company on behalf of such partners. The Company reviews the financial condition of potential purchasers and partners prior to signing sales or joint interest agreements. At December 31, 1996 and 1995 the Company's allowance for doubtful accounts receivable, which is reflected in the consolidated balance sheet as a reduction in accounts receivable, totalled $2.5 million and $2.0 million, respectively. Accounts receivable totalling $1.1 million and $3.8 million were written off as uncollectible in 1995 and 1994, respectively.
INVENTORIES
Inventories are valued at the lower of cost (average price or first-in, first-out) or market. Crude oil inventories at December 31, 1996 and 1995 were $4.5 million and $2.7 million, respectively, and materials and supplies inventories at such dates were $9.1 million and $7.8 million, respectively.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures relating to current operations are expensed or capitalized, as appropriate, depending on whether such expenditures provide future economic benefits. Liabilities are recognized when the expenditures are considered probable and can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) undiscounted site-specific costs. Generally, such recognition coincides with the Company's commitment to a formal plan of action.
INCOME TAXES
The Company follows the asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are determined using the tax rate for the period in which those amounts are expected to be received or paid, based on a scheduling of temporary differences between the tax bases of assets and liabilities and their reported amounts. Under this method of accounting for income taxes, any future changes in income tax rates will affect deferred income tax balances and financial results.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the periods in which certain items of revenue and expense are included. Actual results may differ from such estimates.
(2) MONTEREY RESOURCES, INC.
In 1996 Santa Fe formed Monterey to assume the operations of the Company's Western Division (the "Western Division") which conducted the Company's oil and gas operations in the State of California. In November 1996, prior to the initial public offering (the "IPO") discussed below, pursuant to a contribution and conveyance agreement (the "Contribution Agreement"), among other things: (i) Santa Fe contributed to Monterey substantially all of the assets and properties of the Western Division, subject to the retention by Santa Fe of a production payment, as defined below, and certain other assets; (ii) Santa Fe retained a $30.0 million production payment (the "Production Payment") with respect to certain properties in the Midway-Sunset field; (iii) Monterey assumed all obligations and liabilities of Santa Fe associated with or allocated to the assets and properties of the Western Division, including $245.0 million of indebtedness in respect of Santa Fe's 10.23% Series E Notes due 1997, 10.27% Series F Notes due 1998 and 10.61% Series G Notes due 2005 (the "Series E Notes", "Series F Notes" and "Series G Notes", respectively) and (iv) Monterey agreed to purchase from Santa Fe an $8.3 million promissory note receivable related to the sale to a third party of certain surface acreage located in Orange County, California. Also prior to the IPO, Monterey and Santa Fe entered into a $75.0 million revolving credit facility with a group of banks (the "Monterey Credit Facility") and borrowed $16.0 million which was retained by Santa Fe.
In November 1996 Monterey sold 9,335,000 shares of its common stock for total consideration of $123.6 million (after deducting underwriting discounts of $9.1 million and other related costs of $2.6 million). The proceeds from the IPO were used in part to (i) repay the Series E Notes and Series F Notes ($70.0 million) and pay a prepayment penalty thereon of $2.5 million; (ii) retire the Production Payment ($30.0 million); (iii) repay the $16.0 million outstanding under the Monterey Credit Facility; and (iv) pay a $2.0 million fee with respect to a supplement to the indenture relating to Santa Fe's 11% Senior Subordinated Debentures due 2004. Subsequent to the IPO, Monterey issued $175.0 million in aggregate principal amount of 10.61% Senior Notes due 2005 (the "Monterey Senior Notes") to holders of the Series G Notes in exchange for the cancellation of such notes and paid a $1.3 million consent fee in connection therewith.
The costs and expenses related to the retirement of Santa Fe's outstanding debt, as discussed above, and approximately $3.4 million of deferred debt issue costs and related transaction costs are reflected in the Statement of Operations as an extraordinary item, net of $3.2 million in income taxes.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, Santa Fe owned 82.8% of the Monterey's outstanding common stock. Santa Fe has announced that it intends to distribute pro rata to its common shareholders all of the shares of Monterey's common stock that it owns by means of a tax-free distribution (the "Proposed Spin Off"). Santa Fe's final determination to proceed will require a declaration of the Proposed Spin Off by Santa Fe's Board of Directors. Such declaration is not expected to be made until certain conditions, many of which are beyond the control of Santa Fe, are satisfied, including: (i) receipt by Santa Fe of a ruling from the Internal Revenue Service as to the tax-free nature of the Proposed Spin Off; (ii) approval of the Proposed Spin Off by Santa Fe's shareholders; and (iii) the absence of any future change in market or economic conditions (including developments in the capital markets) or Santa Fe's or Monterey's business and financial condition that causes Santa Fe's Board to conclude that the Proposed Spin Off is not in the best interests of Santa Fe's shareholders. The Company does not expect the Proposed Spin Off to occur prior to July 1997.
Pursuant to the terms of a letter agreement dated as of June 13, 1996, a fee will be payable by Monterey to Chase Securities Inc. and Petrie Parkman & Co., Inc. upon consummation of the Proposed Spin Off. The total amount of such fee is equal to the product of (a) the sum of the market value of the shares of Monterey distributed in the Proposed Spin Off (based upon the average closing price of Monterey's common stock during the ten trading days after the Proposed Spin Off) PLUS the aggregate principal amount of long-term indebtedness assumed by Monterey in connection with the Proposed Spin Off (which totalled $175.0 million) TIMES (b) 0.5%, LESS $1.0 million. If the market value of the Monterey common stock distributed is $16.00 per share, the Company estimates the total fee payable would be approximately $3.5 million, of which $1.75 million would be payable to each of Chase Securities and Petrie Parkman. In addition, a fee of $400,000 will be payable to GKH Partners, L.P., of which $200,000 will be payable by each the Company and Monterey. Certain of the Company's directors are associated with Chase Securities and GKH Partners.
Monterey has agreed to indemnify the Company if at any time during the one-year period after the consummation of the Proposed Spin Off (or if certain tax legislation is enacted and is applicable, such longer period as is required for the Proposed Spin Off to be tax free to Santa Fe) Monterey takes certain actions the effects of which result in the Proposed Spin Off being taxable to Santa Fe.
Santa Fe provides various administrative and financial services to Monterey, including administration of certain employee benefits plans, access to telecommunications, corporate legal assistance and certain other corporate staff and support services. Santa Fe and Monterey have entered into a Services Agreement, terminable by either party on thirty day's notice, under which Monterey pays a fee of $120,000 per month for such services until such time as Monterey assumes full responsibility during 1997 for each of the services covered by the agreement. During 1996 Santa Fe charged Monterey $240,000 under the terms of the Services Agreement.
Certain Monterey employees are participants in Santa Fe's employee benefit and pension plans. Subsequent to the IPO Santa Fe charged Monterey $0.2 million in connection with Monterey employees' participation in such plans.
(3) CORPORATE RESTRUCTURING PROGRAM
In 1993 the Company adopted a corporate restructuring program which included, among other things, a cost reduction program which consisted of a reduction in the Company's salaried work force, an improvement in the efficiency of information systems and a reduction in other general and administration and production and operating costs. The Company's income from operations for 1994 includes restructuring charges of $7.0 million, comprised of severance, benefits and relocation expenses associated with the cost reduction program.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVESTMENT IN HADSON CORPORATION
In December 1993 the Company completed a transaction with Hadson Corporation ("Hadson") under the terms of which the Company sold the common stock of Adobe Gas Pipeline Company ("AGPC"), a wholly-owned subsidiary which held the Company's natural gas gathering and processing assets, to Hadson in exchange for Hadson 11.25% preferred stock with a face value of $52.0 million and 40% of Hadson's common stock. The Company accounted for the sale as a non-monetary transaction and the investment in Hadson was valued at $56.2 million, the carrying value of the Company's investment in AGPC. The Company's investment in Hadson was accounted for on the equity basis.
Also in December 1993 the Company signed a seven-year gas sales contract with Hadson under the terms of which Hadson markets a substantial portion of the Company's domestic natural gas production at market prices as defined by published monthly indices for relevant production locations.
In November 1994 the Company and Hadson settled a lawsuit related to certain of the assets sold to Hadson by the Company in December 1993. The settlement totalled $5.7 million and the Company's share, approximately $3.3 million, is included in Other Income (Expense) in the income statement. The Company paid the full amount of the settlement and Hadson gave the Company a $2.4 million ten-year note for its share. The note bore interest at 9%, payable annually, with the principal amount due at maturity. The note was retired as part of the sales transaction discussed below.
In 1995 the Company sold its holdings in Hadson for $55.2 million. Other Income (Expense) for 1995 includes a $1.8 million charge with respect to the Company's loss on the sale. Subsequent to the sale Hadson's name was changed to LG&E Natural Marketing Inc. ("LG&E").
(5) SANTA FE ENERGY TRUST
In November 1992 5,725,000 Depository Units ("Trust Units"), each consisting of beneficial ownership of one unit of undivided beneficial interest in the Santa Fe Energy Trust (the "Trust") and a $20 face amount beneficial ownership interest in a $1,000 face amount zero coupon United States Treasury obligation maturing on or about February 15, 2008, were sold in a public offering. The Trust consists of certain oil and gas properties conveyed by Santa Fe.
In the first quarter of 1994, the Company sold 575,000 Trust Units which it held for $11.3 million. The gain on the sale of $0.8 million is included in Other Income (Expense).
For any calendar quarter ending on or prior to December 31, 2002, the Trust will receive additional royalty payments to the extent that it needs such payments to distribute $0.40 per Depository Unit per quarter. The source of such additional royalty payments, if needed, will be limited to the Company's remaining royalty interest in certain of the properties conveyed to the Trust. If such additional payments are made, certain proceeds otherwise payable to the Trust in subsequent quarters may be reduced to recoup the amount of such additional payments. The aggregate amount of the additional royalty payments (net of any amounts recouped) will be limited to $20.0 million on a revolving basis. Through December 31, 1996 the Company had made additional royalty payments, net of recoupments, totalling $1.2 million.
At December 31, 1996 and 1995, Accounts Payable included $3.1 million and $2.6 million, respectively, due to the Trust.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) CASH FLOWS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
In December 1996 the Company sold the surface rights to approximately 116 surface acres in Orange County, California for total consideration of $24.2 million and recognized a $12.3 million gain. The Company received $15.9 million in cash and an $8.3 million note which was purchased by Monterey for cash.
In November 1993 the Company completed the sale of certain southern California and Gulf Coast producing properties for net proceeds totalling $42.0 million in cash, $10.5 million of which was collected in 1994.
In April 1994 the Company completed the sale of certain Mid-Continent and Rocky Mountain producing and nonproducing oil and gas properties for net proceeds totalling $46.7 million. The Company's income from operations for 1994 includes $2.2 million attributable to the assets sold. In the first quarter of 1994 the Company sold its interest in certain oil and gas properties, in which it had no remaining basis, for $8.3 million.
The Company made interest payments of $38.6 million, $37.6 million and $47.9 million in 1996, 1995 and 1994, respectively. In 1996, 1995 and 1994, the Company made tax payments of $2.0 million, $1.6 million and $1.8 million, respectively, and in 1996 and 1995 received tax refunds of $11.2 million and $1.3 million, respectively, primarily related to the audit of prior years' returns.
(7) INCOME TAXES
In December 1990 SFP distributed all of the shares of the Company it held to its shareholders (the "SFP Spin Off"). Through the date of the SFP Spin Off the taxable income or loss of the Company was included in the consolidated federal income tax return filed by SFP. The consolidated federal income tax returns of SFP have been examined through 1990 and all years prior to 1986 are closed. Issues relating to the open years are being contested through various stages of administrative appeal. The Company, in conjunction with the SFP Spin Off, agreed to indemnify SFP should the transaction be determined to be taxable to SFP because of the Company's actions. The Company does not believe it has taken any action that would have such an effect. Accounts Receivable at December 31, 1995 included $12.0 million with respect to a refund related to the audit of the years 1981 through 1985 which was collected in 1996. The Company has filed separate consolidated federal income tax returns for periods subsequent to the SFP Spin Off. The consolidated returns of the Company through 1991 have been audited and are closed.
During 1989, the Company received a notice of deficiency for certain state franchise tax returns filed for the years 1978 through 1983 as part of the consolidated tax returns of SFP. The matter was contested by the Company and favorably resolved in 1994. The years 1984 through 1986 have been audited and no significant Company issues were raised. The years 1987 through 1992 are currently being audited.
With the Merger of Adobe the Company succeeded to a net operating loss carryforward that is subject to Internal Revenue Code Section 382 limitations which annually limit taxable income that can be offset by such losses. Certain changes in the Company's shareholders in 1995 resulted in a second Section 382 limitation, the imposition of which is not expected to result in a limitation of the Company's ability to use its net operating losses. Losses carrying forward of $71.4 million will expire beginning in 2004.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total pretax income for the years ended December 31, 1996, 1995 and 1994 was taxed under the following jurisdictions (in millions of dollars):
1996 1995 1994 --------- --------- --------- Domestic............................. 46.4 40.5 22.0 Foreign.............................. 2.4 (4.2) 1.1 --------- --------- --------- 48.8 36.3 23.1 ========= ========= =========
The Company's total income tax expense (benefit) for the years ended December 31, 1996, 1995 and 1994 consisted of (in millions of dollars):
1996 1995 1994 --------- --------- --------- Current U.S. federal.................... 13.6 1.5 (3.5) State........................... 5.1 (2.1) (3.2) Foreign......................... 3.6 2.6 1.4 --------- --------- --------- 22.3(a) 2.0 (5.3) --------- --------- --------- Deferred U.S. federal.................... 4.7 13.3 8.6 State........................... 1.3 (0.6) 2.4 Foreign......................... (17.2)(b) (5.0) 0.3 --------- --------- --------- (11.2) 7.7 11.3 --------- --------- --------- 11.1(a) 9.7 6.0 ========= ========= =========
- ------------
(a) Includes $3.2 million income tax benefit which is reflected in extraordinary item - debt extinguishment costs (see Note 2).
(b) Includes benefit of $8.3 million related to certain prior period foreign expenditures.
The Company's deferred income tax liabilities (assets) at December 31, 1996 and 1995 are composed of the following differences between financial and tax reporting (in millions of dollars):
1996 1995 --------- --------- Capitalized costs and write-offs..... 99.9 138.5 State deferred liability............. 10.5 7.6 Foreign deferred liability........... (8.1) 9.1 --------- --------- Gross deferred liabilities........... 102.3 155.2 --------- --------- Accruals not currently deductible for tax purposes....................... (0.7) (16.7) Alternative minimum tax carryforwards...................... (13.6) (12.7) Net operating loss carryforwards..... (25.0) (54.7) Other................................ (9.2) (7.1) --------- --------- Gross deferred assets................ (48.5) (91.2) --------- --------- Deferred tax liability............... 53.8 64.0 ========= =========
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's total U.S. income tax expense computed by applying the statutory U.S. federal income tax rate to the Company's total income (loss) before income taxes for the years ended December 31, 1996, 1995 and 1994 is presented in the following table (in millions of dollars):
1996 1995 1994 --------- --------- --------- U.S. federal income taxes at statutory rate..................... 17.1 12.7 8.1 Increase (reduction) resulting from: State income taxes, net of federal effect.......................... 4.3 0.6 0.9 Foreign income taxes in excess of (less than) U.S. rate........... (14.4) (0.9) 1.4 U.S. tax on foreign reinvested earnings........................ 2.8 0.8 1.2 Benefit of tax losses.............. (1.8) (0.3) (4.3) Prior period adjustments........... 1.7 (2.7) (1.6) Other.............................. 1.4 (0.5) 0.3 --------- --------- --------- 11.1 9.7 6.0 ========= ========= =========
(8) FINANCING AND DEBT
Long-term debt at December 31, 1996 and 1995 consisted of (in millions of dollars):
DECEMBER 31, -------------------------------------------- 1996 1995 -------------------- -------------------- CURRENT LONG-TERM CURRENT LONG-TERM ------- --------- ------- --------- Santa Fe Senior Notes................. -- -- -- 245.0 11% Senior Subordinated Debentures................ -- 99.5 -- 99.4 Short-term lines of credit... -- 4.0 -- -- ------- --------- ------- --------- -- 103.5 -- 344.4 Monterey Senior Notes................. -- 175.0 -- -- ------- --------- ------- --------- -- 278.5 -- 344.4 ======= ========= ======= =========
Aggregate total maturities of long-term debt during the next five years are as follows: 1997 -- none; 1998 -- none; 1999 -- $25.0 million; 2000 -- $25.0 million; and 2001 -- $29.0 million.
Effective November 13, 1996 Santa Fe entered into a revolving credit agreement (the "Santa Fe Credit Agreement") which matures November 13, 2001. The Santa Fe Credit Agreement permits the Company to obtain revolving credit loans and issue letters of credit up to an aggregate amount of $150.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $30.0 million. Borrowings under the Santa Fe Credit Agreement are unsecured and interest rates are tied to the bank's prime rate or eurodollar offering rate, at the option of the Company. At December 31, 1996, no loans or letters of credit were outstanding under the terms of the Santa Fe Credit Agreement.
Effective November 13, 1996 Monterey entered into the Monterey Credit Agreement which matures November 13, 2000. The Monterey Credit Agreement permits Monterey to obtain revolving credit loans and issue letters of credit up to an aggregate amount of up to $75.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $15.0 million. Borrowings under the Monterey Credit Agreement are unsecured and interest rates are tied to the bank's prime rate
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) or eurodollar offering rate, at the option of Monterey. At December 31, 1996, no loans or letters of credit were outstanding under the terms of the Monterey Credit Agreement.
In November 1996 Monterey issued the Monterey Senior Notes which were exchanged for $175.0 million of senior notes previously issued by Santa Fe. The Monterey Senior Notes bear interest at 10.61% per annum and mature in 2005. Monterey is required to repay $25.0 million of the principal amount each year from 1999 through 2005.
In a public offering in May 1994 the Company issued $100.0 million of 11% Senior Subordinated Debentures due 2004 (the "Debentures"). The Debentures were issued for 99.266% of face value and the Company received proceeds of $96.1 million, after deducting related costs and expenses of $3.2 million. The Debentures, which mature May 15, 2004, are not redeemable prior to May 15, 1999 and may be redeemed after such date at the option of the Company at prices set forth in the indenture for the Debentures. Under certain circumstances, the Company may be required to redeem the Debentures for 101% of the principal amount. The Debentures are general unsecured subordinated obligations of the Company. The Company used the proceeds from the issuance of the Debentures, together with a portion of the proceeds from the issuance of the Series A Preferred (see Note 11), to retire $132.3 million of its then outstanding long-term debt.
In the first quarter of 1995 the Company retired the $10.0 million balance of a loan from an Argentine bank. The loan, which related to the Company's purchase of an interest in a producing oil field in Argentina in 1991, bore interest at 13% at the time it was retired.
Santa Fe has three short-term uncommitted lines of credit totalling $60.0 million which are used to meet short-term cash needs. Interest rates on borrowings under these lines of credit are typically lower than rates paid under the Santa Fe Credit Agreement. At December 31, 1996 $4.0 million was outstanding under these lines of credit. The amount outstanding at December 31, 1996 is classified as long-term since the Santa Fe Credit Agreement is available to refinance such amount on a long-term basis.
At December 31, 1996 the Company had outstanding letters of credit totalling $6.0 million, $2.3 million of which relate to the operations of Monterey.
Certain of the credit agreements and the indenture for the Debentures include covenants that restrict Santa Fe and Monterey's ability to take certain actions, including the ability to incur additional indebtedness and to pay dividends on capital stock. Under the most restrictive of these covenants, at December 31, 1996 Santa Fe could incur up to $417.7 million of additional indebtedness and pay dividends of up to $36.8 million on its aggregate capital stock (including its common stock, 7% Convertible Preferred Stock and Series A Preferred). At December 31, 1996, under the most restrictive of these covenants, Monterey could incur up to $253.4 million of additional indebtedness and pay dividends of $61.7 million on its common stock. Monterey is prohibited from paying more than $31.0 million in dividends to Santa Fe in any fiscal year prior to the consummation of the Proposed Spin Off.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) SEGMENT INFORMATION
The principal business of the Company consists of the acquisition, exploration and development of oil and gas properties and the production and sale of crude oil and liquids and natural gas. Pertinent information with respect to the Company's oil and gas business is presented in the following table (in millions of dollars):
Crude oil and liquids and natural gas accounted for more than 93% of revenues in 1996, 1995 and 1994. The following table (which with respect to certain properties includes royalty and working interest owners' share of production) reflects sales to crude oil purchasers who accounted for more than 10% of the Company's crude oil and liquids revenues (in millions of dollars):
YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ----- ----- ---- Celeron Corporation.................. 66.7 62.1 58.7 Coastal States Trading, Inc.......... 56.4 (a) (a) Shell Oil Company.................... 105.7 100.4 94.5
- ------------
(a) Sales represented less than 10% of crude oil and liquids revenues.
In 1996, 1995 and 1994 the only purchaser of the Company's natural gas to account for more than 10% of natural gas revenues was LG&E (see Note 4 with respect to the Company's gas sales contract with LG&E).
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) CONVERTIBLE PREFERRED STOCK, 7% SERIES
The Company's Convertible Preferred Stock, 7% Series, which was issued in connection with the Company's merger with Adobe Resources Corporation ("Adobe") in 1992, is non-voting and entitled to receive cumulative cash dividends at an annual rate equivalent to $1.40 per share. The holders of the convertible preferred shares may, at their option, convert any or all such shares into 1.3913 shares of the Company's common stock. The Company may, at any time after the fifth anniversary of the effective date of the Merger and upon the occurrence of a "Special Conversion Event", convert all outstanding shares of convertible preferred stock into common stock at the initial conversion rate of 1.3913 shares of common stock, subject to certain adjustments, plus additional shares in respect to accrued and unpaid dividends. A Special Conversion Event is deemed to have occurred when the average daily closing price for a share of the Company's common stock for 20 of 30 consecutive trading days equals or exceeds 125% of the quotient of $20.00 divided by the then applicable conversion rate (approximately $18.00 per share at a conversion rate of 1.3913).
Upon the occurrence an ownership change, as defined, of Santa Fe, each holder of shares of convertible preferred stock shall have the right, at the holder's option, to elect to have all of such holder's shares redeemed for $20.00 per share plus accrued and unpaid interest and dividends. The First Ownership Change shall be deemed to have occurred when any person or group, together with any affiliates or associates, becomes the beneficial owner of 50% or more of the outstanding common stock of Santa Fe.
In November 1996 the Company purchased 3,770,110 of the outstanding shares for $24.50 per share. The excess of the cost of the acquired shares ($94.0 million, including related costs of $1.7 million) over the book value of such shares, $33.7 million, is reflected in the Statement of Operations as a preferred dividend. At December 31, 1996, 1,229,890 shares were outstanding.
(11) SHAREHOLDERS' EQUITY
$.732 SERIES A CONVERTIBLE PREFERRED STOCK
In a public offering in May 1994 the Company issued 10,700,000 shares of $.732 Series A Convertible Preferred Stock. The Series A Preferred was issued at $8.875 per share and the Company received total proceeds of $91.4 million after deducting related costs and expenses of $3.6 million. Each share of Series A Preferred mandatorily converts into one share of common stock on May 15, 1998 and the Company has the option to redeem the shares, in whole or in part, on or after May 15, 1997 and prior to May 15, 1998 at prices set forth in the certificate of designation for the Series A Preferred which decline from $9.058 per share on May 15, 1997 to $8.875 per share on May 14, 1998, payable in common stock. Each share of Series A Preferred is convertible at the option of the holder into 0.8474 shares of common stock at any time prior to May 15, 1998.
The Series A Preferred ranks prior to common stock both as to payment of dividends and distribution of assets upon liquidation. The holders of Series A Preferred are entitled to receive cumulative preferential dividends, accruing at the rate per share of $0.732 per annum ($0.183 per quarter) payable quarterly in arrears.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the shareholders, to cause shares of preferred stock to be issued in one or more series, and to determine the number of shares in each series and the rights, preferences and limitations of each series. Among the specific matters which may be determined by the Board of Directors are: the annual rate of dividends; the redemption price, if any; the terms of a sinking or purchase fund, if any; the amount payable in the
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) event of any voluntary liquidation, dissolution or winding up of the affairs of the Company; conversion rights, if any; and voting powers, if any.
SHAREHOLDER RIGHTS PLAN
The Company has adopted a shareholder rights plan (the "Rights Plan") whereby preferred stock purchase rights (the "Rights") will be distributed to holders of the Company's common stock. The Rights will expire two years after the Proposed Spin Off or on March 3, 2000, whichever occurs first. The Rights will be exercisable only if a person acquires beneficial ownership of 15 percent or more of the Company's common stock (an "Acquiring Person"), or commences a tender offer which would result in ownership of 15 percent or more of such stock. Under the Rights Plan, one Right to purchase one one-hundredth of a share of a new series of junior preferred stock of the Company at an exercise price of $42.00 per one one-hundredth of a share (subject to adjustment) will be issued for each outstanding share of the Company's common stock held at the close of business on March 3, 1997.
If any person becomes an Acquiring Person, each Right will entitle the holder to purchase, at the Right's then current exercise price, shares of the Company's common stock having a value of twice the Right's exercise price. In addition, if, after a person becomes an Acquiring Person, the Company is involved in a merger or other business combination transaction with another person in which the Company is not the surviving corporation, or under certain other circumstances, each Right will entitle its holder to purchase, at the Right's then current exercise price, shares of common stock of the other person having a value of twice the Right's exercise price.
The Company will generally be entitled to redeem the Rights in whole, but not in part, at $0.01 per Right payable in cash or common stock, subject to adjustment, at any time until 10 business days (subject to extension) after the first public announcement that an Acquiring Person has become such.
The terms of the Rights may be amended by the Company without the approval of the holders of the Rights at any time the Rights are redeemable. At any time the Rights are no longer redeemable the terms may be amended only to (i) cure any ambiguity; (ii) correct or supplement any provision which may be defective or inconsistent with other provisions; (iii) shorten or lengthen any time period; or (iv) change or supplement the provisions in any manner which the Company deems necessary or desirable, so long as such change does not adversely affects the interests of the holders of the Rights.
(12) STOCK OPTION PLANS
Under the terms of the Santa Fe Energy Resources 1990 Incentive Stock Compensation Plan (the "1990 Plan") the Company may grant options and awards with respect to no more than 7,500,000 shares of common stock to officers, directors and key employees. Under the terms of the Santa Fe Energy Resources 1995 Incentive Stock Compensation Plan (the "1995 Plan") the Company may grant options and awards with respect to not more than 1,000,000 shares of common stock per year to employees other than executive officers and directors. Awards made under the terms of the 1990 Plan and the 1995 Plan (collectively the "Plans") may be made in the form of Restricted Stock, Bonus Stock, Phantom Units and Stock Appreciation Rights, as such terms are defined in the Plans.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options under the terms of the Plans are granted at the average market price on the date of grant and have a ten-year term with vesting periods ranging from six months to three years. The following table summarizes the activity with respect to options outstanding under the Plans during 1996 and 1995:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (i) expected dividend yield -- 0.0%; (ii) expected stock price volatility -- 22 to 27%; (iii) risk-free interest rate -- 5 to 7%; and (iv) expected life of options -- 10 years.
The following table summarizes certain information with respect to options outstanding under the Plans at December 31, 1996:
In December 1995 the Company granted 0.1 million Phantom Units to certain executive officers which were to be earned over a three-year period commencing January 1, 1996. The Phantom Units vested as a result of the IPO. The Company recognized $1.6 million in expense in 1996 with respect to such Phantom Units.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1996 the Company granted 0.2 million Phantom Units to certain executive officers and key personnel which are to be earned over a three-year period commencing January 1, 1997. During 1996 and 1995 the Company granted 0.1 million and 0.2 million, respectively, shares of restricted stock to certain executive officers and other employees. At December 31, 1996 1.4 million shares were available for options or awards under the 1990 Plan and 1.0 million shares were available under the 1995 Plan.
Under the terms of the Monterey Resources, Inc. 1996 Incentive Stock Compensation Plan (the "Monterey Plan"), Monterey may grant options and awards with respect to up to 3.0 million shares of common stock to officers, directors and key employees, including up to 0.5 million shares of restricted stock. During 1996 Monterey granted options on 0.2 million shares at an average exercise price of $14.59 per share, with each option granted having an average fair value of $7.77 per share. The grants were made at the market price at the date of grant, have a ten year term and vest one year from the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (i) expected dividend yield -- 0.0%; (ii) expected stock price volatility -- 24%; (iii) risk-free interest rate -- 6.4%; and (iv) expected life of options -- 10 years.
During 1996 Monterey also issued 0.1 million restricted shares which vest over a five-year period from the date of grant.
In October 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"), which established financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 encourages companies to adopt a fair value based method of accounting for such plans but continues to allow the use of the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). The Company has elected to continue to account for stock-based compensation costs based on the fair value of options granted as prescribed by FAS 123. Earnings (loss) attributable to common shares and the related per share amounts would have been reduced as is reflected by the proforma amounts in the following table (in millions of dollars, except per share data):
YEAR ENDED DECEMBER 31, -------------------- 1996 1995 --------- --------- As Reported: Earnings (loss) attributable to common shares................. (10.8) 11.8 Earnings (loss) attributable to common shares per share....... (0.12) 0.13 Proforma: Earnings (loss) attributable to common shares................. (12.6) 10.9 Earnings (loss) attributable to common shares per share....... (0.14) 0.12
During the initial phase-in period, the effects of applying FAS 123 for recognizing compensation cost on a proforma basis may not be representative of the effects on reported earnings for future periods since the options granted vest over several periods and additional awards will be made in future periods.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) PENSION AND OTHER EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a defined benefit retirement plan (the "SFER Plan") covering substantially all salaried employees not covered by collective bargaining agreements and a nonqualified supplemental retirement plan (the "Supplemental Plan"). The Supplemental Plan will pay benefits to participants in the SFER Plan in those instances where the SFER Plan formula produces a benefit in excess of limits established by ERISA and the Tax Reform Act of 1986. Benefits payable under the SFER Plan are based on years of service and compensation during the five highest paid years of service during the ten years immediately preceding retirement. The Company's funding policy is to contribute annually not less than the minimum required by ERISA and not more than the maximum amount deductible for income tax purposes.
The following table sets forth the funded status of the SFER Plan and the Supplemental Plan at December 31, 1996 and 1995 (in millions of dollars):
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the components of pension expense for the SFER Plan and Supplemental Plan for 1996, 1995 and 1994 (in millions of dollars):
The Company sponsors a pension plan covering certain hourly-rated employees in California (the "Hourly Plan"). The Hourly Plan provides benefits that are based on a stated amount for each year of service. The Company annually contributes amounts which are actuarially determined to provide the Hourly Plan with sufficient assets to meet future benefit payment requirements.
The following table sets forth the funded status of the Hourly Plan at December 31, 1996 and 1995 (in millions of dollars):
1996 1995 --------- --------- Plan assets at fair value, primarily invested in fixed-rate securities.... 9.5 8.7 Actuarial present value of projected benefit obligations Accumulated benefit obligations Vested.................... (10.9) (10.4) Nonvested................. (0.4) (0.4) --------- --------- Excess of projected benefit obligation over plan assets........ (1.8) (2.1) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions........................ (0.4) (0.3) Unrecognized prior service cost...... 0.4 0.4 Unrecognized net obligation.......... 1.0 1.2 Additional minimum liability......... (1.1) (1.3) --------- --------- Accrued pension liability....... (1.9) (2.1) ========= ========= Major assumptions at year-end Discount rate................... 7.50% 7.50% Expected long-term rate of return on plan assets......... 8.50% 8.50%
The following table sets forth the components of pension expense for the Hourly Plan for 1996, 1995 and 1994 (in millions of dollars):
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Service cost.................... 0.2 0.2 0.2 Interest cost................... 0.8 0.8 0.8 Return on plan assets........... (0.9) (1.4) (0.4) Net amortization and deferral... 0.4 0.9 -- --------- --------- --------- 0.5 0.5 0.6 ========= ========= =========
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company sponsors a pension plan for certain persons employed in foreign locations (the "Foreign Plan"). The following table sets forth the funded status of the Foreign Plan at December 31, 1996 and 1995 (in millions of dollars):
1996 1995 --------- --------- Plan assets.......................... -- -- Actuarial present value of projected benefit obligations: Accumulated benefit obligations.................. Vested.......................... (0.1) -- Nonvested....................... (0.2) (0.2) Effect of projected future salary increases............. (0.1) -- --------- --------- Excess of projected benefit obligations over plan assets....... (0.4) (0.2) Unrecognized prior service costs..... 0.1 0.1 --------- --------- Accrued pension liability............ (0.3) (0.1) ========= ========= Major assumptions at year-end: Discount rate................... 7.50% 7.50% Rate of increase in future compensation................. 5.00% 5.00%
The following table sets forth the components of pension expense for the Foreign Plan for 1996, 1995 and 1994 (in millions of dollars):
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Service cost......................... 0.1 0.1 -- Interest cost........................ -- -- -- Net amortization and deferral........ -- -- -- --------- --------- --------- 0.1 0.1 -- ========= ========= =========
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care and life insurance benefits for substantially all employees who retire under the provisions of a Company-sponsored retirement plan and their dependents. Participation in the plans is voluntary and requires a monthly contribution by the retiree. The following table sets forth the plan's funded status at December 31, 1996 and 1995 (in millions of dollars):
DECEMBER 31, -------------------- 1996 1995 --------- --------- Plan assets, at fair value........... -- -- Accumulated postretirement benefit obligation Retirees........................... (4.2) (4.6) Eligible active participants....... (1.0) (1.4) Other active participants.......... (2.1) (1.2) --------- --------- Accumulated postretirement benefit obligation in excess of plan assets............................. (7.3) (7.2) Unrecognized transition obligation... 3.7 3.8 Unrecognized net loss (gain) from past experience different from that assumed and from changes in assumptions........................ (0.2) 0.3 --------- --------- Accrued postretirement benefit cost............................... (3.8) (3.1) ========= ========= Assumed discount rate................ 7.50% 7.75% Assumed rate of compensation increase........................... 5.25% 5.25%
The Company's net periodic postretirement benefit cost for 1996, 1995 and 1994 includes the following components (in millions of dollars):
YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ---- ---- ---- Service costs........................ 0.5 0.3 0.4 Interest costs....................... 0.5 0.5 0.5 Amortization of unrecognized transition obligation.............. 0.3 0.3 0.3 ---- ---- ---- 1.3 1.1 1.2 ==== ==== ====
Estimated costs and liabilities have been developed assuming trend rates for growth in future health care costs beginning with 8.0% for 1996 graded to 6.0% (5.5% for post age 65) by the year 2000 and remaining constant thereafter. Increasing the assumed health care cost trend rate by one percent each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $0.4 million and the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for 1997 by $0.1 million.
SAVINGS PLAN
The Company has a savings plan available to substantially all salaried employees and intended to qualify as a deferred compensation plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). The Company will match employee contributions for an amount up to 4% of each employee's base salary. In addition, if at the end of each fiscal year the Company's performance for such year has exceeded certain predetermined criteria, each participant will receive an additional matching contribution equal to 50% of the regular matching contribution. The Company's contributions to the 401(k) Plan, which are made in the form of the Company's common stock and charged to expense, totalled $1.2 million in 1996, $1.3 million in 1995 and $1.2 million in 1994.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also has a savings plan with respect to certain personnel employed in foreign locations. The plan is an unsecured creditor of the Company and at December 31, 1996 and 1995 the Company's liability with respect to the plan totalled $0.3 million and $0.1 million, respectively.
(14) COMMITMENTS AND CONTINGENCIES
OIL AND GAS HEDGING
From time to time the Company hedges a portion of its oil and gas sales to provide a certain minimum level of cash flow from its sales of oil and gas. While the hedges are generally intended to reduce the Company's exposure to declines in market price, the Company's gain from increases in market price may be limited. The Company uses various financial instruments whereby monthly settlements are based on differences between the prices specified in the instruments and the settlement prices of certain futures contracts quoted on the New York Mercantile Exchange ("NYMEX") or certain other indices. Generally, in instances where the applicable settlement price is less than the price specified in the contract, the Company receives a settlement based on the difference; in instances where the applicable settlement price is higher than the specified price, the Company pays an amount based on the difference. The instruments utilized by the Company differ from futures contracts in that there is no contractual obligation which requires or allows for the future delivery of the product. Gains or losses on hedging activities are recognized in oil and gas revenues in the period in which the hedged production is sold.
Crude oil sales hedges resulted in a $13.4 million decrease in revenues in 1996 and a $2.4 million increase in revenues in 1995. At December 31, 1996 the Company had open crude oil sales hedges on an average of 2,000 barrels per day for the period January to June 1997. Under the terms of the instruments, if the average of the applicable daily settlement prices is below $21.00 per barrel, the Company will receive a settlement based on the difference, and if the average of the applicable daily settlement prices is above $26.10, the Company will be required to pay an amount based on the difference.
Subsequent to year end, the Company entered into additional agreements which increased the number of barrels hedged to an average of approximately 7,700 barrels per day for the period January to July 1997. The instruments used have floors ranging from $21.00 to $23.00 per barrel and ceilings ranging from $24.00 to $27.00 per barrel. Under the terms of the instruments, if the aggregate average of the applicable daily settlement prices is below the floor, the Company will receive a settlement based on the difference, and if the aggregate average of the applicable daily settlement prices is above the ceiling, the Company will be required to pay an amount based on the difference.
At December 31, 1996 the Company had no open natural gas sales hedges. Natural gas sales hedges resulted in a decrease in revenues of $21.4 million in 1996, $0.3 million in 1995 and $1.0 million in 1994.
In addition to its oil and gas sales hedges, for the first six months of 1996 the Company hedged 20 MMcf per day of the natural gas it purchases for use in its steam generation operations in the San Joaquin Valley of California. Such hedges resulted in a $3.2 million increase in production and operating costs.
ENVIRONMENTAL REGULATION
Federal, state and local laws and regulations relating to environmental quality control affect the Company in all of its oil and gas operations. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner or
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operator of a site and companies that disposed or arranged for the disposal of the hazardous substance found at a site. CERCLA also authorizes the Environmental Protection Agency (the "EPA") and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its operations, the Company has generated and will generate wastes that may fall within CERCLA's definition of "hazardous substances". The Company may be responsible under CERCLA for all or part of the costs to clean up sites at which such wastes have been disposed. Certain properties owned or used by the Company or its predecessors have been investigated under state and Federal Superfund statutes, and the Company has been and could be named a potentially responsible party ("PRP") for the cleanup of some of these sites.
The Company has been identified as one of over 250 PRPs at a Superfund site in Los Angeles County, California (the "OII Site"). The OII Site was operated by a third party as a waste disposal facility from 1948 until 1983. The EPA is requiring the PRPs to undertake remediation of the site in several phases, which include site monitoring and leachate control, gas control and final remediation. In November 1988 the EPA and a group of PRPs that includes the Company entered into a consent decree covering the site monitoring and leachate control phases of remediation. The Company was a member of the group Coalition Undertaking Remediation Efforts ("CURE") which was responsible for constructing and operating the leachate treatment plant. This phase is now complete and the Company's share of costs with respect to this phase was $0.9 million. Another consent decree provides for the predesign, design and construction of a gas plant to harness and market methane gas emissions. The Company is a member of the New CURE group which is responsible for the gas plant construction and operation and landfill cover. Currently, New CURE is in the design stage of the gas plant. The Company's share of costs of this phase is expected to be $1.9 million and such costs have been provided for in the financial statements. Pursuant to consent decrees settling lawsuits against the municipalities and transporters involved with the OII site but not named by the EPA as PRPs, such parties are required to pay approximately $84 million, of which approximately $76 million will be credited against future remediation expenses. The EPA and the PRPs are currently negotiating the final closure requirements. After taking into consideration the credits from the municipalities and transporters, the Company estimates its share of final costs of closure will be approximately $0.8 million, which amount has been provided for by the Company in its financial statements. The Company has entered into a Joint Defense Agreement with the other PRPs to defend against a lawsuit filed in September 1994 by 95 homeowners alleging, among other things, nuisance, trespass, strict liability and infliction of emotional distress. A second lawsuit has been filed by 33 additional homeowners and the Company and the other PRPs have entered into a Joint Defense Agreement. At this stage of the lawsuit the Company is not able to estimate costs or potential liability.
In 1994 the Company received a request from the EPA for information pursuant to Section 104(e) of CERCLA and a letter ordering the Company and other PRPs to negotiate with the EPA regarding implementation of a remedial plan for a site located in Santa Fe Springs, California (the "Santa Fe Springs Site"). The Company owned the property on which the Santa Fe Springs Site is located from 1921 to 1932. During that time the property was leased to another company and in 1932 the property was sold to that company. During the time the other company leased or owned the property and for a period thereafter, hazardous wastes were allegedly disposed at the Santa Fe Springs Site. The EPA estimates total past and future costs for remediation to be approximately $8.0 million. The Company filed its response to the Section 104(e) order setting forth its position and defenses based on the fact that the other company was the lessee and operator of the site during the time the Company was the owner of the property. However, the Company has also given its Notice of Intent to comply with the EPA's order to prepare a remediation design plan. The PRPs estimate total costs to final remediation to be $3.0 million and the Company has provided $250,000 for such costs in the financial statements.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1995 the Company and twelve other companies received notice that they have been identified as PRPs by the California Department of Toxic Substances Control (the "DTSC") as having generated and/or transported hazardous waste to the Environmental Protection Corporation ("EPC") Eastside Landfill (the "Eastside Site") during its fourteen-year operation from 1971 to 1985. EPC has since liquidated all assets and placed the proceeds in trust (the "EPC Trust") for closure and post-closure activities. However, these monies may not be sufficient to close the site. The PRPs have entered into an enforceable agreement with the DTSC to characterize the contamination at the site and prepare a focused remedial investigation and feasibility study. The DTSC has agreed to implement reasonable measures to bring new PRPs into the agreement. The DTSC will address subsequent phases of the cleanup, including remedial design and implementation in a separate order agreement. The cost of the remedial investigation and feasibility study is estimated to be $0.8 million, the cost of which will be shared by the PRPs and the EPC Trust. The ultimate costs of subsequent phases will not be known until the remedial investigation and feasibility study is completed and a remediation plan is accepted by the DTSC. The Company currently estimates final remediation could cost $2 million to $6 million and believes the monies in the EPC Trust will be sufficient to fund the lower end of this range of costs. The Company has provided $80,000 in its financial statements for its share of costs related to this site.
Pursuant to the Contribution Agreement, Monterey agreed to indemnify and hold harmless Santa Fe from and against any costs incurred in the future relating to environmental liabilities of the Western Division assets (other than those retained by Santa Fe), including any costs or expenses incurred at any of the OII Site, the Santa Fe Springs Site and the Eastside Site, and any costs or liabilities that may arise in the future that are attributable to laws, rules or regulations in respect to any property or interest therein located in California and formerly owned or operated by the Western Division or its precedessors.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with eleven employees. The initial term of ten of the agreements expire on December 31, 1998; however, beginning January 1, 1998 and on each January 1 thereafter, the term is automatically extended for one-year periods, unless by September 30 of the preceding year the Company gives notice that the agreement will not be extended. The term of the agreements is automatically extended for a period of two years following a change of control. The initial term of the other agreement expires December 31, 1999 and beginning January 1, 1999, is automatically extended for one-year periods and is automatically extended for a three-year period following a change of control.
In the event following a change in control employment is terminated by the employee for "good reason" or the employee is involuntarily terminated by the Company other than for "cause" (as those terms are defined in the employment agreements), or if during the six months preceding a change in control, the employee's employment is terminated by the employee for good reason or by the Company other than for cause, and such termination is demonstrated to be connected with the change in control, the employment agreements provide for payment of certain amounts to the employee based on the employee's salary and bonus under the Company's incentive compensation plan; payout of non-vested restricted stock, phantom units, stock options, if any, and continuation of certain insurance benefits on a tax neutral basis for a period of up to 36 months. The payments and benefits are payable pursuant to the employment agreements only to the extent they are not paid out under the terms of any other plan of the Company. The payments and benefits provided by the employment agreements may be limited, with the exception of those made to Mr. Payne, by certain provisions of the Internal Revenue Code.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING LEASES
The Company has noncancellable agreements with terms ranging from one to ten years to lease office space and equipment. Minimum rental payments due under the terms of these agreements are: 1997 -- $6.2 million,1998 -- $5.7 million, 1999 -- $3.7 million,2000 -- $1.9 million, 2001 -- $1.5 million and $6.1 million thereafter. Rental expense under the terms of noncancellable agreements totalled $5.9 million in 1996, $6.1 million in 1995 and $6.2 million in 1994.
OTHER MATTERS
The Company has certain long-term contracts ranging up to twelve years for the supply and transportation of approximately 20 million cubic feet per day of natural gas to the Company's operations in Kern County, California. In the aggregate, these contracts involve a minimum commitment on the part of the Company of approximately $18.6 million per year (based on prices and transportation charges in effect for December 1996). In connection with the development of a gas field in Argentina in which the Company has a 19.9% working interest, a gas contract with "take-or-pay" and "delivery-or-pay" obligations was executed in 1994 with a gas distribution company.
There are other claims and actions, including certain other environmental matters, pending against the Company. In the opinion of management, the amounts, if any, which may be awarded in connection with any of these claims and actions could be significant to the results of operations of any period but would not be material to the Company's consolidated financial position.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosure About Fair Value of Financial Instruments" requires the disclosure, to the extent practicable, of the fair value of financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences, if any, of realization or settlement. The following table reflects the financial instruments for which the fair value differs from the carrying amount of such financial instrument in the Company's December 31, 1996 and 1995 balance sheets (in millions of dollars):
The fair value of the Company's 11% Senior Subordinated Debentures, Convertible Preferred Stock, 7% Series and $.732 Series A Convertible Preferred Stock is based on market prices. The fair value of the Company's fixed-rate long-term debt is based on current borrowing rates available for financings with similar terms and maturities. With respect to the Company's floating-rate debt the carrying amount approximates fair value.
At December 31, 1996 the Company had open oil sales hedging contracts (see Note 14). Based on the year-end 1996 settlement prices of the applicable NYMEX futures contracts, the Company would recognize no gain or loss with respect to such hedges in 1997. The actual gains or losses realized by the Company from these hedges may vary significantly due to the volatility of the futures markets and other indices.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------
(a) The fourth quarter of 1996 includes impairments of oil and gas properties of $47.0 million (see Note 1), a $12.3 million gain on the sale of certain surface lands (see Note 6), a $6.0 million extraordinary item with respect to debt extinguishment costs (see Note 2) and a $33.7 million convertible preferred redemption premium (see Note 10).
(b) Revenues less operating expenses other than general and administrative.
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OIL AND GAS RESERVES AND RELATED FINANCIAL DATA
Information with respect to the Company's oil and gas producing activities is presented in the following tables. Reserve quantities as well as certain information regarding future production and discounted cash flows were determined by independent petroleum consultants, Ryder Scott Company.
OIL AND GAS RESERVES
The following table sets forth the Company's net proved oil and gas reserves at December 31, 1993, 1994, 1995 and 1996 and the changes in net proved oil and gas reserves for the years ended December 31, 1994, 1995 and 1996.
(TABLE CONTINUED ON FOLLOWING PAGE)
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Proved reserves are estimated quantities of crude oil and natural gas which geological and engineering data indicate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods.
Indonesian reserves represent an entitlement to gross reserves in accordance with a production sharing contract. These reserves include estimated quantities allocable to the Company for recovery of operating costs as well as quantities related to the Company's net equity share after recovery of costs. Accordingly, these quantities are subject to fluctuations with an inverse relationship to the price of oil. If oil prices increase, the reserve quantities attributable to the recovery of operating costs decline. Although this reduction would be offset partially by an increase in the net equity share, the overall effect would be a reduction of reserves attributable to the Company. At December 31, 1996, the quantities include 0.6 million barrels which the Company is contractually obligated to sell for $.20 per barrel.
The Company has certain commitments with respect to the delivery of natural gas (see Note 14) which the Company believes it can fulfill from its proved reserves and supply contracts with other companies.
At December 31, 1996 U.S. proved reserves included 216.4 MMBbls of crude oil and liquids (171.0 MMBbls of which were proved developed) and 12.2 Bcf of natural gas (9.5 Bcf of which were proved developed) attributable to Monterey.
At December 31, 1996, 2.0 million barrels of crude oil reserves and 14.1 billion cubic feet of natural gas reserves were subject to a 90% net profits interest held by Santa Fe Energy Trust.
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
ESTIMATED PRESENT VALUE OF FUTURE NET CASH FLOWS
Estimated future net cash flows from the Company's proved oil and gas reserves at December 31, 1996, 1995 and 1994 are presented in the following table (in millions of dollars, except as noted):
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The following tables sets forth the changes in the present value of estimated future net cash flows from proved reserves during 1996, 1995 and 1994 (in millions of dollars):
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Estimated future cash flows represent an estimate of future net cash flows from the production of proved reserves using estimated sales prices and estimates of the production costs, ad valorem and production taxes, and future development costs necessary to produce such reserves. No deduction has been made for depletion, depreciation or any indirect costs such as general corporate overhead or interest expense.
The sales prices used in the calculation of estimated future net cash flows are based on the prices in effect at year end. Such prices have been held constant except for known and determinable escalations.
Operating costs and ad valorem and production taxes are estimated based on current costs with respect to producing oil and gas properties. Future development costs are based on the best estimate of such costs assuming current economic and operating conditions.
Income tax expense is computed based on applying the appropriate statutory tax rate to the excess of future cash inflows less future production and development costs over the current tax basis of the properties involved. While applicable investment tax credits and other permanent differences are considered in computing taxes, no recognition is given to tax benefits applicable to future exploration costs or the activities of the Company that are unrelated to oil and gas producing activities.
The information presented with respect to estimated future net revenues and cash flows and the present value thereof is not intended to represent the fair value of oil and gas reserves. Actual future sales prices and production and development costs may vary significantly from those in effect at year-end and actual future production may not occur in the periods or amounts projected. This information is presented to allow a reasonable comparison of reserve values prepared using standardized measurement criteria and should be used only for that purpose.
At December 31, 1996 approximately $126.0 million of the Company's estimated present value of future net cash flows were attributable to the minority interest in Monterey.
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES The following table includes all costs incurred, whether capitalized or charged to expense at the time incurred (in millions of dollars):
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES The following table sets forth information concerning capitalized costs at December 31, 1996 and 1995 related to the Company's oil and gas operations (in millions of dollars):
OTHER INDONESIA FOREIGN TOTAL --------- ------- --------- Oil and gas properties Unproved......................... 12.0 3.0 61.2 Proved........................... 99.1 1.8 2,262.3 Other............................ -- -- 12.8 Accumulated amortization of unproved properties......................... (3.8) (1.8) (20.8) Accumulated depletion, depreciation and impairment of proved properties......................... (39.7) -- (1,441.5) Accumulated depreciation of other oil and gas properties................. -- -- (5.3) --------- ------- --------- 67.6 3.0 868.7 ========= ======= =========
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES The following table sets forth the Company's results of operations from oil and gas producing activities for the years ended December 31, 1996, 1995 and 1994 (in millions of dollars):
Income taxes are computed by applying the appropriate statutory rate to the results of operations before income taxes. Applicable tax credits and allowances related to oil and gas producing activities have been taken into account in computing income tax expenses. No deduction has been made for indirect cost such as corporate overhead or interest expense.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SANTA FE ENERGY RESOURCES, INC.
By /s/ JANET F. CLARK JANET F. CLARK VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Dated: March 11, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE AND TITLE ------------------------ JAMES L. PAYNE, Chairman of the Board, President and Chief Executive Officer and Director (PRINCIPAL EXECUTIVE OFFICER)
JANET F. CLARK, Vice President and Chief Financial Officer (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
DIRECTORS ----------- William E. Greehey By: /s/ JANET F. CLARK Melvyn N. Klein JANET F. CLARK Allan V. Martini VICE PRESIDENT AND Marc J. Shapiro CHIEF FINANCIAL OFFICER Kathryn D. Wriston ATTORNEY IN FACT
Dated: March 11, 1997
SANTA FE ENERGY RESOURCES, INC. SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1996 (IN MILLIONS OF DOLLARS)
=================================================================== 1996 1995 1994 - ------------------------------------------------------------------- Accounts receivable Balance at the beginning of period........................ 2.0 3.1 6.3 Charge (credit) to income.................. 0.5 -- 0.6 Net amounts written off... -- (1.1) (3.8) ----- ----- ----- Balance at the end of period.... 2.5 2.0 3.1 ===== ===== =====
INDEX OF EXHIBITS
A. EXHIBITS
EXHIBIT NUMBER DESCRIPTION 3(a) -- Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Form S-2 Registration Statement of Santa Fe Energy Resources, Inc. ("SFER, Inc.") Commission File No. 33-32831).
3(b) -- Bylaws, as amended (incorporated by reference to Exhibit 3(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992).
4(a) -- Form of Certificate of Designation, Preferences and Rights of the 7% Convertible Preferred Stock of SFER, Inc. (incorporated by reference to Exhibit 3(b) of the Form S-4 Registration Statement of SFER, Inc., Commission File No. 33-45043).
4(b) -- Rights Agreement dated as of March 3, 1997, between SFER, Inc. and First Chicago Trust Company of New York, as Rights Agent (incorporated by reference to Exhibit 1 to SFER, Inc.'s Form 8-A filed February 28, 1997.)
4(c) -- Form of Amended Certificate of Designations of Series A Junior Participating Preferred Stock of SFER, Inc. (incorporated by reference to Exhibit 1 to SFER, Inc.'s Form 8-A filed February 28, 1997).
4(d) -- Note Agreement dated as of November 19, 1996 by and among Monterey Resources, Inc. and various institutional investors relating to the issuance of $175,000,000 of Senior Notes maturing in 2005 (incorporated by reference to Exhibit 10.15 to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
4(e) -- Form of Certificate of Designation of the Dividend Enhanced Convertible Stock, $.732 Series A Convertible Preferred Stock of SFER, Inc. (incorporated by reference to Exhibit 4.3 of the Form S-3 Registration Statement of SFER, Inc., Commission File No. 33-52849).
4(f) -- Form of Indenture dated as of May 25, 1994 and Form of Debenture relating to SFER, Inc.'s 11% Senior Subordinated Debentures Due 2004 (incorporated by reference to Exhibit 4.1 of the Form S-3 Registration Statement of SFER, Inc. Commission File No. 33-52849).
4(g) -- First Supplemental Indenture, dated as of October 21, 1996, between SFER, Inc. and State Street Bank and Trust Company, as Trustee, relating to SFER Inc.'s 11% Senior Subordinated Debentures due 2004 (incorporated by reference to Exhibit 10.1 to SFER Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).
10(a) -- Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group, as amended, dated December 23, 1983 (incorporated by reference to Exhibit 10.8 of the Form S-2 Registration Statement of SFER, Inc. Commission File No. 33-32831).
10(b) -- SFER, Inc. Incentive Compensation Plan, as amended (incorporated by reference to Exhibit 10(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995).
10(c) -- SFER, Inc. 1990 Incentive Stock Compensation Plan, Third Amendment and Restatement (incorporated by reference to Exhibit 10(a) to SFER Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
*10(d) -- Examples of Employment Agreements entered into with executive officers of SFER, Inc.
*10(e) -- Example of Indemnification Agreements with SFER Inc.'s directors and officers.
*10(f) -- Spin-Off Tax Indemnification Agreement between SFER, Inc. and Santa Fe Pacific Corporation.
*10(g) -- Agreement Concerning Taxes among SFER, Inc., certain subsidiaries of SFER, Inc. and Santa Fe Pacific Corporation.
INDEX OF EXHIBITS -- (CONTINUED)
EXHIBIT NUMBER DESCRIPTION
*10(h) -- Santa Fe Energy Resources Supplemental Retirement Plan effective as of December 4, 1990.
10(i) -- SFER, Inc. Deferred Compensation Plan, effective as of January 1, 1991 as amended and restated, effective February 1, 1994 (incorporated by reference to Exhibit 10(p) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993).
10(j) -- Gas Marketing Agreement, dated as of December 14, 1993, between SFER, Inc., Santa Fe Energy Operating Partners, L.P. and Adobe Gas Pipeline Company (incorporated by reference to Exhibit 10(t) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993).
*10(k) -- Credit Agreement dated as of November 13, 1996 among SFER, Inc., the banks signatory thereto, and The Chase Manhattan Bank, as Administrative Agent and ABN AMRO Bank, N.V., as Co-Agent.
10(l) -- Credit Agreement dated as of November 13, 1996 among Monterey Resources, Inc., the Banks signatory thereto and The Chase Manhattan Bank, as Administrative Agent (incorporated by reference to Exhibit 10.16 to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
10(m) -- Agreement for the Allocation of Consolidated Federal Income Tax Liability and State and Local Taxes among the members of the SFER, Inc. affiliated Group dated November 19, 1996 (incorporated by reference to Exhibit 10.2 to Monterey Resources Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
10(n) -- Agreement Concerning Taxes and Tax Indemnifications upon Spin-Off, dated November 19, 1996, between Monterey Resources, Inc. and SFER, Inc. (incorporated by reference to Exhibit 10.3 to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
10(o) -- Registration Rights and Indemnification Agreement dated November 19, , 1996, between Monterey Resources, Inc. and SFER, Inc. (incorporated by reference to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
10(p) -- Agreement Regarding Shelf Registration Statement dated March 24, 1995 between SFER, Inc. and HC Associates, GKH Partners, L.P., GKH Investments, L.P., Ernest H. Cockrell Texas Testamentary Trust and Carol Cockrell Jennings Texas Testamentary Trust (incorporated by reference to Exhibit 10(o) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995).
10(q) -- Conveyance and Contribution Agreement dated as of November 1, 1996, between Monterey Resources, Inc. and SFER, Inc. (incorporated by reference to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
*21 -- Subsidiaries of the registrant.
*23(a) -- Consent of Independent Accountants with respect to Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-44542, 33-58613, 33-59253, 33-59255 and 333-07949).
*23(b) -- Consent of Ryder Scott Company with respect to Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-4452, 33-58613, 33-59253, 33-59255 and 333-07949).
*24 -- Powers of Attorney.
- ------------
* Included in this report
B. REPORTS ON FORM 8-K.
DATE ITEM ------------------ ----- February 28, 1997 5
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
PAGE 1. Financial Statements: Report of Independent Accountants ..................................... 63
Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994 ............................................... 64
Consolidated Balance Sheet -- December 31, 1996 and 1995 ......................................................... 65
Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ......................................................... 66
Consolidated Statement of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 ................................................... 67
Notes to Consolidated Financial Statements ............................ 68
2. Financial Statement Schedules:
Schedule VIII -- Valuation and Qualifying Accounts .............................................................. 100
All other schedules have been omitted because they are not applicable or the required information is presented in the financial statements or the notes to financial statements.
3. Exhibits:
See Index of Exhibits on page 101 for a description of the exhibits filed as a part of this report.
(b) Reports on Form 8-K
DATE ITEM ----------------- ---- February 28, 1997 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Santa Fe Energy Resources, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 62 present fairly, in all material respects, the financial position of Santa Fe Energy Resources, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas February 21, 1997
SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Revenues Sales of crude oil and liquids produced...................... $ 455.4 $ 352.4 $ 305.2 Sales of natural gas produced... 105.8 77.1 83.4 Sales of crude oil purchased.... 21.1 6.7 11.9 Other........................... 1.0 13.2 3.7 --------- --------- --------- 583.3 449.4 404.2 --------- --------- --------- Costs and Expenses Production and operating........ 188.4 155.8 151.1 Cost of crude oil purchased..... 20.8 6.5 11.7 Exploration, including dry hole costs......................... 34.5 23.4 20.4 Depletion, depreciation and amortization.................. 148.2 133.2 121.3 Impairment of oil and gas properties.................... 57.4 30.2 -- General and administrative...... 30.1 26.9 27.3 Taxes (other than income)....... 26.5 19.2 25.8 Restructuring charges........... -- -- 7.0 Loss (gain) on disposition of assets........................ (12.1) 0.3 (8.6) --------- --------- --------- 493.8 395.5 356.0 --------- --------- --------- Income from Operations............... 89.5 53.9 48.2 Interest income................. 1.9 10.7 2.8 Interest expense................ (37.6) (32.5) (27.5) Interest capitalized............ 5.2 5.8 3.6 Other income (expense).......... (1.0) (1.6) (4.0) --------- --------- --------- Income Before Income Taxes, Minority Interest and Extraordinary Items... 58.0 36.3 23.1 Income taxes.................... (14.3) (9.7) (6.0) --------- --------- --------- Income Before Minority Interest and Extraordinary Items................ 43.7 26.6 17.1 Minority Interest in Monterey Resources, Inc................ (1.3) -- -- --------- --------- --------- Income Before Extraordinary Items.... 42.4 26.6 17.1 Extraordinary item -- debt extinguishment costs............ (6.0) -- -- --------- --------- --------- Net Income........................... 36.4 26.6 17.1 Preferred dividend requirement................... (13.5) (14.8) (11.7) Convertible preferred repurchase premium....................... (33.7) -- -- --------- --------- --------- Earnings (Loss) Attributable to Common Shares...................... $ (10.8) $ 11.8 $ 5.4 ========= ========= ========= Earnings (Loss) Attributable to Common Shares Per Share Earnings (loss) before extraordinary items........... $ (0.05) $ 0.13 $ 0.06 Extraordinary items -- debt extinguishment costs.......... (0.07) -- -- --------- --------- --------- Earnings (loss) to common shares........................ $ (0.12) $ 0.13 $ 0.06 ========= ========= ========= Weighted Average Number of Common Shares Outstanding (in millions)...................... 90.6 90.2 89.9 ========= ========= =========
The accompanying notes are an integral part of these financial statements.
SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS)
DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- ASSETS Current Assets Cash and cash equivalents....... $ 14.6 $ 42.6 Accounts receivable............. 109.1 89.0 Inventories..................... 13.6 10.5 Other current assets............ 35.2 17.2 ----------- ----------- 172.5 159.3 ----------- ----------- Properties and Equipment, at cost Oil and gas (on the basis of successful efforts accounting)................... 2,539.8 2,336.3 Other........................... 34.4 35.6 ----------- ----------- 2,574.2 2,371.9 Accumulated depletion, depreciation, amortization and impairment.................... (1,664.4) (1,482.4) ----------- ----------- 909.8 889.5 ----------- ----------- Other Assets Receivable under gas balancing arrangements.................. 4.5 5.8 Other........................... 33.2 10.2 ----------- ----------- 37.7 16.0 ----------- ----------- $ 1,120.0 $ 1,064.8 =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable................ $ 115.4 $ 73.1 Income taxes payable............ 21.4 3.0 Interest payable................ 6.0 7.9 Other current liabilities....... 36.6 25.6 ----------- ----------- 179.4 109.6 ----------- ----------- Long-Term Debt....................... 278.5 344.4 ----------- ----------- Deferred Revenues.................... 4.0 4.9 ----------- ----------- Other Long-Term Obligations.......... 27.5 24.2 ----------- ----------- Deferred Income Taxes................ 53.8 64.0 ----------- ----------- Minority Interest in Monterey Resources, Inc..................... 30.3 -- ----------- ----------- Commitments and Contingencies (Note 14)................................ -- -- ----------- ----------- Convertible Preferred Stock, 7% Series, $0.01 par value, 5.0 million shares authorized and issued; 1.2 million and 5.0 million outstanding at December 31, 1996 and 1995, respectively....................... 19.7 80.0 ----------- ----------- Shareholders' Equity Preferred stock, $0.01 par value, 38.1 million shares authorized, none issued....... -- -- $.732 Series A preferred stock, $0.01 par value, 10.7 million shares authorized, issued and outstanding................... 91.4 91.4 Common stock, $0.01 par value, 200.0 million shares authorized.................... 0.9 0.9 Paid-in capital................. 601.3 501.4 Accumulated deficit............. (166.5) (155.7) Foreign currency translation adjustment.................... (0.3) (0.3) ----------- ----------- 526.8 437.7 ----------- ----------- $ 1,120.0 $ 1,064.8 =========== ===========
The accompanying notes are an integral part of these financial statements.
SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF DOLLARS)
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Operating Activities: Net income...................... $ 36.4 $ 26.6 $ 17.1 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization............. 148.2 133.2 121.3 Impairment of oil and gas properties............... 57.4 30.2 -- Restructuring charges...... -- -- 1.0 Deferred income taxes...... (11.2) 7.7 11.3 Loss (gain) on disposition of assets................ (12.1) 0.3 (8.6) Exploratory dry hole costs.................... 11.2 5.5 6.5 Minority interest in Monterey Resources, Inc...................... 1.3 -- -- Equity in losses and adjustment to valuation of investment in Hadson Corporation.............. -- -- 6.1 Hadson Corporation preferred dividends received in-kind......... -- -- (4.5) Other...................... 6.7 2.4 3.0 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable...... (20.1) (12.8) 1.3 Decrease (increase) in inventories.............. (3.1) (1.3) (0.5) Increase (decrease) in accounts payable......... 20.0 (4.5) (8.6) Increase (decrease) in interest payable......... (1.9) (0.6) (1.7) Increase (decrease) in income taxes payable..... 18.4 1.5 0.2 Net change in other assets and liabilities.......... (23.6) (13.7) (19.4) --------- --------- --------- Net Cash Provided by Operating Activities......................... 227.6 174.5 124.5 --------- --------- --------- Investing Activities: Capital expenditures, including exploratory dry hole costs.... (185.7) (189.4) (136.6) Acquisitions of producing properties, net of related debt.......................... (37.8) (33.8) (2.2) Proceeds from sale of investment in Hadson Corporation......... -- 55.2 -- Net proceeds from sales of properties.................... 16.7 7.2 81.1 --------- --------- --------- Net Cash Used in Investing Activities......................... (206.8) (160.8) (57.7) --------- --------- --------- Financing Activities: Issuance of Monterey Resources, Inc. common stock............. 123.6 -- -- Issuance of Santa Fe Energy Resources, Inc. common stock......................... 2.4 -- -- Purchase of 7% Series convertible preferred stock... (94.0) -- -- Principal payments on long-term borrowings.................... (70.0) (10.0) (144.7) Net change in revolving credit agreement..................... 4.0 -- (50.0) Issuance of 11% senior subordinated debentures....... -- -- 96.1 Issuance of $.732 Series A convertible preferred stock... -- -- 91.4 Cash dividends paid............. (14.8) (14.8) (10.7) --------- --------- --------- Net Cash Used in Financing Activities......................... (48.8) (24.8) (17.9) --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents................... (28.0) (11.1) 48.9 Cash and Cash Equivalents at Beginning of Year.................. 42.6 53.7 4.8 --------- --------- --------- Cash and Cash Equivalents at End of Year............................... $ 14.6 $ 42.6 $ 53.7 ========= ========= =========
The accompanying notes are an integral part of these financial statements.
SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (SHARES AND DOLLARS IN MILLIONS)
TOTAL SHAREHOLDERS' EQUITY -------------- Balance at December 31, 1993......... $323.6 Issuance of common stock Employee stock compensation and savings plans.................. 2.0 Issuance of preferred stock........ 91.4 Amortization of restricted stock awards........................... 0.1 Pension liability adjustment....... 0.9 Foreign currency transaction adjustments...................... (0.1) Net income......................... 17.1 Dividends declared................. (11.7) -------------- Balance at December 31, 1994......... 423.3 Issuance of common stock Employee stock compensation and savings plans.................. 2.5 Foreign currency translation adjustments...................... 0.1 Net income......................... 26.6 Dividends declared................. (14.8) -------------- Balance at December 31, 1995......... 437.7 Issuance of common stock Employee stock compensation and savings plans.................. 6.4 Issuance of Monterey Resources, Inc. common stock................ 93.5 Purchase of 7% Series convertible preferred stock.................. (33.7) Net income......................... 36.4 Dividends declared................. (13.5) -------------- Balance at December 31, 1996......... $526.8 ==============
The accompanying notes are an integral part of these financial statements.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Santa Fe Energy Resources, Inc. ("Santa Fe" or the "Company") and its subsidiaries include the accounts of all wholly owned subsidiaries and Monterey Resources, Inc. ("Monterey"). Prior to its initial public offering in November 1996, the Company owned 100% of the outstanding common stock of Monterey. At December 31, 1996, the Company owned 82.8% of the outstanding common stock of Monterey (See Note 2). References herein to the "Company" or "Santa Fe" relate to Santa Fe Energy Resources, Inc., individually or together with its consolidated subsidiaries.
All significant intercompany accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current presentation.
OIL AND GAS OPERATIONS
The Company follows the successful efforts method of accounting for its oil and gas exploration and production activities. Costs (both tangible and intangible) of productive wells and development dry holes, as well as the cost of prospective acreage, are capitalized. The costs of drilling and equipping exploratory wells which do not find proved reserves are expensed upon determination that the well does not justify commercial development. Other exploratory costs, including geological and geophysical costs and delay rentals, are charged to expense as incurred.
Depletion and depreciation of proved properties are computed on an individual field basis using the unit-of-production method based upon proved oil and gas reserves attributable to the field. Certain other oil and gas properties are depreciated or amortized on a straight-line basis.
In the fourth quarter of 1995 the Company changed its impairment policy to conform to the provisions of Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). In accordance with the provisions of FAS 121, proved properties are reviewed to determine if the carrying value of the property exceeds the expected undiscounted future net cash flows from the operation of the property. Based on this review and the continuing evaluation of development plans, production data, economics and other factors, as appropriate, the Company records impairment (additional depletion and depreciation) to the extent that the carrying value of the property exceeds the fair value of the property based on discounted future net cash flows. In accordance with its policy, the Company recorded impairments of $57.4 million in 1996 and $30.2 million in 1995. With respect to the impairments recorded in 1995, approximately $22.1 million was due to the adoption of FAS 121.
The Company provides for future abandonment and site restoration costs with respect to certain of its oil and gas properties. The Company estimates that with respect to these properties such future costs total approximately $39.0 million and such amount is being accrued over the expected life of the properties. At December 31, 1996 and 1995 Accumulated Depletion, Depreciation, Amortization and Impairment includes $16.6 million and $15.5 million, respectively, with respect to such costs.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The value of undeveloped acreage is aggregated and the portion of such costs estimated to be nonproductive, based on historical experience, is amortized to expense over the average holding period. Additional amortization may be recognized based upon periodic assessment of prospect evaluation results. The cost of properties determined to be productive is transferred to proved properties; the cost of properties determined to be nonproductive is charged to accumulated amortization.
Maintenance and repairs are expensed as incurred; major renewals and improvements are capitalized. Gains and losses arising from sales of properties are included in income currently.
REVENUE RECOGNITION
Revenues from the sale of crude oil and liquids produced are generally recognized upon the passage of title, net of royalties and net profits interests.
Revenues from natural gas production are generally recorded using the entitlement method, net of royalties and net profits interests. Sales proceeds in excess of the Company's entitlement are included in Deferred Revenues and the Company's share of sales taken by others is included in Other Assets. At December 31, 1996 the Company's deferred revenues for sales proceeds received in excess of the Company's entitlement was $3.2 million with respect to 2.5 MMcf and the asset related to the Company's share of sales taken by others was $4.5 million with respect to 3.2 MMcf.
The Company hedges a portion of its oil and gas sales. See Note 14 -- Commitments and Contingencies -- Oil and Gas Hedging.
Revenues from sales of crude oil purchased relate to the sales of low viscosity crude oil purchased and blended with certain of the Company's high viscosity, low gravity crude oil production, either to facilitate pipeline transportation or to realize higher margins. The cost to purchase such crude oil is reflected as an expense.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and common equivalent shares outstanding during the year.
ACCOUNTS RECEIVABLE
Accounts Receivable relates primarily to sales of oil and gas and amounts due from joint interest partners for expenditures made by the Company on behalf of such partners. The Company reviews the financial condition of potential purchasers and partners prior to signing sales or joint interest agreements. At December 31, 1996 and 1995 the Company's allowance for doubtful accounts receivable, which is reflected in the consolidated balance sheet as a reduction in accounts receivable, totalled $2.5 million and $2.0 million, respectively. Accounts receivable totalling $1.1 million and $3.8 million were written off as uncollectible in 1995 and 1994, respectively.
INVENTORIES
Inventories are valued at the lower of cost (average price or first-in, first-out) or market. Crude oil inventories at December 31, 1996 and 1995 were $4.5 million and $2.7 million, respectively, and materials and supplies inventories at such dates were $9.1 million and $7.8 million, respectively.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures relating to current operations are expensed or capitalized, as appropriate, depending on whether such expenditures provide future economic benefits. Liabilities are recognized when the expenditures are considered probable and can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) undiscounted site-specific costs. Generally, such recognition coincides with the Company's commitment to a formal plan of action.
INCOME TAXES
The Company follows the asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are determined using the tax rate for the period in which those amounts are expected to be received or paid, based on a scheduling of temporary differences between the tax bases of assets and liabilities and their reported amounts. Under this method of accounting for income taxes, any future changes in income tax rates will affect deferred income tax balances and financial results.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the periods in which certain items of revenue and expense are included. Actual results may differ from such estimates.
(2) MONTEREY RESOURCES, INC.
In 1996 Santa Fe formed Monterey to assume the operations of the Company's Western Division (the "Western Division") which conducted the Company's oil and gas operations in the State of California. In November 1996, prior to the initial public offering (the "IPO") discussed below, pursuant to a contribution and conveyance agreement (the "Contribution Agreement"), among other things: (i) Santa Fe contributed to Monterey substantially all of the assets and properties of the Western Division, subject to the retention by Santa Fe of a production payment, as defined below, and certain other assets; (ii) Santa Fe retained a $30.0 million production payment (the "Production Payment") with respect to certain properties in the Midway-Sunset field; (iii) Monterey assumed all obligations and liabilities of Santa Fe associated with or allocated to the assets and properties of the Western Division, including $245.0 million of indebtedness in respect of Santa Fe's 10.23% Series E Notes due 1997, 10.27% Series F Notes due 1998 and 10.61% Series G Notes due 2005 (the "Series E Notes", "Series F Notes" and "Series G Notes", respectively) and (iv) Monterey agreed to purchase from Santa Fe an $8.3 million promissory note receivable related to the sale to a third party of certain surface acreage located in Orange County, California. Also prior to the IPO, Monterey and Santa Fe entered into a $75.0 million revolving credit facility with a group of banks (the "Monterey Credit Facility") and borrowed $16.0 million which was retained by Santa Fe.
In November 1996 Monterey sold 9,335,000 shares of its common stock for total consideration of $123.6 million (after deducting underwriting discounts of $9.1 million and other related costs of $2.6 million). The proceeds from the IPO were used in part to (i) repay the Series E Notes and Series F Notes ($70.0 million) and pay a prepayment penalty thereon of $2.5 million; (ii) retire the Production Payment ($30.0 million); (iii) repay the $16.0 million outstanding under the Monterey Credit Facility; and (iv) pay a $2.0 million fee with respect to a supplement to the indenture relating to Santa Fe's 11% Senior Subordinated Debentures due 2004. Subsequent to the IPO, Monterey issued $175.0 million in aggregate principal amount of 10.61% Senior Notes due 2005 (the "Monterey Senior Notes") to holders of the Series G Notes in exchange for the cancellation of such notes and paid a $1.3 million consent fee in connection therewith.
The costs and expenses related to the retirement of Santa Fe's outstanding debt, as discussed above, and approximately $3.4 million of deferred debt issue costs and related transaction costs are reflected in the Statement of Operations as an extraordinary item, net of $3.2 million in income taxes.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, Santa Fe owned 82.8% of the Monterey's outstanding common stock. Santa Fe has announced that it intends to distribute pro rata to its common shareholders all of the shares of Monterey's common stock that it owns by means of a tax-free distribution (the "Proposed Spin Off"). Santa Fe's final determination to proceed will require a declaration of the Proposed Spin Off by Santa Fe's Board of Directors. Such declaration is not expected to be made until certain conditions, many of which are beyond the control of Santa Fe, are satisfied, including: (i) receipt by Santa Fe of a ruling from the Internal Revenue Service as to the tax-free nature of the Proposed Spin Off; (ii) approval of the Proposed Spin Off by Santa Fe's shareholders; and (iii) the absence of any future change in market or economic conditions (including developments in the capital markets) or Santa Fe's or Monterey's business and financial condition that causes Santa Fe's Board to conclude that the Proposed Spin Off is not in the best interests of Santa Fe's shareholders. The Company does not expect the Proposed Spin Off to occur prior to July 1997.
Pursuant to the terms of a letter agreement dated as of June 13, 1996, a fee will be payable by Monterey to Chase Securities Inc. and Petrie Parkman & Co., Inc. upon consummation of the Proposed Spin Off. The total amount of such fee is equal to the product of (a) the sum of the market value of the shares of Monterey distributed in the Proposed Spin Off (based upon the average closing price of Monterey's common stock during the ten trading days after the Proposed Spin Off) PLUS the aggregate principal amount of long-term indebtedness assumed by Monterey in connection with the Proposed Spin Off (which totalled $175.0 million) TIMES (b) 0.5%, LESS $1.0 million. If the market value of the Monterey common stock distributed is $16.00 per share, the Company estimates the total fee payable would be approximately $3.5 million, of which $1.75 million would be payable to each of Chase Securities and Petrie Parkman. In addition, a fee of $400,000 will be payable to GKH Partners, L.P., of which $200,000 will be payable by each the Company and Monterey. Certain of the Company's directors are associated with Chase Securities and GKH Partners.
Monterey has agreed to indemnify the Company if at any time during the one-year period after the consummation of the Proposed Spin Off (or if certain tax legislation is enacted and is applicable, such longer period as is required for the Proposed Spin Off to be tax free to Santa Fe) Monterey takes certain actions the effects of which result in the Proposed Spin Off being taxable to Santa Fe.
Santa Fe provides various administrative and financial services to Monterey, including administration of certain employee benefits plans, access to telecommunications, corporate legal assistance and certain other corporate staff and support services. Santa Fe and Monterey have entered into a Services Agreement, terminable by either party on thirty day's notice, under which Monterey pays a fee of $120,000 per month for such services until such time as Monterey assumes full responsibility during 1997 for each of the services covered by the agreement. During 1996 Santa Fe charged Monterey $240,000 under the terms of the Services Agreement.
Certain Monterey employees are participants in Santa Fe's employee benefit and pension plans. Subsequent to the IPO Santa Fe charged Monterey $0.2 million in connection with Monterey employees' participation in such plans.
(3) CORPORATE RESTRUCTURING PROGRAM
In 1993 the Company adopted a corporate restructuring program which included, among other things, a cost reduction program which consisted of a reduction in the Company's salaried work force, an improvement in the efficiency of information systems and a reduction in other general and administration and production and operating costs. The Company's income from operations for 1994 includes restructuring charges of $7.0 million, comprised of severance, benefits and relocation expenses associated with the cost reduction program.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVESTMENT IN HADSON CORPORATION
In December 1993 the Company completed a transaction with Hadson Corporation ("Hadson") under the terms of which the Company sold the common stock of Adobe Gas Pipeline Company ("AGPC"), a wholly-owned subsidiary which held the Company's natural gas gathering and processing assets, to Hadson in exchange for Hadson 11.25% preferred stock with a face value of $52.0 million and 40% of Hadson's common stock. The Company accounted for the sale as a non-monetary transaction and the investment in Hadson was valued at $56.2 million, the carrying value of the Company's investment in AGPC. The Company's investment in Hadson was accounted for on the equity basis.
Also in December 1993 the Company signed a seven-year gas sales contract with Hadson under the terms of which Hadson markets a substantial portion of the Company's domestic natural gas production at market prices as defined by published monthly indices for relevant production locations.
In November 1994 the Company and Hadson settled a lawsuit related to certain of the assets sold to Hadson by the Company in December 1993. The settlement totalled $5.7 million and the Company's share, approximately $3.3 million, is included in Other Income (Expense) in the income statement. The Company paid the full amount of the settlement and Hadson gave the Company a $2.4 million ten-year note for its share. The note bore interest at 9%, payable annually, with the principal amount due at maturity. The note was retired as part of the sales transaction discussed below.
In 1995 the Company sold its holdings in Hadson for $55.2 million. Other Income (Expense) for 1995 includes a $1.8 million charge with respect to the Company's loss on the sale. Subsequent to the sale Hadson's name was changed to LG&E Natural Marketing Inc. ("LG&E").
(5) SANTA FE ENERGY TRUST
In November 1992 5,725,000 Depository Units ("Trust Units"), each consisting of beneficial ownership of one unit of undivided beneficial interest in the Santa Fe Energy Trust (the "Trust") and a $20 face amount beneficial ownership interest in a $1,000 face amount zero coupon United States Treasury obligation maturing on or about February 15, 2008, were sold in a public offering. The Trust consists of certain oil and gas properties conveyed by Santa Fe.
In the first quarter of 1994, the Company sold 575,000 Trust Units which it held for $11.3 million. The gain on the sale of $0.8 million is included in Other Income (Expense).
For any calendar quarter ending on or prior to December 31, 2002, the Trust will receive additional royalty payments to the extent that it needs such payments to distribute $0.40 per Depository Unit per quarter. The source of such additional royalty payments, if needed, will be limited to the Company's remaining royalty interest in certain of the properties conveyed to the Trust. If such additional payments are made, certain proceeds otherwise payable to the Trust in subsequent quarters may be reduced to recoup the amount of such additional payments. The aggregate amount of the additional royalty payments (net of any amounts recouped) will be limited to $20.0 million on a revolving basis. Through December 31, 1996 the Company had made additional royalty payments, net of recoupments, totalling $1.2 million.
At December 31, 1996 and 1995, Accounts Payable included $3.1 million and $2.6 million, respectively, due to the Trust.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) CASH FLOWS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
In December 1996 the Company sold the surface rights to approximately 116 surface acres in Orange County, California for total consideration of $24.2 million and recognized a $12.3 million gain. The Company received $15.9 million in cash and an $8.3 million note which was purchased by Monterey for cash.
In November 1993 the Company completed the sale of certain southern California and Gulf Coast producing properties for net proceeds totalling $42.0 million in cash, $10.5 million of which was collected in 1994.
In April 1994 the Company completed the sale of certain Mid-Continent and Rocky Mountain producing and nonproducing oil and gas properties for net proceeds totalling $46.7 million. The Company's income from operations for 1994 includes $2.2 million attributable to the assets sold. In the first quarter of 1994 the Company sold its interest in certain oil and gas properties, in which it had no remaining basis, for $8.3 million.
The Company made interest payments of $38.6 million, $37.6 million and $47.9 million in 1996, 1995 and 1994, respectively. In 1996, 1995 and 1994, the Company made tax payments of $2.0 million, $1.6 million and $1.8 million, respectively, and in 1996 and 1995 received tax refunds of $11.2 million and $1.3 million, respectively, primarily related to the audit of prior years' returns.
(7) INCOME TAXES
In December 1990 SFP distributed all of the shares of the Company it held to its shareholders (the "SFP Spin Off"). Through the date of the SFP Spin Off the taxable income or loss of the Company was included in the consolidated federal income tax return filed by SFP. The consolidated federal income tax returns of SFP have been examined through 1990 and all years prior to 1986 are closed. Issues relating to the open years are being contested through various stages of administrative appeal. The Company, in conjunction with the SFP Spin Off, agreed to indemnify SFP should the transaction be determined to be taxable to SFP because of the Company's actions. The Company does not believe it has taken any action that would have such an effect. Accounts Receivable at December 31, 1995 included $12.0 million with respect to a refund related to the audit of the years 1981 through 1985 which was collected in 1996. The Company has filed separate consolidated federal income tax returns for periods subsequent to the SFP Spin Off. The consolidated returns of the Company through 1991 have been audited and are closed.
During 1989, the Company received a notice of deficiency for certain state franchise tax returns filed for the years 1978 through 1983 as part of the consolidated tax returns of SFP. The matter was contested by the Company and favorably resolved in 1994. The years 1984 through 1986 have been audited and no significant Company issues were raised. The years 1987 through 1992 are currently being audited.
With the Merger of Adobe the Company succeeded to a net operating loss carryforward that is subject to Internal Revenue Code Section 382 limitations which annually limit taxable income that can be offset by such losses. Certain changes in the Company's shareholders in 1995 resulted in a second Section 382 limitation, the imposition of which is not expected to result in a limitation of the Company's ability to use its net operating losses. Losses carrying forward of $71.4 million will expire beginning in 2004.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total pretax income for the years ended December 31, 1996, 1995 and 1994 was taxed under the following jurisdictions (in millions of dollars):
1996 1995 1994 --------- --------- --------- Domestic............................. 46.4 40.5 22.0 Foreign.............................. 2.4 (4.2) 1.1 --------- --------- --------- 48.8 36.3 23.1 ========= ========= =========
The Company's total income tax expense (benefit) for the years ended December 31, 1996, 1995 and 1994 consisted of (in millions of dollars):
1996 1995 1994 --------- --------- --------- Current U.S. federal.................... 13.6 1.5 (3.5) State........................... 5.1 (2.1) (3.2) Foreign......................... 3.6 2.6 1.4 --------- --------- --------- 22.3(a) 2.0 (5.3) --------- --------- --------- Deferred U.S. federal.................... 4.7 13.3 8.6 State........................... 1.3 (0.6) 2.4 Foreign......................... (17.2)(b) (5.0) 0.3 --------- --------- --------- (11.2) 7.7 11.3 --------- --------- --------- 11.1(a) 9.7 6.0 ========= ========= =========
- ------------
(a) Includes $3.2 million income tax benefit which is reflected in extraordinary item - debt extinguishment costs (see Note 2).
(b) Includes benefit of $8.3 million related to certain prior period foreign expenditures.
The Company's deferred income tax liabilities (assets) at December 31, 1996 and 1995 are composed of the following differences between financial and tax reporting (in millions of dollars):
1996 1995 --------- --------- Capitalized costs and write-offs..... 99.9 138.5 State deferred liability............. 10.5 7.6 Foreign deferred liability........... (8.1) 9.1 --------- --------- Gross deferred liabilities........... 102.3 155.2 --------- --------- Accruals not currently deductible for tax purposes....................... (0.7) (16.7) Alternative minimum tax carryforwards...................... (13.6) (12.7) Net operating loss carryforwards..... (25.0) (54.7) Other................................ (9.2) (7.1) --------- --------- Gross deferred assets................ (48.5) (91.2) --------- --------- Deferred tax liability............... 53.8 64.0 ========= =========
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's total U.S. income tax expense computed by applying the statutory U.S. federal income tax rate to the Company's total income (loss) before income taxes for the years ended December 31, 1996, 1995 and 1994 is presented in the following table (in millions of dollars):
1996 1995 1994 --------- --------- --------- U.S. federal income taxes at statutory rate..................... 17.1 12.7 8.1 Increase (reduction) resulting from: State income taxes, net of federal effect.......................... 4.3 0.6 0.9 Foreign income taxes in excess of (less than) U.S. rate........... (14.4) (0.9) 1.4 U.S. tax on foreign reinvested earnings........................ 2.8 0.8 1.2 Benefit of tax losses.............. (1.8) (0.3) (4.3) Prior period adjustments........... 1.7 (2.7) (1.6) Other.............................. 1.4 (0.5) 0.3 --------- --------- --------- 11.1 9.7 6.0 ========= ========= =========
(8) FINANCING AND DEBT
Long-term debt at December 31, 1996 and 1995 consisted of (in millions of dollars):
DECEMBER 31, -------------------------------------------- 1996 1995 -------------------- -------------------- CURRENT LONG-TERM CURRENT LONG-TERM ------- --------- ------- --------- Santa Fe Senior Notes................. -- -- -- 245.0 11% Senior Subordinated Debentures................ -- 99.5 -- 99.4 Short-term lines of credit... -- 4.0 -- -- ------- --------- ------- --------- -- 103.5 -- 344.4 Monterey Senior Notes................. -- 175.0 -- -- ------- --------- ------- --------- -- 278.5 -- 344.4 ======= ========= ======= =========
Aggregate total maturities of long-term debt during the next five years are as follows: 1997 -- none; 1998 -- none; 1999 -- $25.0 million; 2000 -- $25.0 million; and 2001 -- $29.0 million.
Effective November 13, 1996 Santa Fe entered into a revolving credit agreement (the "Santa Fe Credit Agreement") which matures November 13, 2001. The Santa Fe Credit Agreement permits the Company to obtain revolving credit loans and issue letters of credit up to an aggregate amount of $150.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $30.0 million. Borrowings under the Santa Fe Credit Agreement are unsecured and interest rates are tied to the bank's prime rate or eurodollar offering rate, at the option of the Company. At December 31, 1996, no loans or letters of credit were outstanding under the terms of the Santa Fe Credit Agreement.
Effective November 13, 1996 Monterey entered into the Monterey Credit Agreement which matures November 13, 2000. The Monterey Credit Agreement permits Monterey to obtain revolving credit loans and issue letters of credit up to an aggregate amount of up to $75.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $15.0 million. Borrowings under the Monterey Credit Agreement are unsecured and interest rates are tied to the bank's prime rate
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) or eurodollar offering rate, at the option of Monterey. At December 31, 1996, no loans or letters of credit were outstanding under the terms of the Monterey Credit Agreement.
In November 1996 Monterey issued the Monterey Senior Notes which were exchanged for $175.0 million of senior notes previously issued by Santa Fe. The Monterey Senior Notes bear interest at 10.61% per annum and mature in 2005. Monterey is required to repay $25.0 million of the principal amount each year from 1999 through 2005.
In a public offering in May 1994 the Company issued $100.0 million of 11% Senior Subordinated Debentures due 2004 (the "Debentures"). The Debentures were issued for 99.266% of face value and the Company received proceeds of $96.1 million, after deducting related costs and expenses of $3.2 million. The Debentures, which mature May 15, 2004, are not redeemable prior to May 15, 1999 and may be redeemed after such date at the option of the Company at prices set forth in the indenture for the Debentures. Under certain circumstances, the Company may be required to redeem the Debentures for 101% of the principal amount. The Debentures are general unsecured subordinated obligations of the Company. The Company used the proceeds from the issuance of the Debentures, together with a portion of the proceeds from the issuance of the Series A Preferred (see Note 11), to retire $132.3 million of its then outstanding long-term debt.
In the first quarter of 1995 the Company retired the $10.0 million balance of a loan from an Argentine bank. The loan, which related to the Company's purchase of an interest in a producing oil field in Argentina in 1991, bore interest at 13% at the time it was retired.
Santa Fe has three short-term uncommitted lines of credit totalling $60.0 million which are used to meet short-term cash needs. Interest rates on borrowings under these lines of credit are typically lower than rates paid under the Santa Fe Credit Agreement. At December 31, 1996 $4.0 million was outstanding under these lines of credit. The amount outstanding at December 31, 1996 is classified as long-term since the Santa Fe Credit Agreement is available to refinance such amount on a long-term basis.
At December 31, 1996 the Company had outstanding letters of credit totalling $6.0 million, $2.3 million of which relate to the operations of Monterey.
Certain of the credit agreements and the indenture for the Debentures include covenants that restrict Santa Fe and Monterey's ability to take certain actions, including the ability to incur additional indebtedness and to pay dividends on capital stock. Under the most restrictive of these covenants, at December 31, 1996 Santa Fe could incur up to $417.7 million of additional indebtedness and pay dividends of up to $36.8 million on its aggregate capital stock (including its common stock, 7% Convertible Preferred Stock and Series A Preferred). At December 31, 1996, under the most restrictive of these covenants, Monterey could incur up to $253.4 million of additional indebtedness and pay dividends of $61.7 million on its common stock. Monterey is prohibited from paying more than $31.0 million in dividends to Santa Fe in any fiscal year prior to the consummation of the Proposed Spin Off.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) SEGMENT INFORMATION
The principal business of the Company consists of the acquisition, exploration and development of oil and gas properties and the production and sale of crude oil and liquids and natural gas. Pertinent information with respect to the Company's oil and gas business is presented in the following table (in millions of dollars):
Crude oil and liquids and natural gas accounted for more than 93% of revenues in 1996, 1995 and 1994. The following table (which with respect to certain properties includes royalty and working interest owners' share of production) reflects sales to crude oil purchasers who accounted for more than 10% of the Company's crude oil and liquids revenues (in millions of dollars):
YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ----- ----- ---- Celeron Corporation.................. 66.7 62.1 58.7 Coastal States Trading, Inc.......... 56.4 (a) (a) Shell Oil Company.................... 105.7 100.4 94.5
- ------------
(a) Sales represented less than 10% of crude oil and liquids revenues.
In 1996, 1995 and 1994 the only purchaser of the Company's natural gas to account for more than 10% of natural gas revenues was LG&E (see Note 4 with respect to the Company's gas sales contract with LG&E).
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) CONVERTIBLE PREFERRED STOCK, 7% SERIES
The Company's Convertible Preferred Stock, 7% Series, which was issued in connection with the Company's merger with Adobe Resources Corporation ("Adobe") in 1992, is non-voting and entitled to receive cumulative cash dividends at an annual rate equivalent to $1.40 per share. The holders of the convertible preferred shares may, at their option, convert any or all such shares into 1.3913 shares of the Company's common stock. The Company may, at any time after the fifth anniversary of the effective date of the Merger and upon the occurrence of a "Special Conversion Event", convert all outstanding shares of convertible preferred stock into common stock at the initial conversion rate of 1.3913 shares of common stock, subject to certain adjustments, plus additional shares in respect to accrued and unpaid dividends. A Special Conversion Event is deemed to have occurred when the average daily closing price for a share of the Company's common stock for 20 of 30 consecutive trading days equals or exceeds 125% of the quotient of $20.00 divided by the then applicable conversion rate (approximately $18.00 per share at a conversion rate of 1.3913).
Upon the occurrence an ownership change, as defined, of Santa Fe, each holder of shares of convertible preferred stock shall have the right, at the holder's option, to elect to have all of such holder's shares redeemed for $20.00 per share plus accrued and unpaid interest and dividends. The First Ownership Change shall be deemed to have occurred when any person or group, together with any affiliates or associates, becomes the beneficial owner of 50% or more of the outstanding common stock of Santa Fe.
In November 1996 the Company purchased 3,770,110 of the outstanding shares for $24.50 per share. The excess of the cost of the acquired shares ($94.0 million, including related costs of $1.7 million) over the book value of such shares, $33.7 million, is reflected in the Statement of Operations as a preferred dividend. At December 31, 1996, 1,229,890 shares were outstanding.
(11) SHAREHOLDERS' EQUITY
$.732 SERIES A CONVERTIBLE PREFERRED STOCK
In a public offering in May 1994 the Company issued 10,700,000 shares of $.732 Series A Convertible Preferred Stock. The Series A Preferred was issued at $8.875 per share and the Company received total proceeds of $91.4 million after deducting related costs and expenses of $3.6 million. Each share of Series A Preferred mandatorily converts into one share of common stock on May 15, 1998 and the Company has the option to redeem the shares, in whole or in part, on or after May 15, 1997 and prior to May 15, 1998 at prices set forth in the certificate of designation for the Series A Preferred which decline from $9.058 per share on May 15, 1997 to $8.875 per share on May 14, 1998, payable in common stock. Each share of Series A Preferred is convertible at the option of the holder into 0.8474 shares of common stock at any time prior to May 15, 1998.
The Series A Preferred ranks prior to common stock both as to payment of dividends and distribution of assets upon liquidation. The holders of Series A Preferred are entitled to receive cumulative preferential dividends, accruing at the rate per share of $0.732 per annum ($0.183 per quarter) payable quarterly in arrears.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the shareholders, to cause shares of preferred stock to be issued in one or more series, and to determine the number of shares in each series and the rights, preferences and limitations of each series. Among the specific matters which may be determined by the Board of Directors are: the annual rate of dividends; the redemption price, if any; the terms of a sinking or purchase fund, if any; the amount payable in the
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) event of any voluntary liquidation, dissolution or winding up of the affairs of the Company; conversion rights, if any; and voting powers, if any.
SHAREHOLDER RIGHTS PLAN
The Company has adopted a shareholder rights plan (the "Rights Plan") whereby preferred stock purchase rights (the "Rights") will be distributed to holders of the Company's common stock. The Rights will expire two years after the Proposed Spin Off or on March 3, 2000, whichever occurs first. The Rights will be exercisable only if a person acquires beneficial ownership of 15 percent or more of the Company's common stock (an "Acquiring Person"), or commences a tender offer which would result in ownership of 15 percent or more of such stock. Under the Rights Plan, one Right to purchase one one-hundredth of a share of a new series of junior preferred stock of the Company at an exercise price of $42.00 per one one-hundredth of a share (subject to adjustment) will be issued for each outstanding share of the Company's common stock held at the close of business on March 3, 1997.
If any person becomes an Acquiring Person, each Right will entitle the holder to purchase, at the Right's then current exercise price, shares of the Company's common stock having a value of twice the Right's exercise price. In addition, if, after a person becomes an Acquiring Person, the Company is involved in a merger or other business combination transaction with another person in which the Company is not the surviving corporation, or under certain other circumstances, each Right will entitle its holder to purchase, at the Right's then current exercise price, shares of common stock of the other person having a value of twice the Right's exercise price.
The Company will generally be entitled to redeem the Rights in whole, but not in part, at $0.01 per Right payable in cash or common stock, subject to adjustment, at any time until 10 business days (subject to extension) after the first public announcement that an Acquiring Person has become such.
The terms of the Rights may be amended by the Company without the approval of the holders of the Rights at any time the Rights are redeemable. At any time the Rights are no longer redeemable the terms may be amended only to (i) cure any ambiguity; (ii) correct or supplement any provision which may be defective or inconsistent with other provisions; (iii) shorten or lengthen any time period; or (iv) change or supplement the provisions in any manner which the Company deems necessary or desirable, so long as such change does not adversely affects the interests of the holders of the Rights.
(12) STOCK OPTION PLANS
Under the terms of the Santa Fe Energy Resources 1990 Incentive Stock Compensation Plan (the "1990 Plan") the Company may grant options and awards with respect to no more than 7,500,000 shares of common stock to officers, directors and key employees. Under the terms of the Santa Fe Energy Resources 1995 Incentive Stock Compensation Plan (the "1995 Plan") the Company may grant options and awards with respect to not more than 1,000,000 shares of common stock per year to employees other than executive officers and directors. Awards made under the terms of the 1990 Plan and the 1995 Plan (collectively the "Plans") may be made in the form of Restricted Stock, Bonus Stock, Phantom Units and Stock Appreciation Rights, as such terms are defined in the Plans.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options under the terms of the Plans are granted at the average market price on the date of grant and have a ten-year term with vesting periods ranging from six months to three years. The following table summarizes the activity with respect to options outstanding under the Plans during 1996 and 1995:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (i) expected dividend yield -- 0.0%; (ii) expected stock price volatility -- 22 to 27%; (iii) risk-free interest rate -- 5 to 7%; and (iv) expected life of options -- 10 years.
The following table summarizes certain information with respect to options outstanding under the Plans at December 31, 1996:
In December 1995 the Company granted 0.1 million Phantom Units to certain executive officers which were to be earned over a three-year period commencing January 1, 1996. The Phantom Units vested as a result of the IPO. The Company recognized $1.6 million in expense in 1996 with respect to such Phantom Units.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1996 the Company granted 0.2 million Phantom Units to certain executive officers and key personnel which are to be earned over a three-year period commencing January 1, 1997. During 1996 and 1995 the Company granted 0.1 million and 0.2 million, respectively, shares of restricted stock to certain executive officers and other employees. At December 31, 1996 1.4 million shares were available for options or awards under the 1990 Plan and 1.0 million shares were available under the 1995 Plan.
Under the terms of the Monterey Resources, Inc. 1996 Incentive Stock Compensation Plan (the "Monterey Plan"), Monterey may grant options and awards with respect to up to 3.0 million shares of common stock to officers, directors and key employees, including up to 0.5 million shares of restricted stock. During 1996 Monterey granted options on 0.2 million shares at an average exercise price of $14.59 per share, with each option granted having an average fair value of $7.77 per share. The grants were made at the market price at the date of grant, have a ten year term and vest one year from the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (i) expected dividend yield -- 0.0%; (ii) expected stock price volatility -- 24%; (iii) risk-free interest rate -- 6.4%; and (iv) expected life of options -- 10 years.
During 1996 Monterey also issued 0.1 million restricted shares which vest over a five-year period from the date of grant.
In October 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"), which established financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 encourages companies to adopt a fair value based method of accounting for such plans but continues to allow the use of the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). The Company has elected to continue to account for stock-based compensation costs based on the fair value of options granted as prescribed by FAS 123. Earnings (loss) attributable to common shares and the related per share amounts would have been reduced as is reflected by the proforma amounts in the following table (in millions of dollars, except per share data):
YEAR ENDED DECEMBER 31, -------------------- 1996 1995 --------- --------- As Reported: Earnings (loss) attributable to common shares................. (10.8) 11.8 Earnings (loss) attributable to common shares per share....... (0.12) 0.13 Proforma: Earnings (loss) attributable to common shares................. (12.6) 10.9 Earnings (loss) attributable to common shares per share....... (0.14) 0.12
During the initial phase-in period, the effects of applying FAS 123 for recognizing compensation cost on a proforma basis may not be representative of the effects on reported earnings for future periods since the options granted vest over several periods and additional awards will be made in future periods.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) PENSION AND OTHER EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a defined benefit retirement plan (the "SFER Plan") covering substantially all salaried employees not covered by collective bargaining agreements and a nonqualified supplemental retirement plan (the "Supplemental Plan"). The Supplemental Plan will pay benefits to participants in the SFER Plan in those instances where the SFER Plan formula produces a benefit in excess of limits established by ERISA and the Tax Reform Act of 1986. Benefits payable under the SFER Plan are based on years of service and compensation during the five highest paid years of service during the ten years immediately preceding retirement. The Company's funding policy is to contribute annually not less than the minimum required by ERISA and not more than the maximum amount deductible for income tax purposes.
The following table sets forth the funded status of the SFER Plan and the Supplemental Plan at December 31, 1996 and 1995 (in millions of dollars):
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the components of pension expense for the SFER Plan and Supplemental Plan for 1996, 1995 and 1994 (in millions of dollars):
The Company sponsors a pension plan covering certain hourly-rated employees in California (the "Hourly Plan"). The Hourly Plan provides benefits that are based on a stated amount for each year of service. The Company annually contributes amounts which are actuarially determined to provide the Hourly Plan with sufficient assets to meet future benefit payment requirements.
The following table sets forth the funded status of the Hourly Plan at December 31, 1996 and 1995 (in millions of dollars):
1996 1995 --------- --------- Plan assets at fair value, primarily invested in fixed-rate securities.... 9.5 8.7 Actuarial present value of projected benefit obligations Accumulated benefit obligations Vested.................... (10.9) (10.4) Nonvested................. (0.4) (0.4) --------- --------- Excess of projected benefit obligation over plan assets........ (1.8) (2.1) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions........................ (0.4) (0.3) Unrecognized prior service cost...... 0.4 0.4 Unrecognized net obligation.......... 1.0 1.2 Additional minimum liability......... (1.1) (1.3) --------- --------- Accrued pension liability....... (1.9) (2.1) ========= ========= Major assumptions at year-end Discount rate................... 7.50% 7.50% Expected long-term rate of return on plan assets......... 8.50% 8.50%
The following table sets forth the components of pension expense for the Hourly Plan for 1996, 1995 and 1994 (in millions of dollars):
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Service cost.................... 0.2 0.2 0.2 Interest cost................... 0.8 0.8 0.8 Return on plan assets........... (0.9) (1.4) (0.4) Net amortization and deferral... 0.4 0.9 -- --------- --------- --------- 0.5 0.5 0.6 ========= ========= =========
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company sponsors a pension plan for certain persons employed in foreign locations (the "Foreign Plan"). The following table sets forth the funded status of the Foreign Plan at December 31, 1996 and 1995 (in millions of dollars):
1996 1995 --------- --------- Plan assets.......................... -- -- Actuarial present value of projected benefit obligations: Accumulated benefit obligations.................. Vested.......................... (0.1) -- Nonvested....................... (0.2) (0.2) Effect of projected future salary increases............. (0.1) -- --------- --------- Excess of projected benefit obligations over plan assets....... (0.4) (0.2) Unrecognized prior service costs..... 0.1 0.1 --------- --------- Accrued pension liability............ (0.3) (0.1) ========= ========= Major assumptions at year-end: Discount rate................... 7.50% 7.50% Rate of increase in future compensation................. 5.00% 5.00%
The following table sets forth the components of pension expense for the Foreign Plan for 1996, 1995 and 1994 (in millions of dollars):
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Service cost......................... 0.1 0.1 -- Interest cost........................ -- -- -- Net amortization and deferral........ -- -- -- --------- --------- --------- 0.1 0.1 -- ========= ========= =========
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care and life insurance benefits for substantially all employees who retire under the provisions of a Company-sponsored retirement plan and their dependents. Participation in the plans is voluntary and requires a monthly contribution by the retiree. The following table sets forth the plan's funded status at December 31, 1996 and 1995 (in millions of dollars):
DECEMBER 31, -------------------- 1996 1995 --------- --------- Plan assets, at fair value........... -- -- Accumulated postretirement benefit obligation Retirees........................... (4.2) (4.6) Eligible active participants....... (1.0) (1.4) Other active participants.......... (2.1) (1.2) --------- --------- Accumulated postretirement benefit obligation in excess of plan assets............................. (7.3) (7.2) Unrecognized transition obligation... 3.7 3.8 Unrecognized net loss (gain) from past experience different from that assumed and from changes in assumptions........................ (0.2) 0.3 --------- --------- Accrued postretirement benefit cost............................... (3.8) (3.1) ========= ========= Assumed discount rate................ 7.50% 7.75% Assumed rate of compensation increase........................... 5.25% 5.25%
The Company's net periodic postretirement benefit cost for 1996, 1995 and 1994 includes the following components (in millions of dollars):
YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ---- ---- ---- Service costs........................ 0.5 0.3 0.4 Interest costs....................... 0.5 0.5 0.5 Amortization of unrecognized transition obligation.............. 0.3 0.3 0.3 ---- ---- ---- 1.3 1.1 1.2 ==== ==== ====
Estimated costs and liabilities have been developed assuming trend rates for growth in future health care costs beginning with 8.0% for 1996 graded to 6.0% (5.5% for post age 65) by the year 2000 and remaining constant thereafter. Increasing the assumed health care cost trend rate by one percent each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $0.4 million and the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for 1997 by $0.1 million.
SAVINGS PLAN
The Company has a savings plan available to substantially all salaried employees and intended to qualify as a deferred compensation plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). The Company will match employee contributions for an amount up to 4% of each employee's base salary. In addition, if at the end of each fiscal year the Company's performance for such year has exceeded certain predetermined criteria, each participant will receive an additional matching contribution equal to 50% of the regular matching contribution. The Company's contributions to the 401(k) Plan, which are made in the form of the Company's common stock and charged to expense, totalled $1.2 million in 1996, $1.3 million in 1995 and $1.2 million in 1994.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also has a savings plan with respect to certain personnel employed in foreign locations. The plan is an unsecured creditor of the Company and at December 31, 1996 and 1995 the Company's liability with respect to the plan totalled $0.3 million and $0.1 million, respectively.
(14) COMMITMENTS AND CONTINGENCIES
OIL AND GAS HEDGING
From time to time the Company hedges a portion of its oil and gas sales to provide a certain minimum level of cash flow from its sales of oil and gas. While the hedges are generally intended to reduce the Company's exposure to declines in market price, the Company's gain from increases in market price may be limited. The Company uses various financial instruments whereby monthly settlements are based on differences between the prices specified in the instruments and the settlement prices of certain futures contracts quoted on the New York Mercantile Exchange ("NYMEX") or certain other indices. Generally, in instances where the applicable settlement price is less than the price specified in the contract, the Company receives a settlement based on the difference; in instances where the applicable settlement price is higher than the specified price, the Company pays an amount based on the difference. The instruments utilized by the Company differ from futures contracts in that there is no contractual obligation which requires or allows for the future delivery of the product. Gains or losses on hedging activities are recognized in oil and gas revenues in the period in which the hedged production is sold.
Crude oil sales hedges resulted in a $13.4 million decrease in revenues in 1996 and a $2.4 million increase in revenues in 1995. At December 31, 1996 the Company had open crude oil sales hedges on an average of 2,000 barrels per day for the period January to June 1997. Under the terms of the instruments, if the average of the applicable daily settlement prices is below $21.00 per barrel, the Company will receive a settlement based on the difference, and if the average of the applicable daily settlement prices is above $26.10, the Company will be required to pay an amount based on the difference.
Subsequent to year end, the Company entered into additional agreements which increased the number of barrels hedged to an average of approximately 7,700 barrels per day for the period January to July 1997. The instruments used have floors ranging from $21.00 to $23.00 per barrel and ceilings ranging from $24.00 to $27.00 per barrel. Under the terms of the instruments, if the aggregate average of the applicable daily settlement prices is below the floor, the Company will receive a settlement based on the difference, and if the aggregate average of the applicable daily settlement prices is above the ceiling, the Company will be required to pay an amount based on the difference.
At December 31, 1996 the Company had no open natural gas sales hedges. Natural gas sales hedges resulted in a decrease in revenues of $21.4 million in 1996, $0.3 million in 1995 and $1.0 million in 1994.
In addition to its oil and gas sales hedges, for the first six months of 1996 the Company hedged 20 MMcf per day of the natural gas it purchases for use in its steam generation operations in the San Joaquin Valley of California. Such hedges resulted in a $3.2 million increase in production and operating costs.
ENVIRONMENTAL REGULATION
Federal, state and local laws and regulations relating to environmental quality control affect the Company in all of its oil and gas operations. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner or
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operator of a site and companies that disposed or arranged for the disposal of the hazardous substance found at a site. CERCLA also authorizes the Environmental Protection Agency (the "EPA") and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its operations, the Company has generated and will generate wastes that may fall within CERCLA's definition of "hazardous substances". The Company may be responsible under CERCLA for all or part of the costs to clean up sites at which such wastes have been disposed. Certain properties owned or used by the Company or its predecessors have been investigated under state and Federal Superfund statutes, and the Company has been and could be named a potentially responsible party ("PRP") for the cleanup of some of these sites.
The Company has been identified as one of over 250 PRPs at a Superfund site in Los Angeles County, California (the "OII Site"). The OII Site was operated by a third party as a waste disposal facility from 1948 until 1983. The EPA is requiring the PRPs to undertake remediation of the site in several phases, which include site monitoring and leachate control, gas control and final remediation. In November 1988 the EPA and a group of PRPs that includes the Company entered into a consent decree covering the site monitoring and leachate control phases of remediation. The Company was a member of the group Coalition Undertaking Remediation Efforts ("CURE") which was responsible for constructing and operating the leachate treatment plant. This phase is now complete and the Company's share of costs with respect to this phase was $0.9 million. Another consent decree provides for the predesign, design and construction of a gas plant to harness and market methane gas emissions. The Company is a member of the New CURE group which is responsible for the gas plant construction and operation and landfill cover. Currently, New CURE is in the design stage of the gas plant. The Company's share of costs of this phase is expected to be $1.9 million and such costs have been provided for in the financial statements. Pursuant to consent decrees settling lawsuits against the municipalities and transporters involved with the OII site but not named by the EPA as PRPs, such parties are required to pay approximately $84 million, of which approximately $76 million will be credited against future remediation expenses. The EPA and the PRPs are currently negotiating the final closure requirements. After taking into consideration the credits from the municipalities and transporters, the Company estimates its share of final costs of closure will be approximately $0.8 million, which amount has been provided for by the Company in its financial statements. The Company has entered into a Joint Defense Agreement with the other PRPs to defend against a lawsuit filed in September 1994 by 95 homeowners alleging, among other things, nuisance, trespass, strict liability and infliction of emotional distress. A second lawsuit has been filed by 33 additional homeowners and the Company and the other PRPs have entered into a Joint Defense Agreement. At this stage of the lawsuit the Company is not able to estimate costs or potential liability.
In 1994 the Company received a request from the EPA for information pursuant to Section 104(e) of CERCLA and a letter ordering the Company and other PRPs to negotiate with the EPA regarding implementation of a remedial plan for a site located in Santa Fe Springs, California (the "Santa Fe Springs Site"). The Company owned the property on which the Santa Fe Springs Site is located from 1921 to 1932. During that time the property was leased to another company and in 1932 the property was sold to that company. During the time the other company leased or owned the property and for a period thereafter, hazardous wastes were allegedly disposed at the Santa Fe Springs Site. The EPA estimates total past and future costs for remediation to be approximately $8.0 million. The Company filed its response to the Section 104(e) order setting forth its position and defenses based on the fact that the other company was the lessee and operator of the site during the time the Company was the owner of the property. However, the Company has also given its Notice of Intent to comply with the EPA's order to prepare a remediation design plan. The PRPs estimate total costs to final remediation to be $3.0 million and the Company has provided $250,000 for such costs in the financial statements.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1995 the Company and twelve other companies received notice that they have been identified as PRPs by the California Department of Toxic Substances Control (the "DTSC") as having generated and/or transported hazardous waste to the Environmental Protection Corporation ("EPC") Eastside Landfill (the "Eastside Site") during its fourteen-year operation from 1971 to 1985. EPC has since liquidated all assets and placed the proceeds in trust (the "EPC Trust") for closure and post-closure activities. However, these monies may not be sufficient to close the site. The PRPs have entered into an enforceable agreement with the DTSC to characterize the contamination at the site and prepare a focused remedial investigation and feasibility study. The DTSC has agreed to implement reasonable measures to bring new PRPs into the agreement. The DTSC will address subsequent phases of the cleanup, including remedial design and implementation in a separate order agreement. The cost of the remedial investigation and feasibility study is estimated to be $0.8 million, the cost of which will be shared by the PRPs and the EPC Trust. The ultimate costs of subsequent phases will not be known until the remedial investigation and feasibility study is completed and a remediation plan is accepted by the DTSC. The Company currently estimates final remediation could cost $2 million to $6 million and believes the monies in the EPC Trust will be sufficient to fund the lower end of this range of costs. The Company has provided $80,000 in its financial statements for its share of costs related to this site.
Pursuant to the Contribution Agreement, Monterey agreed to indemnify and hold harmless Santa Fe from and against any costs incurred in the future relating to environmental liabilities of the Western Division assets (other than those retained by Santa Fe), including any costs or expenses incurred at any of the OII Site, the Santa Fe Springs Site and the Eastside Site, and any costs or liabilities that may arise in the future that are attributable to laws, rules or regulations in respect to any property or interest therein located in California and formerly owned or operated by the Western Division or its precedessors.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with eleven employees. The initial term of ten of the agreements expire on December 31, 1998; however, beginning January 1, 1998 and on each January 1 thereafter, the term is automatically extended for one-year periods, unless by September 30 of the preceding year the Company gives notice that the agreement will not be extended. The term of the agreements is automatically extended for a period of two years following a change of control. The initial term of the other agreement expires December 31, 1999 and beginning January 1, 1999, is automatically extended for one-year periods and is automatically extended for a three-year period following a change of control.
In the event following a change in control employment is terminated by the employee for "good reason" or the employee is involuntarily terminated by the Company other than for "cause" (as those terms are defined in the employment agreements), or if during the six months preceding a change in control, the employee's employment is terminated by the employee for good reason or by the Company other than for cause, and such termination is demonstrated to be connected with the change in control, the employment agreements provide for payment of certain amounts to the employee based on the employee's salary and bonus under the Company's incentive compensation plan; payout of non-vested restricted stock, phantom units, stock options, if any, and continuation of certain insurance benefits on a tax neutral basis for a period of up to 36 months. The payments and benefits are payable pursuant to the employment agreements only to the extent they are not paid out under the terms of any other plan of the Company. The payments and benefits provided by the employment agreements may be limited, with the exception of those made to Mr. Payne, by certain provisions of the Internal Revenue Code.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING LEASES
The Company has noncancellable agreements with terms ranging from one to ten years to lease office space and equipment. Minimum rental payments due under the terms of these agreements are: 1997 -- $6.2 million,1998 -- $5.7 million, 1999 -- $3.7 million,2000 -- $1.9 million, 2001 -- $1.5 million and $6.1 million thereafter. Rental expense under the terms of noncancellable agreements totalled $5.9 million in 1996, $6.1 million in 1995 and $6.2 million in 1994.
OTHER MATTERS
The Company has certain long-term contracts ranging up to twelve years for the supply and transportation of approximately 20 million cubic feet per day of natural gas to the Company's operations in Kern County, California. In the aggregate, these contracts involve a minimum commitment on the part of the Company of approximately $18.6 million per year (based on prices and transportation charges in effect for December 1996). In connection with the development of a gas field in Argentina in which the Company has a 19.9% working interest, a gas contract with "take-or-pay" and "delivery-or-pay" obligations was executed in 1994 with a gas distribution company.
There are other claims and actions, including certain other environmental matters, pending against the Company. In the opinion of management, the amounts, if any, which may be awarded in connection with any of these claims and actions could be significant to the results of operations of any period but would not be material to the Company's consolidated financial position.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosure About Fair Value of Financial Instruments" requires the disclosure, to the extent practicable, of the fair value of financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences, if any, of realization or settlement. The following table reflects the financial instruments for which the fair value differs from the carrying amount of such financial instrument in the Company's December 31, 1996 and 1995 balance sheets (in millions of dollars):
The fair value of the Company's 11% Senior Subordinated Debentures, Convertible Preferred Stock, 7% Series and $.732 Series A Convertible Preferred Stock is based on market prices. The fair value of the Company's fixed-rate long-term debt is based on current borrowing rates available for financings with similar terms and maturities. With respect to the Company's floating-rate debt the carrying amount approximates fair value.
At December 31, 1996 the Company had open oil sales hedging contracts (see Note 14). Based on the year-end 1996 settlement prices of the applicable NYMEX futures contracts, the Company would recognize no gain or loss with respect to such hedges in 1997. The actual gains or losses realized by the Company from these hedges may vary significantly due to the volatility of the futures markets and other indices.
SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------
(a) The fourth quarter of 1996 includes impairments of oil and gas properties of $47.0 million (see Note 1), a $12.3 million gain on the sale of certain surface lands (see Note 6), a $6.0 million extraordinary item with respect to debt extinguishment costs (see Note 2) and a $33.7 million convertible preferred redemption premium (see Note 10).
(b) Revenues less operating expenses other than general and administrative.
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OIL AND GAS RESERVES AND RELATED FINANCIAL DATA
Information with respect to the Company's oil and gas producing activities is presented in the following tables. Reserve quantities as well as certain information regarding future production and discounted cash flows were determined by independent petroleum consultants, Ryder Scott Company.
OIL AND GAS RESERVES
The following table sets forth the Company's net proved oil and gas reserves at December 31, 1993, 1994, 1995 and 1996 and the changes in net proved oil and gas reserves for the years ended December 31, 1994, 1995 and 1996.
(TABLE CONTINUED ON FOLLOWING PAGE)
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Proved reserves are estimated quantities of crude oil and natural gas which geological and engineering data indicate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods.
Indonesian reserves represent an entitlement to gross reserves in accordance with a production sharing contract. These reserves include estimated quantities allocable to the Company for recovery of operating costs as well as quantities related to the Company's net equity share after recovery of costs. Accordingly, these quantities are subject to fluctuations with an inverse relationship to the price of oil. If oil prices increase, the reserve quantities attributable to the recovery of operating costs decline. Although this reduction would be offset partially by an increase in the net equity share, the overall effect would be a reduction of reserves attributable to the Company. At December 31, 1996, the quantities include 0.6 million barrels which the Company is contractually obligated to sell for $.20 per barrel.
The Company has certain commitments with respect to the delivery of natural gas (see Note 14) which the Company believes it can fulfill from its proved reserves and supply contracts with other companies.
At December 31, 1996 U.S. proved reserves included 216.4 MMBbls of crude oil and liquids (171.0 MMBbls of which were proved developed) and 12.2 Bcf of natural gas (9.5 Bcf of which were proved developed) attributable to Monterey.
At December 31, 1996, 2.0 million barrels of crude oil reserves and 14.1 billion cubic feet of natural gas reserves were subject to a 90% net profits interest held by Santa Fe Energy Trust.
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
ESTIMATED PRESENT VALUE OF FUTURE NET CASH FLOWS
Estimated future net cash flows from the Company's proved oil and gas reserves at December 31, 1996, 1995 and 1994 are presented in the following table (in millions of dollars, except as noted):
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The following tables sets forth the changes in the present value of estimated future net cash flows from proved reserves during 1996, 1995 and 1994 (in millions of dollars):
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Estimated future cash flows represent an estimate of future net cash flows from the production of proved reserves using estimated sales prices and estimates of the production costs, ad valorem and production taxes, and future development costs necessary to produce such reserves. No deduction has been made for depletion, depreciation or any indirect costs such as general corporate overhead or interest expense.
The sales prices used in the calculation of estimated future net cash flows are based on the prices in effect at year end. Such prices have been held constant except for known and determinable escalations.
Operating costs and ad valorem and production taxes are estimated based on current costs with respect to producing oil and gas properties. Future development costs are based on the best estimate of such costs assuming current economic and operating conditions.
Income tax expense is computed based on applying the appropriate statutory tax rate to the excess of future cash inflows less future production and development costs over the current tax basis of the properties involved. While applicable investment tax credits and other permanent differences are considered in computing taxes, no recognition is given to tax benefits applicable to future exploration costs or the activities of the Company that are unrelated to oil and gas producing activities.
The information presented with respect to estimated future net revenues and cash flows and the present value thereof is not intended to represent the fair value of oil and gas reserves. Actual future sales prices and production and development costs may vary significantly from those in effect at year-end and actual future production may not occur in the periods or amounts projected. This information is presented to allow a reasonable comparison of reserve values prepared using standardized measurement criteria and should be used only for that purpose.
At December 31, 1996 approximately $126.0 million of the Company's estimated present value of future net cash flows were attributable to the minority interest in Monterey.
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES The following table includes all costs incurred, whether capitalized or charged to expense at the time incurred (in millions of dollars):
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES The following table sets forth information concerning capitalized costs at December 31, 1996 and 1995 related to the Company's oil and gas operations (in millions of dollars):
OTHER INDONESIA FOREIGN TOTAL --------- ------- --------- Oil and gas properties Unproved......................... 12.0 3.0 61.2 Proved........................... 99.1 1.8 2,262.3 Other............................ -- -- 12.8 Accumulated amortization of unproved properties......................... (3.8) (1.8) (20.8) Accumulated depletion, depreciation and impairment of proved properties......................... (39.7) -- (1,441.5) Accumulated depreciation of other oil and gas properties................. -- -- (5.3) --------- ------- --------- 67.6 3.0 868.7 ========= ======= =========
SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES The following table sets forth the Company's results of operations from oil and gas producing activities for the years ended December 31, 1996, 1995 and 1994 (in millions of dollars):
Income taxes are computed by applying the appropriate statutory rate to the results of operations before income taxes. Applicable tax credits and allowances related to oil and gas producing activities have been taken into account in computing income tax expenses. No deduction has been made for indirect cost such as corporate overhead or interest expense.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SANTA FE ENERGY RESOURCES, INC.
By /s/ JANET F. CLARK JANET F. CLARK VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Dated: March 11, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE AND TITLE ------------------------ JAMES L. PAYNE, Chairman of the Board, President and Chief Executive Officer and Director (PRINCIPAL EXECUTIVE OFFICER)
JANET F. CLARK, Vice President and Chief Financial Officer (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
DIRECTORS ----------- William E. Greehey By: /s/ JANET F. CLARK Melvyn N. Klein JANET F. CLARK Allan V. Martini VICE PRESIDENT AND Marc J. Shapiro CHIEF FINANCIAL OFFICER Kathryn D. Wriston ATTORNEY IN FACT
Dated: March 11, 1997
SANTA FE ENERGY RESOURCES, INC. SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1996 (IN MILLIONS OF DOLLARS)
=================================================================== 1996 1995 1994 - ------------------------------------------------------------------- Accounts receivable Balance at the beginning of period........................ 2.0 3.1 6.3 Charge (credit) to income.................. 0.5 -- 0.6 Net amounts written off... -- (1.1) (3.8) ----- ----- ----- Balance at the end of period.... 2.5 2.0 3.1 ===== ===== =====
INDEX OF EXHIBITS
A. EXHIBITS
EXHIBIT NUMBER DESCRIPTION 3(a) -- Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Form S-2 Registration Statement of Santa Fe Energy Resources, Inc. ("SFER, Inc.") Commission File No. 33-32831).
3(b) -- Bylaws, as amended (incorporated by reference to Exhibit 3(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992).
4(a) -- Form of Certificate of Designation, Preferences and Rights of the 7% Convertible Preferred Stock of SFER, Inc. (incorporated by reference to Exhibit 3(b) of the Form S-4 Registration Statement of SFER, Inc., Commission File No. 33-45043).
4(b) -- Rights Agreement dated as of March 3, 1997, between SFER, Inc. and First Chicago Trust Company of New York, as Rights Agent (incorporated by reference to Exhibit 1 to SFER, Inc.'s Form 8-A filed February 28, 1997.)
4(c) -- Form of Amended Certificate of Designations of Series A Junior Participating Preferred Stock of SFER, Inc. (incorporated by reference to Exhibit 1 to SFER, Inc.'s Form 8-A filed February 28, 1997).
4(d) -- Note Agreement dated as of November 19, 1996 by and among Monterey Resources, Inc. and various institutional investors relating to the issuance of $175,000,000 of Senior Notes maturing in 2005 (incorporated by reference to Exhibit 10.15 to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
4(e) -- Form of Certificate of Designation of the Dividend Enhanced Convertible Stock, $.732 Series A Convertible Preferred Stock of SFER, Inc. (incorporated by reference to Exhibit 4.3 of the Form S-3 Registration Statement of SFER, Inc., Commission File No. 33-52849).
4(f) -- Form of Indenture dated as of May 25, 1994 and Form of Debenture relating to SFER, Inc.'s 11% Senior Subordinated Debentures Due 2004 (incorporated by reference to Exhibit 4.1 of the Form S-3 Registration Statement of SFER, Inc. Commission File No. 33-52849).
4(g) -- First Supplemental Indenture, dated as of October 21, 1996, between SFER, Inc. and State Street Bank and Trust Company, as Trustee, relating to SFER Inc.'s 11% Senior Subordinated Debentures due 2004 (incorporated by reference to Exhibit 10.1 to SFER Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).
10(a) -- Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group, as amended, dated December 23, 1983 (incorporated by reference to Exhibit 10.8 of the Form S-2 Registration Statement of SFER, Inc. Commission File No. 33-32831).
10(b) -- SFER, Inc. Incentive Compensation Plan, as amended (incorporated by reference to Exhibit 10(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995).
10(c) -- SFER, Inc. 1990 Incentive Stock Compensation Plan, Third Amendment and Restatement (incorporated by reference to Exhibit 10(a) to SFER Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
*10(d) -- Examples of Employment Agreements entered into with executive officers of SFER, Inc.
*10(e) -- Example of Indemnification Agreements with SFER Inc.'s directors and officers.
*10(f) -- Spin-Off Tax Indemnification Agreement between SFER, Inc. and Santa Fe Pacific Corporation.
*10(g) -- Agreement Concerning Taxes among SFER, Inc., certain subsidiaries of SFER, Inc. and Santa Fe Pacific Corporation.
INDEX OF EXHIBITS -- (CONTINUED)
EXHIBIT NUMBER DESCRIPTION
*10(h) -- Santa Fe Energy Resources Supplemental Retirement Plan effective as of December 4, 1990.
10(i) -- SFER, Inc. Deferred Compensation Plan, effective as of January 1, 1991 as amended and restated, effective February 1, 1994 (incorporated by reference to Exhibit 10(p) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993).
10(j) -- Gas Marketing Agreement, dated as of December 14, 1993, between SFER, Inc., Santa Fe Energy Operating Partners, L.P. and Adobe Gas Pipeline Company (incorporated by reference to Exhibit 10(t) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993).
*10(k) -- Credit Agreement dated as of November 13, 1996 among SFER, Inc., the banks signatory thereto, and The Chase Manhattan Bank, as Administrative Agent and ABN AMRO Bank, N.V., as Co-Agent.
10(l) -- Credit Agreement dated as of November 13, 1996 among Monterey Resources, Inc., the Banks signatory thereto and The Chase Manhattan Bank, as Administrative Agent (incorporated by reference to Exhibit 10.16 to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
10(m) -- Agreement for the Allocation of Consolidated Federal Income Tax Liability and State and Local Taxes among the members of the SFER, Inc. affiliated Group dated November 19, 1996 (incorporated by reference to Exhibit 10.2 to Monterey Resources Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
10(n) -- Agreement Concerning Taxes and Tax Indemnifications upon Spin-Off, dated November 19, 1996, between Monterey Resources, Inc. and SFER, Inc. (incorporated by reference to Exhibit 10.3 to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
10(o) -- Registration Rights and Indemnification Agreement dated November 19, , 1996, between Monterey Resources, Inc. and SFER, Inc. (incorporated by reference to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
10(p) -- Agreement Regarding Shelf Registration Statement dated March 24, 1995 between SFER, Inc. and HC Associates, GKH Partners, L.P., GKH Investments, L.P., Ernest H. Cockrell Texas Testamentary Trust and Carol Cockrell Jennings Texas Testamentary Trust (incorporated by reference to Exhibit 10(o) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995).
10(q) -- Conveyance and Contribution Agreement dated as of November 1, 1996, between Monterey Resources, Inc. and SFER, Inc. (incorporated by reference to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
*21 -- Subsidiaries of the registrant.
*23(a) -- Consent of Independent Accountants with respect to Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-44542, 33-58613, 33-59253, 33-59255 and 333-07949).
*23(b) -- Consent of Ryder Scott Company with respect to Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-4452, 33-58613, 33-59253, 33-59255 and 333-07949).
*24 -- Powers of Attorney.
- ------------
* Included in this report
B. REPORTS ON FORM 8-K.
DATE ITEM ------------------ ----- February 28, 1997 5