Item 3. Legal Proceedings
Freeport-McMoRan Sulphur LLC v. IMC-Agrico Company, Civ. Act. No. 462,776 (19th Jud. Dist. Ct. for Parish of East Baton Rouge, La.; filed July 22, 1999). The sulphur supply agreement between our subsidiary, Freeport-McMoRan Sulphur LLC (FSC) and IMC-Agrico, now known as IMC Phosphate Company (IMC), requires good faith renegotiation of the pricing provisions if a party can prove that fundamental changes in IMC's operations or the sulphur and sulphur transportation markets invalidate certain assumptions and result in the performance by that party becoming "commercially impracticable" or "grossly inequitable." In the fourth quarter of 1998, IMC attempted to invoke this contract provision in an effort to renegotiate the pricing terms of the agreement. After careful review of the agreement, IMC's operations and the referenced markets, we determined that there is no basis for renegotiation of the pricing provisions of the agreement. After discussions failed to resolve this dispute, FSC filed suit against IMC seeking a judicial declaration that no basis exists under the agreement for a renegotiation of its pricing terms.
On July 25, 2000, IMC filed a supplemental demand alleging that FSC's suspension of sulphur production at Main Pass and the proposed sale of FSC's sulphur transportation assets constitute a statement of intent to breach the sulphur supply agreement. IMC further alleges that FSC cannot assign the sulphur supply agreement without IMC's consent. On December 22, 2000, IMC filed a motion for partial summary judgment with respect to its claim that FSC cannot assign the sulphur supply agreement without IMC's consent. The sulphur supply agreement permits assignments under many circumstances without IMC's consent, including the sale of all or substantially all of FSC's assets; the agreement also permits any assignment with IMC's consent. IMC contends that the sale of FSC's sulphur transportation, logistics and marketing assets without Main Pass will not be substantially all of FSC's assets; thus, IMC's consent would be needed to assign the sulphur supply agreement. In February 2001, FSC filed a motion for partial summary judgment on these issues. These motions are currently scheduled to be heard by the court in March 2001. We and our legal advisors believe all of IMC's claims are without merit.
Daniel W. Krasner v. James R. Moffett; Rene L. Latiolais; J. Terrell Brown; Thomas D. Clark, Jr.; B.M. Rankin, Jr.; Richard C. Adkerson; Robert M. Wohleber; Freeport-McMoRan Sulphur Inc. and McMoRan Oil & Gas Co., Civ. Act. No. 16729-NC (Del. Ch. filed Oct. 22, 1998). Gregory J. Sheffield and Moise Katz v. Richard C. Adkerson, J. Terrell Brown, Thomas D. Clark, Jr., Rene L. Latiolais, James R. Moffett, B.M. Rankin, Jr., Robert M. Wohleber and McMoRan Exploration Co., (Court of Chancery of the State of Delaware, filed December 15, 1998.) These two lawsuits were consolidated on January 13, 1999. The complaint alleges that Freeport-McMoRan Sulphur Inc.'s directors breached their fiduciary duty to Freeport-McMoRan Sulphur Inc.'s stockholders in connection with the combination of Freeport Sulphur and McMoRan Oil & Gas. The plaintiffs contend that the transaction was structured to give preference to McMoRan Oil & Gas stockholders and failed to recognize the true value of Freeport Sulphur. The plaintiffs claim that the directors failed to take actions that were necessary to obtain the true value of Freeport Sulphur such as auctioning the company to the highest bidder or evaluating Freeport Sulphur's worth as an acquisition candidate. The plaintiffs also claim that McMoRan Oil & Gas Co. knowingly aided and abetted the breaches of fiduciary duty committed by the other defendants. In January 2001, the court granted the motions to dismiss for the defendants with 30 days leave for the plaintiffs to amend. In February 2001, the plaintiffs filed an amended complaint. We will continue to defend this action vigorously.
Other than the proceedings discussed above, we may from time to time be involved in various legal proceedings of a character normally incident to the ordinary course of our business. We believe that potential liability from any of these pending or threatened proceedings will not have a material adverse effect on our financial condition or results of operations. We maintain liability insurance to cover some, but not all, of the potential liabilities normally incident to the ordinary course of our businesses as well as other insurance coverages customary in our business, with coverage limits as we deem prudent.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders None.
Executive Officers of the Registrant Listed below are the names and ages, as of February 28, 2001, of the present executive officers of McMoRan together with the principal positions and offices with McMoRan held by each.
Name Age Position or Office ----- --- ------------------ James R. Moffett 62 Co-Chairman of the Board
Richard C. Adkerson 54 Co-Chairman of the Board, President and Chief Executive Officer
C. Howard Murrish 60 Executive Vice President
Nancy D. Parmelee 49 Senior Vice President,Chief Financial Officer and Secretary
Theodore P. Fowler 49 Senior Vice President
W. Russell King 51 Senior Vice President
John G. Amato 56 General Counsel
James R. Moffett has served as our Co-Chairman of the Board since November 1998. From 1994 to November 1998 he served as Co- Chairman of the Board of McMoRan Oil & Gas. From November 1997 to November 1998 he also served as Co-Chairman of the Board of Freeport Sulphur. Mr. Moffett has also served as the Chairman of the Board and Chief Executive Officer of Freeport-McMoRan Copper & Gold Inc. (FCX) since July 1995, and as Chairman of the Board of FCX since May 1992. Mr. Moffett served as Chairman of the Board of Freeport-McMoRan Inc. from September 1984 until December 1997. Mr. Moffett's technical background is in geology and he has been actively engaged in petroleum geological activities in the areas of our company's operations throughout his business career. He is a founder of the predecessor of our company.
Richard C. Adkerson has served as our Co-Chairman of the Board, President and Chief Executive Officer since November 1998. From April 1994 to November 1998 he was Co-Chairman of the Board and Chief Executive Officer of McMoRan Oil & Gas. From November 1997 to November 1998 he was Vice Chairman of the Board of Freeport
Sulphur. Mr. Adkerson has also served as President of FCX since April 1997. Mr. Adkerson served as Executive Vice President of FCX from July 1995 to April 1997, and as Senior Vice President of FCX from February 1994 to July 1995. Mr. Adkerson served as Vice Chairman of Freeport-McMoRan Inc. until December 1997 and as Senior Vice President and Chief Financial Officer of Freeport-McMoRan Inc. from 1992 to 1995. He also served as Chairman of the Board of Stratus Properties Inc., a real estate development company, from March 1992 to August 1998, as President from August 1995 to May 1996 and as Chief Executive Officer from August 1995 to May 1998. Prior to 1989, Mr. Adkerson was a partner and managing director in Arthur Andersen and served as the head of that firm's worldwide oil and gas practice.
C. Howard Murrish has served as Executive Vice President of McMoRan since November 1998. He has served as President and Chief Operating Officer of McMoRan Oil & Gas since September 1994.
Nancy D. Parmelee has served as Senior Vice President and Chief Financial Officer of McMoRan since August 1999 and Vice President and Controller -- Accounting Operations from September 1998 through August 1999. She was appointed as Secretary of McMoRan in January 2000. Ms. Parmelee has served as Assistant Controller of FCX since July 1994. She also served as Vice President and Controller - Operations Accounting of Freeport- McMoRan Inc. from November 1996 to December 1997 and as Assistant Controller from August 1993 to November 1996.
Theodore P. Fowler has served as a Senior Vice President of McMoRan since November 1999. Mr. Fowler has been a consultant to a number of fertilizer industry clients and was Senior Vice President and Operations Manager of IMC-Agrico Company, now known as IMC Phosphate Company, a unit of IMC Global Inc., from February 1996 to November 1998. Mr. Fowler served as Vice President of Freeport-McMoRan Inc. from August 1995 to January 1996.
W. Russell King was appointed as Senior Vice President of McMoRan in January 2000. Mr. King has served as Senior Vice President of FCX since July 1994. He has also served as Senior Vice President of Freeport-McMoRan Inc. from November 1993 to December 1997.
John G. Amato has served as our General Counsel since November 1998. Mr. Amato served as General Counsel to McMoRan Oil & Gas from April 1994 to November 1998, to Freeport Sulphur from November 1997 to November 1998, and to Stratus Properties Inc. from August 1995 to August 1998. Prior to August 1995, Mr. Amato served as General Counsel of FCX and to Freeport-McMoRan Inc. Mr. Amato currently provides legal and business advisory services to FCX under a consulting arrangement.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol "MMR." Our common shares have been trading since November 18, 1998. The following table sets forth, for the period indicated, the range of high and low sales prices, as reported by the NYSE.
As of February 28, 2001 there were approximately 12,000 holders of record of our common stock. We have not in the past paid, and do not anticipate in the future paying, cash dividends on our common stock. The decision whether or not to pay dividends and in what amounts is solely at the discretion of our Board of Directors. McMoRan Oil & Gas' credit facility contains certain restrictions on its ability to make distributions to McMoRan. Freeport Sulphur's credit facility prohibits any distributions from Freeport Sulphur to McMoRan or any of its other subsidiaries.
Item 6.
Item 6. Selected Financial Data The following table sets forth our selected audited historical financial and unaudited operating data for each of the five years in the period ended December 31, 2000. We became a publicly traded entity on November 17, 1998, when McMoRan Oil & Gas Co. and Freeport-McMoRan Sulphur Inc. (Freeport Sulphur) (see Note 1 of Notes to Financial Statements) combined their operations. This transaction was accounted for as a purchase, with McMoRan Oil & Gas as the acquiring entity. Accordingly, the information presented below for periods prior to November 17, 1998 reflects only the historical financial and operating data attributable to McMoRan Oil & Gas. Financial and operating data relating to the assets acquired from Freeport Sulphur are included on and after November 17, 1998. We currently intend to cease active participation in the sulphur business as more fully discussed in "Decision to Exit Sulphur Operations" below and Note 3. The information shown in the table below may not be indicative of our future results. You should read the information below together with Items 7. and 7A. "Management's Discussion and Analysis of Financial Condition and Results of Operations and Disclosures About Market Risks" and Item 8.
Item 8. Financial Statements and Supplementary Data
REPORT OF MANAGEMENT
McMoRan Exploration Co. (McMoRan) is responsible for the preparation of the financial statements and all other information contained in this Annual Report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts that are based on management's informed judgments and estimates.
McMoRan maintains a system of internal accounting controls designed to provide reasonable assurance at reasonable costs that assets are safeguarded against loss or unauthorized use, that transactions are executed in accordance with management's authorization and that transactions are recorded and summarized properly. The system is tested and evaluated on a regular basis by McMoRan's internal auditors, PricewaterhouseCoopers LLP. In accordance with auditing standards generally accepted in the United States, McMoRan's independent public accountants, Arthur Andersen LLP, have developed an overall understanding of our accounting and financial controls and have conducted other tests as they consider necessary to support their opinion on the financial statements.
The Board of Directors, through its Audit Committee composed solely of independent, non-employee directors, is responsible for overseeing the integrity and reliability of McMoRan's accounting and financial reporting practices and the effectiveness of its system of internal controls. Arthur Andersen LLP and PricewaterhouseCoopers LLP meet regularly with, and have access to, this committee, with and without management present, to discuss the results of their audit work.
James R. Moffett Richard C. Adkerson Nancy D. Parmelee Co-Chairman of the Board Co-Chairman of the Board, Senior Vice President, President Chief Financial Officer and Chief Executive Officer and Secretary
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF McMoRan EXPLORATION CO.:
We have audited the accompanying balance sheets of McMoRan Exploration Co. (a Delaware Corporation) as of December 31, 2000 and 1999 and the related statements of operations, cash flow and changes in stockholders' equity for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McMoRan Exploration Co. as of December 31, 2000 and 1999 and the results of its operations and its cash flow for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP New Orleans, Louisiana March 16, 2001
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes, which include information in Notes 2, 3, 7, 8 and 10 regarding noncash transactions, are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
McMoRan EXPLORATION CO. NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION Background. McMoRan Exploration Co. (McMoRan), a Delaware corporation, became a publicly traded entity on November 17, 1998 when McMoRan Oil & Gas Co. and Freeport-McMoRan Sulphur Inc. (Freeport Sulphur) combined their respective operations (the Merger). In the Merger, Freeport Sulphur's shareholders received 0.625 McMoRan common shares for each Freeport Sulphur outstanding common share or a total of 5.5 million McMoRan shares, while McMoRan Oil & Gas' shareholders received 0.20 McMoRan common shares for each McMoRan Oil & Gas outstanding common share, or a total of 8.6 million McMoRan common shares.
Basis of Presentation. The Merger is reflected in the accompanying financial statements using the purchase method of accounting, with McMoRan Oil & Gas as the acquiring entity. Accordingly, these financial statements reflect historical assets, liabilities, revenues and expenses attributable to McMoRan Oil & Gas as the predecessor of McMoRan and all subsequent references to McMoRan for the period prior to the Merger refer to the oil and gas operations previously conducted by McMoRan Oil & Gas. Operating results of the acquired assets are included on and after November 17, 1998. McMoRan's earnings per share, weighted average shares outstanding and certain stock option information have been restated to reflect the effective reverse stock split of McMoRan Oil & Gas' shares resulting from the Merger. The assets acquired and liabilities assumed from Freeport Sulphur were recorded at estimated fair values based on cash flow models and independent appraisals. Effective June 30, 2000, McMoRan announced its intention to exit the sulphur business and pursue a sale of its recovered sulphur business assets. On February 26, 2001, McMoRan entered into a letter of intent to form a joint venture to own and operate its assets associated with the recovered sulphur business (Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation. Investments in joint ventures and partnerships in which McMoRan owns an undivided interest in the underlying assets are reflected in the accompanying financial statements using the proportionate consolidation method.
Reclassifications. Certain prior year amounts have been reclassified to conform to the year 2000 presentation.
Use of Estimates. The preparation of McMoRan's financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in these financial statements and the accompanying notes. The more significant estimates include useful lives for depreciation and amortization, valuation allowances for deferred tax assets, reclamation and environmental obligations, the carrying value of assets held for sale or disposal, postretirement and other employee benefits, and estimates of proved oil and gas reserves and related future cash flows. Actual results could differ from those estimates.
Cash and Cash Equivalents. Highly liquid investments purchased with a maturity of three months or less are considered cash equivalents (excluding restricted cash, see Note 10).
Inventories. Inventories are stated at the lower of average cost or market.
Property, Plant and Equipment. Oil and Gas. McMoRan follows the successful efforts method of accounting for its oil and gas exploration and development activities. Geological and geophysical costs and costs of retaining unproved properties are charged to expense as incurred and are included as a reduction of operating cash flow in the accompanying statements of cash flow. Costs of exploratory wells are capitalized pending determination of whether they have discovered proved reserves. If proved reserves are not discovered the related drilling costs are expensed. Acquisition costs of leases and development activities are also capitalized. Other exploration costs are charged to expense as incurred. Depreciation and amortization are determined on a field-by-field basis using the unit-of-production method. Gains or losses are included in earnings when properties are sold.
Sulphur. McMoRan's sulphur property, plant and equipment are carried at the lower of cost or estimated fair value of the assets. Effective June 30, 2000, the asset carrying values of McMoRan's Main Pass sulphur mine and certain related facilities were written off to reflect McMoRan's decision to cease sulphur mine production. Certain other sulphur mining-related assets were reduced to their fair values and are currently being held for sale (Note 3). McMoRan's sulphur transportation logistic and marketing assets are depreciated on a straight line basis over an estimated 30 years for terminals and 5 to 15 years for machinery, equipment and certain transportation assets.
Other. Other property, plant and equipment are carried at cost less salvage value and are depreciated on a straight-line basis over their estimated remaining useful life.
Costs for unproved oil and gas properties are assessed periodically, and a loss is recognized if the properties are deemed impaired. When events or circumstances indicate that proved oil and gas property carrying amounts may not be recoverable from estimated future cash flows from the property, a reduction of the carrying amount to fair value is required. Measurement of the impairment loss is based on the estimated fair value of the asset. Generally, McMoRan estimates fair value using valuation techniques such as expected future cash flows. In the fourth quarter of 2000, because of a reduction of West Cameron Block 616's estimated oil and gas reserves, the net book value of this field exceeded the related estimated future undiscounted cash flows. Accordingly, a $14.0 million charge to depreciation and amortization expense was recognized that reduced this property's net book value to its estimated fair value. Fair value was estimated using future undiscounted cash flow from this field, adjusted to present value using an interest rate considered appropriate for this asset.
Financial Instruments and Contracts. Based on its assessment of market conditions, McMoRan may enter into financial contracts to manage certain risks resulting from fluctuations in oil and natural gas prices. Costs or premiums and gains or losses on contracts meeting deferral criteria are recognized with the hedged transactions. Also, gains or losses are recognized if the hedged transaction is no longer expected to occur or if deferral criteria are not met. McMoRan monitors its credit risk on an ongoing basis and considers this risk to be minimal.
McMoRan has oil forward sales contracts related to its Main Pass oil production. Gains or losses on these contracts are recognized with the hedged transaction. McMoRan settled contracts on 0.3 million barrels of oil at a cost of $2.8 million during 2000 and 0.1 million barrels at a cost of $0.2 million during 1999. As of December 31, 2000, McMoRan had contracts to sell 0.1 million barrels of oil at an average price of $19.00 per barrel through December 2001. These contracts had a fair value of approximately $(0.6) million as of December 31, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133, as subsequently amended, is effective for fiscal years beginning after June 15, 2000 and establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
McMoRan adopted SFAS 133 effective January 1, 2001. Under SFAS 133, McMoRan has designated its Main Pass oil forward sales contracts as cash flow hedges, whereby changes in their fair value will be recognized in other comprehensive income (a component of stockholders' equity) until settled, when resulting gains and losses will be recorded in earnings. Upon adoption of SFAS 133, McMoRan will record the fair value of the oil forward contracts as a liability with a corresponding amount reflected in other comprehensive income. The hedge ineffectiveness associated with these contracts, which is required to be charged to earnings under SFAS 133, is immaterial.
Environmental Remediation and Compliance. McMoRan incurs costs for environmental programs and projects. Expenditures pertaining to future revenues from operations are capitalized. Expenditures resulting from the remediation of conditions caused by past operations that do not contribute to future revenue generation are charged to expense. Liabilities are recognized for remedial activities when the efforts are probable and the costs can be reasonably estimated.
McMoRan's estimated future expenditures to restore its oil and gas properties and related facilities to a condition that it believes complies with environmental and other regulations are accrued over the life of the properties. These future expenditures are estimated based on current costs, laws and regulations. At December 31, 2000, McMoRan had $16.0 million in accrued oil and gas reclamation costs.
Effective June 30, 2000, McMoRan initiated a plan to exit active participation in the sulphur business and specifically to cease production from its sulphur mining operations (Note 3). Accordingly, McMoRan recorded charges totaling $40.7 million during 2000 to accrue all remaining estimated reclamation costs related to its sulphur mines and related facilities. McMoRan has $69.2 million in accrued sulphur reclamation costs at December 31, 2000, including $15.5 million in current liabilities. McMoRan's future sulphur reclamation expenditures are partially offset by a $7.3 million receivable, included in "Other assets," representing a third party reimbursement commitment relating to McMoRan's Caminada sulphur mine.
Reclamation cost estimates are by their nature imprecise and can be expected to be revised over time because of a number of factors, including changes in reclamation plans, cost estimates, governmental regulations, technology and inflation.
Share Purchase Program. In 1999, McMoRan's Board of Directors authorized an open market share purchase program for up to two million shares of its common stock. In March 2000, the Board authorized the purchase of up to an additional 500,000 shares of its common stock, increasing the total shares authorized under the share purchase program to 2.5 million. As of December 31, 2000, McMoRan had purchased 2,244,635 shares of its common stock at an average cost of $18.56 per share.
Earnings Per Share. Basic net income (loss) per share was calculated by dividing net income (loss) applicable to common stock by the weighted-average number of common shares outstanding during the years presented. Diluted net income (loss) per share was calculated by dividing net income by the weighted-average number of common shares outstanding during the years presented plus the net effect of outstanding dilutive options, which represented approximately 266,000 shares of common stock during 1999. Stock options representing approximately 96,000 shares of common stock in 2000 and 164,000 shares of common stock in 1998 were considered anti-dilutive because of these years' net losses and were excluded from the diluted net loss per share calculation.
Outstanding stock options to purchase approximately 1,274,000 shares of common stock at an average exercise price of $19.74 per share in 2000, 472,000 shares of common stock at an average exercise price of $22.15 per share in 1999, and 813,000 shares of common stock at an average exercise price of $19.31 per share in 1998, were excluded from the diluted net income (loss) per share calculation because their exercise prices were greater than the average market price of McMoRan's common shares for the years presented.
3. SULPHUR OPERATIONS As a result of the Merger, McMoRan acquired Freeport Sulphur, a business engaged in the purchasing, transporting, terminaling, processing, and marketing of recovered sulphur and the production of related oil reserves. Prior to August 31, 2000, Freeport Sulphur was also engaged in the mining of sulphur. The purchase price ($109.1 million) was based on the market value of Freeport Sulphur's stock at the time the Merger was announced plus related transaction costs.
In July 2000, McMoRan undertook a plan to exit its sulphur mining operations and to sell its remaining sulphur transportation, logistics and marketing assets. Main Pass sulphur mine production ceased on August 31, 2000. McMoRan has retained the services of Chase Securities Inc. to assist it in the marketing of its sulphur transportation and marketing assets to third parties (see below).
On February 26, 2001, McMoRan announced it had entered into a letter of intent with Savage Industries Inc. to form a joint venture, which would own and operate McMoRan's recovered sulphur business. The intended terms are such that McMoRan and Savage will each own a 50 percent interest in the joint venture. McMoRan intends to contribute the assets currently used in its sulphur transportation, marketing and terminaling business to the new joint venture. The joint venture would operate these assets and would continue to serve both producers and consumers of sulphur. It is expected that the joint venture would enter into new long-term service agreements with major U.S. oil and gas refiners and processors to provide off-take security and market access for their sulphur by-product.
The terms of the letter of intent contemplate Savage contributing cash to the joint venture and becoming its operator. The joint venture would use the existing assets and commercial contracts of McMoRan's transportation and marketing business, as well as new contracts to be completed with sulphur producers to secure financing. It is expected that the joint venture would distribute at least $55 million in cash to McMoRan at closing of the contemplated transaction. McMoRan will use the proceeds from the transaction to repay borrowings under its sulphur credit facility, which had $51.0 million outstanding as of February 28, 2001. The transaction completion is subject to securing joint venture financing arrangements, completion of definitive agreements, board approvals and certain other approvals. If the joint venture is ultimately formed, McMoRan's transportation, logistics and marketing assets will be contributed to the joint venture and thus be eliminated from McMoRan's consolidated balance sheet. Upon consummation, McMoRan would account for its interest in the joint venture using the equity method of accounting. The reclamation obligations associated with McMoRan's nonoperating sulphur mining facilities will not be included in the contemplated joint venture transaction and will remain on McMoRan's consolidated balance sheet until the reclamation activities are completed (see Note 2 "Environmental Remediation and Compliance").
As a result of McMoRan's intention to pursue the joint venture with Savage, McMoRan's sulphur operations previously reported as "discontinued operations" during the second and third quarters of 2000 have been restated to reflect the sulphur business as a consolidated component of McMoRan's operations for all periods presented.
Following is a summary of the net book value of McMoRan's sulphur assets (in thousands):
a. Includes assets to be included in the currently contemplated joint venture transaction. The assets include goodwill of $11.4 million and $11.6 million at December 31, 2000 and 1999, respectively. Accumulated amortization of goodwill totaled $652,000 and $451,000 at December 31, 2000 and 1999, respectively. b. Includes certain specialized marine equipment previously used in handling mined sulphur, the Port Sulphur, Louisiana terminal and other miscellaneous assets.
McMoRan recorded noncash charges totaling $86.0 million during 2000 to adjust its sulphur segment assets and liabilities to their fair values. These charges include $20.1 million to write off the remaining book value of the Main Pass sulphur mine; $25.2 million for the writedown of the book value of the mining- related assets, including certain specialized marine equipment used in handling mined sulphur ($19.1 million) and materials and supplies inventory ($6.1 million), to their estimated recoverable values; and $40.7 million for the remaining unaccrued estimated mine reclamation costs. All of the above noncash charges were charged to depreciation expense, except the $6.1 million write off of materials and supplies inventory, which was charged to production and delivery costs.
McMoRan has recorded a $7.5 million employee-related charge associated with its planned exit from active participation in sulphur operations. This accrual includes $4.7 million of employee termination charges and $2.8 million resulting from curtailments of McMoRan's retirement and post-retirement health and welfare pension plans. McMoRan anticipates the funding of these costs will occur in 2001. McMoRan included $5.4 million of the anticipated employee-related separation costs in production and delivery costs and the remaining $2.1 million in general and administrative expenses.
During the fourth quarter of 2000, McMoRan signed a letter of intent for an alternative use of the Main Pass sulphur facility which is intended to generate cash flow to offset and defer a significant portion of the long-term reclamation obligations associated with the facility. This proposed transaction is subject to negotiation of definitive agreements and obtaining appropriate regulatory approvals. Additionally, McMoRan sold its remaining Culberson sulphur mine assets for $3.5 million and its Grand Isle base facility previously used for offshore logistical support of its sulphur operations for $1.2 million, resulting in recognition of gains totaling $4.4 million.
As a result of terminating production at Main Pass, certain sulphur reclamation and mine shutdown costs are expected to be incurred on an accelerated basis. Accordingly, $15.5 million of sulphur reclamation costs are reported as current liabilities at December 31, 2000. During the second half of 2000, McMoRan incurred a total of $16.3 million of sulphur reclamation costs, including $13.7 million for the Main Pass mine and related facilities.
In connection with the decision to exit active participation in its sulphur operations, McMoRan recorded a $34.9 million noncash charge to its deferred tax valuation allowance, which eliminated its net deferred tax asset related primarily to its sulphur transportation, logistics and marketing business.
4. ACQUISITIONS AND EXPLORATION PROGRAM In 1997, McMoRan completed a rights offering, in which it sold approximately 5.7 million shares of its common stock, (as adjusted for the effects of the Merger, see Note 1) and received $92.2 million of net proceeds (Rights Offering). In connection with the Rights Offering, McMoRan, Phosphate Resource Partners Limited Partnership (Phosphate Resource Partners) and an individual investor (see Note 5) formed an aggregate $210 million, multi-year oil and gas exploration program to explore and develop prospects primarily offshore in the Gulf of Mexico and onshore in the Gulf Coast region (the Exploration Program). In November 1999, McMoRan purchased Phosphate Resource Partners' 47 percent interest in the Exploration Program for $31.9 million, net of transaction costs. McMoRan currently owns a 95 percent interest in
the Exploration Program, with the individual investor owning the remaining five percent. At December 31, 2000 an aggregate $207.2 million had been incurred by the Exploration Program, with the remaining $2.8 million planned and committed for expenditure during 2001.
Effective January 1, 2000, McMoRan acquired from Texaco Exploration and Production Inc. (Texaco) the right to explore and earn assignments of operating rights in 89 unexplored oil and gas properties. The properties covered about 391,000 gross acres and are located in water depths ranging from 10 to 2,600 feet in federal and state waters offshore Louisiana and Texas. McMoRan must incur or commit to incur $110 million of exploration expenditures on these properties by June 30, 2003, with minimum spending requirements during the interim (see Note 10).
On January 14, 2000, McMoRan purchased from Shell Offshore Inc. (Shell), a wholly owned subsidiary of Royal Dutch Petroleum Co., Shell's interest in 55 exploration leases for $37.8 million after transaction costs and purchase adjustments. The leases cover approximately 260,000 gross acres and are located in varying water depths of up to a maximum of approximately 2,000 feet in the offshore Louisiana area. McMoRan funded the purchase with borrowings under its bank lines of credit (see Note 9).
The following unaudited selected pro forma information presents the results of operations of McMoRan as if the Merger and the purchase of Phosphate Resource Partners interest in the Exploration Program had occurred on January 1, 1998. These unaudited pro forma results of operations have been prepared for informational purposes only and do not necessarily indicate the results of operations that actually would have occurred had the acquisitions taken place on these dates, or which may result in the future.
5. TRANSACTIONS WITH AFFILIATES Management Services. FM Services Company (FM Services) provides certain management and administrative services to McMoRan including technical, administrative, accounting, financial, tax and other services under a management services agreement. Related amounts charged to McMoRan, which include the actual costs of these services and related overhead, totaled $12.1 million in 2000, $9.9 million in 1999 and $4.3 million in 1998. McMoRan owns 45 percent of FM Services. Management believes the costs for these services do not differ materially from the costs that would have been incurred had the relevant personnel providing the services been employed directly by McMoRan.
Phosphate Resource Partners Limited Partnership. In November 1997, Phosphate Resource Partners purchased approximately 5.5 percent or 770,000 of McMoRan's post Merger total shares for $13.5 million in fulfillment of its commitment to purchase any shares relating to unexercised rights from the Rights Offering (the Stand-By Commitment). In August 1997, Phosphate Resource Partners purchased the ownership interests owned by MCN Energy Group Inc. in the Vermilion Blocks 160 and 410 oil and gas fields ($24.5 million), and assumed the then outstanding debt owed by McMoRan under a previous exploration program ($20.0 million). Upon completion of the Rights Offering, McMoRan reimbursed the $44.5 million previously paid by Phosphate Resource Partners and also paid them a $6.0 million fee for the Stand-by Commitment, for acquiring and holding these assets until completion of the Rights Offering and for agreeing to enter into the Exploration Program. In 1999, as part of McMoRan's open market share purchase program (see Note 2), McMoRan purchased all of the shares owned by Phosphate Resource Partners for $12.8 million or $16.64 per share.
Program Participant. Effective December 15, 1997, Mr. Gerald J. Ford, an individual investor elected to McMoRan's Board of Directors in January 1998, became an individual participant in the Exploration Program (Note 4). Through December 31, 2000, Mr. Ford has paid $7.3 million for his proportionate share of the Exploration Program and related development costs incurred, net of his proportional interest in the proceeds from the sale of Brazos Block A-19 and Vermilion Block 408.
6. PROPERTY, PLANT AND EQUIPMENT, OTHER ASSETS AND OTHER LIABILITIES The components of net property, plant and equipment follow (in thousands):
Capitalized costs associated with exploratory wells in progress at December 31, 2000 were approximately $20.4 million.
In mid-February 2001, after flow testing and evaluating the results of multiple potentially productive zones within the West Delta Block 12 #1 exploratory well, McMoRan concluded the well did not contain commercial quantities of hydrocarbons. The well has been temporarily abandoned and its permanent abandonment is planned. Accordingly, McMoRan expects to charge approximately $12.0 million to exploration expense in the first quarter of 2001 for all drilling and related costs associated with this prospect.
In early March 2001, the Garden Block 272 #1 exploratory well reached a total depth of approximately 22,000 feet and subsequent evaluations of the well indicated that the well did not contain commercial quantities of hydrocarbons. McMoRan expects to record an approximate $17 million charge to exploration expense during the first quarter of 2001 for the well's drilling and related costs.
At December 31, 2000 the Louisiana State Lease 340 #1 well was drilling pursuant to a turnkey contract with a contract depth of approximately 18,500 feet. The well encountered mechanical difficulties prior to reaching contract depth and, after considerable effort to complete the drilling of the well, the turnkey operator terminated the contract. McMoRan incurred no drilling costs since the contract depth was not reached. A second exploratory well is currently in progress at this prospect.
The components of other assets follow (in thousands):
7. EMPLOYEE BENEFITS Stock Options. Prior to the Merger, both McMoRan Oil & Gas and Freeport Sulphur had outstanding nonqualified stock options and McMoRan Oil & Gas had outstanding stock appreciation rights (collectively, stock-based awards) previously granted under certain McMoRan Oil & Gas and Freeport Sulphur benefit plans. Pursuant to the Merger, all
outstanding stock-based awards were cancelled and replaced with McMoRan stock options granted under the McMoRan Adjusted Stock Award Plan (McMoRan Adjusted Plan).
The McMoRan Adjusted Plan issued stock options on the same basis as the McMoRan common shares that were distributed to the former McMoRan Oil & Gas and Freeport Sulphur shareholders upon consummation of the Merger (see Note 1). Accordingly, for each McMoRan Oil & Gas and Freeport Sulphur stock-based award outstanding at the Merger date, McMoRan stock options were granted in amounts and with exercise prices equal to the previous McMoRan Oil & Gas and Freeport Sulphur awards, as adjusted to reflect the Merger. In early 1999, an investor group's beneficial ownership of McMoRan common stock increased to a level that exceeded the 20 percent threshold that triggers acceleration of the vesting periods under the provisions of the McMoRan Adjusted Plan. As a result, all options issued under the McMoRan Adjusted Plan became fully exercisable.
In May 2000, the McMoRan shareholders approved the McMoRan 2000 Stock Incentive Plan (the 2000 Plan). At December 31, 2000, the 2000 Plan is authorized and has available for grant options representing up to 600,000 McMoRan shares. In 1998, the McMoRan Oil & Gas and Freeport Sulphur shareholders approved the McMoRan 1998 stock option plan (the 1998 Plan) in connection with the Merger. The 1998 Plan is authorized to grant options representing up to 775,000 McMoRan common shares. McMoRan also adopted the McMoRan 1998 Stock Option Plan for Non-Employee Directors (the Director Plan), authorizing McMoRan to grant directors options to purchase up to 75,000 McMoRan common shares. Generally, stock options granted are exercisable in 25 percent annual increments beginning one year from the date of grant and will expire 10 years after the date of grant. Options to purchase 25,000 shares under the 1998 Plan and 65,000 shares under the Director Plan were available for new grants as of December 31, 2000.
A summary of stock options outstanding (with prior years' outstanding McMoRan Oil & Gas options adjusted to reflect the effective reverse stock split as a result of the Merger) follows:
Summary information of all stock options outstanding at December 31, 2000 follows:
McMoRan has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock Based Compensation," and continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for McMoRan's stock option grants. Had compensation cost for McMoRan's stock option grants been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS 123, McMoRan's proforma SFAS 123 results would have increased its net loss by $1.9 million to $133.4 million ($9.01 per share) in 2000, reduced its net income by $8.7 million to a net loss of $8.6 million ($0.63 per share) in 1999 and increased its net loss by $3.0 million to $21.1 million ($2.29 per share) in 1998. The proforma 1999 results
include approximately $8.0 million of compensation associated with the accelerated vesting of options granted under the McMoRan Adjusted Plan. For the proforma computations, the fair values of the option grants were estimated on the dates of grant using the Black-Scholes option-pricing model. The weighted average fair value for stock option grants was $11.50 per option in 2000, $10.00 per option in 1999, and $7.89 per option in 1998, as adjusted for the effects of the Merger. The weighted average assumptions used include a risk-free interest rate of 6.7 percent in 2000, 5.6 percent in 1999 and 5.3 percent in 1998, with expected volatility of 35 percent in 2000, 34 percent in 1999 and 47 percent in 1998 and expected lives of 10 years. The proforma effects on net income (loss) are not representative of future years because of the potential changes in the factors used in calculating the Black-Scholes valuation, the timing of option grants and the effect of the accelerated vesting in 1999. No other discounts or restrictions related to vesting or the likelihood of vesting of stock options were applied.
Pension Plans and Other Benefits. Prior to the Merger, McMoRan's defined benefit plan assets and liabilities and related costs were immaterial because of McMoRan's limited number of employees. In connection with the Merger, McMoRan merged its plan with Freeport Sulphur's defined benefit pension plan. During 2000, McMoRan decided to terminated its defined benefit pension plan covering substantially all its employees and replace this plan with a defined contribution plan for its employees, as further discussed below. All participants' account balances in the plan were fully vested on June 30, 2000 and interest credits will continue to accrue under the plan until the assets are finally liquidated. The final distribution will occur once approval is obtained from the Internal Revenue Service and the Pension Benefit Guaranty Corporation, which is expected in 2001. McMoRan also provides certain health care and life insurance benefits (Other Benefits) to retired employees. In connection with early retirement programs implemented during 1999 and 2000, McMoRan increased its benefit obligation by approximately $3.0 million and $1.0 million, respectively, in special termination benefits granted to retiring employees. McMoRan recognized a $1.5 million curtailment loss for its Other Benefits as a result of the substantial reduction in its workforce following its decision to exit active participation in its sulphur operations. McMoRan has the right to modify or terminate these benefits. Information on the McMoRan plans follows (dollars in thousands):
a. As discussed above, McMoRan decided to terminate its defined benefit pension plan, resulting in a $1.3 million curtailment loss, and ceased accruing benefits on June 30, 2000.
The initial health care cost trend rate used for the other benefits was 6.5 percent in 2000, decreasing ratably annually until reaching 4.75 percent in 2004. A one-percentage-point increase or decrease in assumed health care cost trend rates would not have a significant impact on service or interest costs. The components of net periodic benefit cost for McMoRan's plans follow (in thousands):
McMoRan has an employee savings plan under Section 401(k) of the Internal Revenue Code. The plan allows eligible employees to contribute up to 20 percent of their pre-tax compensation, subject to limitations prescribed by the Internal Revenue Code, which was $10,000 for both 1998 and 1999 and $10,500 for 2000. McMoRan matches 100 percent of the first 5 percent of the employees' contribution, with such matching amounts vesting after three years of service. As a result of McMoRan's decision to terminate its defined benefit pension plan effective July 1, 2000, McMoRan fully vested all active Section 401(k) savings plan participants on June 30, 2000. Subsequently, all new plan participants will vest in McMoRan's matching contributions upon three years of service with McMoRan. Additionally, McMoRan established a defined contribution plan for substantially all its employees. Under this plan McMoRan contributes amounts to individual employee accounts totaling either 4 percent or 10 percent of each employee's pay, depending on a combination of each employee's age and years of service with McMoRan. McMoRan charged operations for a total of $0.8 million in 2000 and $0.7 million in 1999 for its cost of the Section 401(k) savings plan and the 2000 cost of the new defined contribution plan. The matching contribution was immaterial in 1998 because of McMoRan's limited number of employees. Additionally, McMoRan has other employee benefit plans, certain of which are related to McMoRan's performance, which costs are recognized currently in general and administrative expense.
8. INCOME TAXES McMoRan accounts for income taxes pursuant to SFAS 109, "Accounting for Income Taxes." In 1998, McMoRan recorded a $35.0 million net deferred tax asset upon the acquisition of Freeport Suphur's assets. As a result of McMoRan's decision to exit active participation in its sulphur business and after evaluating projected results from operations, during 2000 McMoRan concluded that a full valuation allowance was required for its net deferred tax asset resulting in a charge to income tax expense of $34.9 million (Note 3). McMoRan has $139.3 million of net deferred tax assets as of December 31, 2000, resulting from net operating loss carryfowards and other temporary differences related to McMoRan's activities. McMoRan has provided a valuation allowance, which includes approximately $45 million associated with McMoRan's sulphur operations, for the full amount of these net deferred tax assets. The components of McMoRan's net deferred tax asset at December 31, 2000 and 1999 follow (in thousands):
McMoRan recognized no income tax provision or benefit prior to 1999. McMoRan's income tax provision totaled $71,000 in 1999, which included state income taxes of $12,000 and deferred federal income taxes of $59,000.
Reconciliations of the differences between income taxes computed at the federal statutory tax rate and the income taxes recorded follow (dollars in thousands):
9. HALLIBURTON ALLIANCE and LONG-TERM DEBT
In June 2000, McMoRan consummated an agreement with Halliburton Company to form a strategic alliance that combines the skills, technologies and resources of both companies' personnel and technical consultants into an integrated team to manage McMoRan's oil and gas activities. Halliburton will provide products and services to McMoRan at market rates and McMoRan will use Halliburton's products and services on an exclusive basis to the extent practicable.
Halliburton has provided a guarantee that provides up to $50 million of borrowings available to McMoRan Oil & Gas under terms of its amended revolving facility. Under terms of the variable- rate facility, McMoRan has potential credit availability of up to $75 million, including the $50 million currently available under the Halliburton guarantee. The $25 million balance of the commitment is subject to semi-annual borrowing base redeterminations based on traditional present value analysis of McMoRan Oil & Gas' proved reserves. Currently, McMoRan has no availability under this portion of the commitment; however, the $25 million of availability could become available in total or in part upon the bank's evaluation of McMoRan's new discoveries during 2000 and in the future. Any future amounts available under the $25 million portion of the commitment cannot be drawn unless all amounts available under the Halliburton guaranteed facility are fully drawn.
McMoRan pays Halliburton commitment fees based on amounts borrowed and available under its portion of the facility. As security for Halliburton's guarantee, McMoRan has provided a first priority lien on interests in its producing fields, excluding oil production from Main Pass, and in Ship Shoal Block 296, where it announced a discovery during the second quarter of 2000. Halliburton also has the right to elect to participate in McMoRan's future development opportunities by providing a portion of the exploration and development costs of each prospect in which it elects to participate. Amounts paid by Halliburton representing the reimbursement of exploration costs will be used to reduce outstanding borrowings and the commitment under the Halliburton guaranteed portion of the facility. As of December 31, 2000, McMoRan had no borrowings outstanding under this facility and Halliburton has not elected to participate in any McMoRan prospects. This facility will mature by December 31, 2003.
The amount of availability under the Halliburton guaranteed portion of the facility is contingent upon McMoRan's raising additional capital. During 2000, McMoRan raised $75 million of additional capital to satisfy the Halliburton requirements through December 31, 2000. McMoRan met these capital requirements by issuing 3.8 million common shares for $50.2 million in April 2000 and by entering into farm-out agreements for certain of its exploration prospects. These farm-out agreements, which involve the participation of third parties in McMoRan's exploration prospects, will reduce McMoRan's future drilling commitments by at least $25 million. McMoRan is required to raise a total of $125 million of capital by December 2001 ($75 million of which has been satisfied as of December 31, 2000), which requires McMoRan to raise an approximate $50 million of additional capital in 2001. In the event McMoRan fails to raise the cumulative $125 million by December 31, 2001, the $50 million commitment will be reduced by the amount of the shortfall and McMoRan will be required to repay any loans outstanding in excess of the adjusted commitment
amount. McMoRan can meet its obligations with respect to additional capital through the sale of equity securities, program interests in its exploration prospects or the sale of interests in individual exploration prospects.
In addition to the facility discussed above, McMoRan has a variable rate revolving credit facility that is available to Freeport Sulphur. On August 11, 2000, Freeport Sulphur amended its credit facility to provide $64.5 million for use solely in McMoRan's sulphur operations. This amended revolving credit facility is secured by substantially all of the assets of Freeport Sulphur, including its Main Pass oil interests, and will mature on the earlier of April 30, 2001 or the receipt of the net proceeds from the sale of McMoRan's sulphur transportation, logistics and marketing assets. The sulphur debt is classified as a current liability in McMoRan's balance sheet.
10. COMMITMENTS AND CONTINGENCIES Commitments. At December 31, 2000, McMoRan had committed to spend $115 million during 2001 on exploration and development activities. Actual expenditures could be significantly higher during 2001 as McMoRan continues to evaluate exploration opportunities on its large acreage position (Note 4). Effective January 1, 2000, McMoRan entered into an agreement with Texaco that committed it to expend $110 million on exploration by June 30, 2003 (see Note 4). Under the terms of the agreement McMoRan exceeded the requirement to spend a minimum of $10 million by December 31, 2000. As of December 31, 2000, McMoRan is required to commit to spend an additional $33.6 million through June 30, 2001, an additional $30 million through June 30, 2002 and an additional $30 million by June 30, 2003. If McMoRan does not meet this commitment schedule it would be subject to a penalty payment of 25 percent of the remaining unexpended and uncommitted minimum amount for the applicable period.
Additionally, McMoRan has a contract with CLK Company L.L.C., an independently owned company, to provide geological and geophysical services to McMoRan on an exclusive basis. The contract provides for an annual retainer fee of $2.5 million ($0.5 million of the annual fee paid in McMoRan common stock, recorded at fair market value at the time issued), plus certain expenses and a 3 percent overriding royalty interest in prospects accepted by McMoRan. Cost of services provided by CLK totaled $3.1 million in 2000, $2.7 million in 1999 and $2.6 million in 1998.
Long-term Contracts and Operating Leases. McMoRan's minimum annual contractual charges under non-cancelable long-term contracts and operating leases total $138.7 million, with $19.3 million in 2001, $15.9 million in 2002, $15.9 million in 2003, $15.5 million in 2004, $15.0 million in 2005 and $57.2 million thereafter. Substantially all of these operating lease payments are associated with McMoRan's lease of an additional tanker to enhance its sulphur marine transportation services and the leasing of its previously owned sulphur rail cars. As discussed in Note 3, McMoRan intends to contribute its sulphur transportation, logistics and marketing assets to a 50 percent- owned joint venture and it also expects that these leases will be assigned to, and funded by, the newly formed joint venture. As of December 31, 2000, McMoRan's long-term commitments, excluding the commitments expected to be assigned to the joint venture, totaled approximately $0.7 million.
Other Liabilities. Freeport Sulphur has a liability to IMC Global Inc. for a portion of IMC Global's postretirement benefits costs relating to certain retired employees of Freeport Sulphur. At December 31, 2000 the liability was estimated to total $10.5 million, including $1.7 million in current liabilities. Future changes to this estimate, because of changes in assumptions or actual results varying from projected results, will be recorded in earnings.
During 2000, Freeport Sulphur negotiated a termination of a sulphur-related obligation owed to Devon Energy Inc., the successor to Pennzoil Company. Freeport Sulphur had assumed this obligation in the 1995 purchase of Pennzoil's sulphur division. Under terms of the sales agreement, Freeport Sulphur was required to make quarterly payments to Pennzoil based on the average market price of sulphur for the given quarter. The payments were scheduled to terminate in 2015. In the third quarter of 2000, this obligation was terminated. Freeport Sulphur paid $6.0 million to Devon Energy and placed $3.5 million in an escrow account to fund certain environmental liabilities, associated with Pennzoil's previous sulphur operations, which Freeport Sulphur assumed. The restricted escrowed funds, which approximate McMoRan's estimate of the assumed environmental liabilities, is classified as a long-term asset and recorded in "Other assets" in the balance sheet at December 31, 2000.
Litigation. Freeport Sulphur's sulphur supply agreement with IMC- Agrico Company, now known as IMC Phosphate Company (IMC), requires good faith renegotiation of the pricing provisions if a party can establish that fundamental changes in IMC's operations or the sulphur and sulphur transportation markets invalidate certain assumptions and result in the performance by that party becoming "commercially impracticable" or "grossly inequitable." In the fourth quarter of 1998, IMC attempted to invoke this contract provision in an effort to renegotiate the pricing terms of the agreement. After careful review of the agreement, IMC's operations and the referenced markets, Freeport Sulphur determined that
there is no basis for renegotiation of the pricing provisions of the agreement. After discussions failed to resolve this dispute, Freeport Sulphur filed suit against IMC seeking a judicial declaration that no basis exists under the agreement for a renegotiation of its pricing terms. IMC has alleged that Freeport Sulphur's announced suspension of sulphur production at Main Pass and Freeport Sulphur's proposed sale of its sulphur transportation assets constitute a statement of intent to breach Freeport Sulphur's obligations under the agreement. Freeport Sulphur intends to pursue vigorously its rights under the agreement.
IMC asserted that Freeport Sulphur cannot assign the sulphur supply contract without IMC's consent on the basis that a sale of Freeport Sulphur's transportation and marketing assets would not constitute a sale of substantially all of Freeport Sulphur's assets, a condition IMC asserts is necessary for an assignment without its consent, since the Main Pass facilities would not be included in the sale. In December 2000, IMC filed a motion for summary judgment on this issue. Freeport Sulphur believes that a sale of the transportation and marketing assets would constitute substantially all of Freeport Sulphur's assets because the reclamation obligations associated with Main Pass result in these facilities having a negative value and the discontinuation of sulphur production at Main Pass did not breach the sulphur supply agreement. Freeport Sulphur and its legal advisors believe IMC's claims are without merit.
Environmental. McMoRan has made, and will continue to make, expenditures for the protection of the environment. McMoRan is subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and regulations applicable to McMoRan's operations could require substantial capital expenditures or could adversely affect its operations in other ways that cannot be predicted at this time.
12. BUSINESS SEGMENTS McMoRan had only one operating segment until the Merger, when it acquired sulphur assets from Freeport Sulphur. McMoRan's oil and gas are produced offshore in the Gulf of Mexico. McMoRan's sulphur business segment includes the purchasing, transporting, terminaling processing, and marketing of recovered sulphur, utilizing its extensive logistics network of sulphur terminaling and transportation assets in the Gulf Coast region. Additionally, Frasch sulphur was produced at the Main Pass mine until August 31, 2000 and at the Culberson mine in West Texas, until June 30, 1999.
Oil from the Main Pass facility, which approximated 40 percent of McMoRan's oil and gas revenue during 2000, has been sold exclusively to Amoco Production Company since the Merger date under a sales contract which has been extended to June 30, 2001. McMoRan's remaining oil and gas production is sold to various U.S. purchasers, including one gas purchaser comprising at least 40 percent of its total revenue during each of the three years ending December 31, 2000. All of McMoRan's customers are currently located in the United States.
A significant portion of the sulphur produced (prior to closing of its sulphur mines) or purchased by Freeport Sulphur is sold to IMC, a chemical fertilizer producer jointly owned by IMC Global and Phosphate Resource Partners, under a long-term supply contract that extends for as long as IMC has a requirement for sulphur. Sales to IMC totaled 51.5 percent of McMoRan's total revenues and 73.1 percent of its sulphur sales during 2000, 55.9 percent of its total revenues and 72.6 percent of its sulphur sales during 1999 and 35.9 percent of its total revenues and 68.4 percent of its sulphur sales for the 1998 period after the Merger.
(a) Includes oil and gas exploration and development costs incurred. Amounts do not include geological and geophysical and other nondrilling exploration costs totaling $24.8 million in 2000, $4.8 million in 1999 and $5.4 million in 1998. (b) Represents assets held by the parent company, the most significant of which include McMoRan's deferred tax asset and certain prepaid pension benefits.
13. SUPPLEMENTARY OIL AND GAS INFORMATION McMoRan's oil and gas exploration, development and production activities are conducted in the offshore Gulf of Mexico and onshore Gulf Coast areas of the United States. Supplementary information presented below is prepared in accordance with requirements prescribed by SFAS 69 " Disclosures about Oil and Gas Producing Activities."
Oil and Gas Capitalized Costs.
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities.
Proved Oil and Gas Reserves (Unaudited). Proved oil and gas reserves at December 31, 2000 have been estimated by independent petroleum engineers in accordance with guidelines established by the Securities and Exchange Commission (SEC), which require such estimates to be based upon existing economic and operating conditions. All estimates of oil and gas reserves are inherently imprecise and subject to change as new technical information about the properties is obtained. Additionally, SEC regulations require the use of certain restrictive definitions based on a concept of "reasonable certainty" in the determination of proved oil and gas reserves and related cash flows. A substantial portion of McMoRan's proved reserves as of December 31, 2000 are represented by new discoveries. The estimates of proved reserves using the SEC definitions results in limited proved reserves assigned to new discoveries which have not been delineated by drilling or placed on production. Consequently, management does not consider these estimates to be reflective of the ultimate recoverable volumes attributable to McMoRan's properties, and cautions against the simplistic use of the reserve quantity and "standardized measure" information shown below. Substantially all of McMoRan's proved reserves, including the 3,668,000 barrels of oil acquired at Main Pass on November 17, 1998, are located offshore in the Gulf of Mexico. Oil, including condensate and plant products, is stated in thousands of barrels and natural gas is in millions of cubic feet.
Standardized Measure of Discounted Future Net Cash Flows From Proved Oil and Gas Reserves (Unaudited). McMoRan's standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves were computed using reserve valuations based on regulations prescribed by the SEC. These regulations provide for the use of year-end oil and gas prices in the projection of future net cash flows. Future income taxes were determined using applicable tax rates and future tax deductions, discounted to present value on a year-by-year basis.
Changes in Standardized Measure of Discounted Future Net Cash Flows From Proved Oil and Gas Reserves (Unaudited).
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
a. Includes charges totaling $78.1 million as a result of McMoRan's decision to exit its sulphur mining operations. b. Reflects a $34.9 million income tax provision charge (see Notes 3 and 8) associated with McMoRan's decision to exit active participation in the sulphur business. c. Includes a $43.2 million gain on the sale of McMoRan's interests in Brazos Block A-19 ($40.1 million) and Vermilion Block 408 ($3.1 million). d. Includes a $23.3 million gain from the settlement of McMoRan's business interruption insurance claim for Brazos Block A-19.
During the second and third quarters of 2000, McMoRan presented its sulphur segment as a discontinued operation. As a result of McMoRan's announced intention to contribute its sulphur transportation, logistics and marketing assets to form a joint venture (Note 3), McMoRan has restated its interim financial information to include the sulphur segment in its consolidated results. The following table presents the reported results of operations filed with the SEC during the periods presented, which disclosed the sulphur segment as a discontinued operation.