YPF S.A. — Interim / Quarterly Report 2004

Nov 17, 2004

YPF Holdings, Inc. and Subsidiaries (A Wholly Owned Subsidiary of YPF S.A.) Consolidated Financial Statements Six-Month Period Ended June 30, 2004, and Independent Accountants’ Report

YPF HOLDINGS, INC. AND SUBSIDIARIES

(A Wholly Owned Subsidiary of YPF S.A.)

TABLE OF CONTENTS

Page

INDEPENDENT ACCOUNTANTS’ REPORT 1

CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE-MONTH
AND SIX-MONTH PERIODS ENDED JUNE 30, 2004 (UNAUDITED):

Consolidated Balance Sheet 2-3

Consolidated Statements of Operations 4

Consolidated Statement of Cash Flows 5

Notes to Consolidated Financial Statements 6-17

INDEPENDENT ACCOUNTANTS’ REPORT

Board of Directors
YPF Holdings, Inc. and Subsidiaries

We have reviewed the accompanying consolidated balance sheet of YPF Holdings, Inc. and Subsidiaries (the “Company”), a wholly owned subsidiary of YPF S.A., as of June 30, 2004, and the related consolidated statements of operations for the three-month and six-month periods then ended, and cash flows for the six-month period then ended. These financial statements are the responsibility of the Company’s management.

Except as discussed in the following paragraph, we conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

We were unable to obtain reviewed financial statements supporting the Company’s investment in Global Companies LLC and Affiliates (“Global”), stated at $30,459,000 at June 30, 2004, and the Company’s equity in the earnings of that affiliate of $586,000 and $6,465,000 which is included in net loss for the three-month and six-month periods then ended, respectively, as described in Note 5 to the financial statements; nor were we able to satisfy ourselves as to the carrying value of the investment in Global or the equity in its earnings by other review procedures.

Based on our review, except for the effects on the consolidated financial statements of the Company as of June 30, 2004 of the adjustments, if any, as might have been determined to be necessary had we been able to obtain sufficient evidence regarding the investment in, and equity in the earnings of, Global, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP
Houston, Texas
August 13, 2004

YPF HOLDINGS, INC. AND SUBSIDIARIES

(A Wholly Owned Subsidiary of YPF S.A.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIX-MONTH PERIOD ENDED JUNE 30, 2004 (UNAUDITED)

1. ORGANIZATION

YPF Holdings, Inc. (“Holdings” or the “Company”), was incorporated in Delaware, U.S.A., on July 31, 1996, and holds investments in certain subsidiaries. The Company is engaged in oil and gas exploration activities in the Gulf of Mexico.

YPF International Ltd. owned 100% of the Company’s shares. On December 1, 2001, 100% of the shares of the Company were sold by YPF International Ltd. to YPF S.A. (“YPF”). YPF S.A. is an approximately 99% owned subsidiary of Repsol YPF.

The consolidated financial statements as of and for the three–month and six-month periods ended June 30, 2004 include the following wholly owned subsidiaries (collectively referred to hereafter as “Subsidiaries”) Tierra Solutions Inc. (“Tierra”), Maxus Energy Corporation (“Maxus”), RYTTSA USA INC.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The consolidated financial statements of the Company include the financial statements of the Company and its subsidiaries. The Company accounts for its 51% ownership interest in Global Companies, LLC on the equity method (see Note 5). All significant intercompany transactions have been eliminated.

Interim Financial Statements—The financial statements as of and for the three–month and six-month periods ended June 30, 2004 have been prepared without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. The interim financial statements as of and for the three-month and six-month periods ended June 30, 2004 should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2003.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from these estimates.

Cash and Cash Equivalents—Short-term, highly liquid investments that have an original maturity of three months or less and deposits in money market mutual funds that are readily convertible into cash are considered cash equivalents.

Fair Value of Financial Instruments—Financial instruments are composed of accounts receivable, notes receivable, accounts payable and notes payable. The carrying value of such financial instruments is equal to their fair value.

Oil and Gas Producing Activities—The Company follows the “successful efforts” method of accounting for its oil and gas exploration and production operations. Accordingly, exploratory costs, excluding the costs of exploratory wells, are charged to expense as incurred. Costs of drilling exploratory wells, including stratigraphic test wells, have been capitalized pending determination as to whether the wells have found proved reserves, which justify commercial development. During the three-month period ended June 30, 2004, the Company recognized dry well costs of approximately $5.9 million.

The capitalized costs related to producing activities, including tangible and intangible costs, have been depreciated on the unit-of-production basis by applying the ratio of produced oil and gas to estimated recoverable proved oil and gas reserves.

The Company reviews its proved oil and gas properties for impairment when changes in circumstances indicate that the carrying amount of such properties may not be recoverable.

The capitalized costs related to acquisitions of properties with unproved reserves are reviewed periodically by management to insure the carrying value is recoverable. If necessary a valuation allowance is provided, by a charge against earnings, to reflect the impairment of unproved acreage.

During the third quarter of 2003, the Emerging Issues Task Force (“EITF”) at the request of the Securities and Exchange Commission undertook an analysis to determine if oil and gas mineral rights acquired should be classified as an intangible asset pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. However, the SEC is not requiring all oil and gas producing companies to apply this classification or the disclosure requirements of intangible assets. Currently, the Company classifies the cost of oil and gas mineral rights as unevaluated properties and believes that this is consistent with oil and gas accounting and industry practice. If the EITF determines that the reclassification is required, the Company would reclassify these costs from unevaluated properties to intangible assets on the balance sheet. There would be no effect on the statements of operations or cash flows.

Although the EITF has not issued formal guidance to oil and gas companies, at the March 2004 meeting, the EITF reached a consensus that mineral rights for mining companies should be accounted for as tangible assets. However, the effective date of that consensus is pending until the resolution of a perceived inconsistency between the characterization of mineral rights as tangible assets in this consensus and the characterization of mineral rights as intangible assets in SFAS 141 and SFAS 142. In order to resolve this inconsistency, FASB is in the process of finalizing a FASB Staff Position (“SFAS 142-b”) that will amend SFAS 141 and SFAS 142. The consensus will be effective when SFAS 142-b has been finalized.

Other Property, Plant and Equipment—The Company’s other property, plant and equipment consisting of software, furniture, fixtures and installations has been depreciated using the straight-line method, with depreciation rates based on the estimated useful life of each class of property. Normal maintenance and repairs to all other fixed assets have been charged to expense as incurred.

Equity Investment in Affiliate—The Company holds an investment in Global Companies LLC and certain affiliates (“Global”) (see Note 5). Since the Company does not exercise independent control over the entity, the equity method of accounting is used to account for this investment. Under the equity method, the Company recognizes its proportionate share of the net income of Global currently, rather than when realized through dividends (see Note 5). The Company allocated goodwill for this investment, which represents the excess of the acquisition cost of the investment in Global over book value. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (“SFAS No.142”) requires that goodwill no longer be amortized over an estimated useful life. Instead, goodwill amounts are subject to a fair-value-based annual impairment assessment. The Company did not have any impairment to recognize in the three-month and six-month periods ended June 30, 2004.

The standard also requires certain identifiable intangible assets to be recognized separately and amortized as appropriate upon reassessment. No such intangibles were identified by the Company at transition.

Restricted Cash—The restricted cash balance represents cash used to pay workers compensation claims for one of the Company’s subsidiaries.

Income Taxes—Income taxes are recognized for (a) the amount of taxes payable or refundable for the current year, and (b) deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred tax assets and liabilities are measured based upon enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Revenue Recognition—Net revenues are recorded based on the Company’s share of overriding royalties recorded on the accrual basis.

New Accounting Pronouncements—In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation Number 46-R (“FIN 46-R”), Consolidation of Variable Interest Entities. FIN 46-R, which modifies certain provisions and effective dates of FIN 46, sets forth criteria to be used in determining whether an investment in a variable interest entity should be consolidated. These provisions are based on the general premise that if a company controls another entity through interests other than voting interests, that company should consolidate that controlled entity. The Company has evaluated whether the provisions of FIN 46-R are applicable to it’s investments, certain of which are currently accounted for by the equity method, as well as other arrangements, which may meet the criteria of the interpretation, and believe that there are currently no material arrangements that meet the definition of a variable interest entity which would require consolidation.

In January 2004, the FASB issued FASB Staff Position No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003, which is effective for interim or annual financial statements for fiscal years ending after December 7, 2003, and permits a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). In May 2004, the FASB issued FASB Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, (“FAS 106-2”) which supercedes FAS 106-1. FAS 106-2 provides guidance on the accounting for the effects of the Act for employers that sponsor postretirement health care plans that provide prescription drug benefits, and requires those employers to provide certain disclosures regarding the effect of the federal subsidy provided under the Act. FAS 106-2 will apply to us for all interim and annual periods commencing on or after July 1, 2004. We believe that the prescription drug benefits provided under our postretirement plan are actuarially equivalent to the Medicare benefit available to participants under our plan, a prerequisite for qualifying for the subsidy, but we do not believe that the subsidy provided under the Act will have a material impact on our consolidated financial statements.

1. RELATED PARTY TRANSACTIONS

The Company performs geological and geophysical exploration activities for affiliated companies. As of June 30, 2004, the Company had accounts receivable from those affiliated companies of $3.7 million. The Company provides payroll and financial services for affiliated companies. As of June 30, 2004, the Company had accounts receivable from those affiliated companies of $7.0 million, net of an allowance for uncollectible accounts of $2.4 million.

At June 30, 2004, the Company had $1.8 million of management fees payable related to the 2001 fiscal year.

As of June 30, 2004, the Company has two promissory notes receivable from Repsol International Finance with B.V. of $78.0 million and $8.2 million, respectively, with maturity on December 31, 2004. The notes accrue interest at a variable interest rate. The average interest rate for the six-month period ended June 30, 2004 was .98%.

1. NOTES PAYABLE

Notes payable consists of the following at June 30, 2004 (amounts in thousands):

At June 30, 2004, the Company had approximately $84,000 of accrued interest payable.

1. EQUITY INVESTMENT IN AFFILIATE

The Company’s 51% investment in Global is reflected in the accompanying financial statements using the equity method of accounting. The Company does not exercise independent control of the entity. Joint control is held with other third parties. The Company has allocated goodwill of $10.5 million, net of accumulated amortization of $4.5 million as of June 30, 2004 to the investment.

The summarized financial information for 100% of Global as of May 31, 2004 for assets and liabilities and for the three-month period ended March 31, 2004 for net income is presented below. The net income for the three-month six-month periods ended June 30, 2004 reflects two months of actual revenues and expenses and one month of estimates. Amounts are stated in thousands:

On July 2, 2004, the Company sold its investment in Global to the investors that owned the remaining 49% of Global for $43,000,000 which will result in a gain of approximately $13 million in the third quarter of 2004.

1. EMPLOYEE BENEFIT PLANS

Pensions—The Company has a number of trustee noncontributory pension plans covering substantially all current and former full-time employees. The Company’s funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements under governmental regulations, plus such additional amounts as management may determine to be appropriate. The benefits related to the plans are based on years of service and compensation earned during years of employment. The Company also has a noncontributory supplemental retirement plan for executive officers and selected key employees. Key information of these plans as of the date of the last actuarial report is as follows (in thousands):

During 2004, the Company contributed a lump sum payment of $2.5 million for the estimated settlement of certain pension liabilities. As the settlement loss is an estimate, the actual settlement loss for the year will be reflected in the year end financial statements.

Other Postretirement and Postemployment Benefits—The Company provides certain health care and life insurance benefits for eligible retired employees and certain insurance and other postemployment benefits for eligible individuals whose employment is terminated by the Company prior to their normal retirement. The Company accrues the estimated cost of retiree benefit payments, other than pensions, during employees’ active service periods. Employees become eligible for these benefits if they meet minimum age and service requirements. The Company accounts for benefits provided after employment but before retirement by accruing the estimated cost of postemployment benefits when the minimum service period is met, payment of the benefit is probable and the amount of the benefit can be reasonably estimated. The Company’s policy is to fund other postretirement and postemployment benefits as claims are incurred. Key information of these plans as of the date of the last actuarial report is as follows (in thousands):

1. INCOME TAXES

Deferred income taxes and benefits are provided for differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Significant deferred tax assets and liabilities are related primarily to net operating loss carryforwards, postretirement benefit costs, and litigation and environmental costs. Deferred tax balances as of June 30, 2004 are as follows (in thousands):

A valuation allowance has been provided for the net deferred tax assets because their future realization is not currently deemed more likely than not by management.

At June 30, 2004, the Company had $212.3 million of net operating loss carryforwards, which will expire in 2022.

At June 30, 2004, the Company had alternative minimum tax credits of $20.7 million that carry forward indefinitely and are available to reduce future regular tax liability to the extent they exceed the related tentative minimum tax otherwise due. The Company also has a General Business Credit carryforward of approximately $15.0 million that expires in 2004.

1. COMMITMENTS AND CONTINGENCIES

In May 2004, Midgard Energy Company (“Midgard”, a subsidiary of the Company) received approximately $7.0 million (including the judgment amount, attorneys’ fees and interest) from Natural Gas Clearinghouse (“NGC”) in satisfaction of a judgment in a long-standing lawsuit. The lawsuit involved a breach of contract claim based on NGC’s failure to process natural gas produced in western Oklahoma in the early to mid-1990s. A judgment was entered in Midgard’s favor in the trial court in 2001, and NGC exhausted the appeals process in April 2004. The Company has reflected the settlement as a reduction of general and administrative expenses for the period.

Litigation Liabilities—Amounts have been provided for various contingencies involving the Company. The estimated probable amounts recorded take into consideration the probability of occurrence, based on management’s expectations and on the opinion of legal counsel.

Environmental Liabilities—Environmental liabilities are recorded when environmental assessments and/or remediation are probable and material and such costs to the Company can be reasonably estimated. The Company’s estimate of environmental assessment and/or remediation costs to be incurred are based on either 1) detailed feasibility studies of remediation approach and cost for individual sites or 2) the Company’s estimate of costs to be incurred based on historical experience and publicly available information based on the stage of assessment and/or remediation of each site. As additional information becomes available regarding each site or as environmental remediation standards change, the Company revises its estimate of costs to be incurred in environmental assessment and/or remediation.

The major components of reserves as of June 30, 2004 are as follows (in thousands):

Laws and regulations relating to health and environmental quality in the United States affect nearly all of the operations of the Company. These laws and regulations set various standards regulating certain aspects of health and environmental quality, provide for penalties and other liabilities for the violation of such standards and establish in certain circumstances remedial obligations.

The Company believes that its policies and procedures in the area of pollution control, product safety and occupational health are adequate to prevent unreasonable risk of environmental and other damage, and of resulting financial liability, in connection with its business. Some risk of environmental and other damage is, however, inherent in particular operations of the Company and, as discussed below, Maxus Energy Corporation (“Maxus”) and Tierra Solutions, Inc. (“Tierra”) have certain potential liabilities associated with operations of Maxus’ former chemical subsidiary. The Company cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or enforced. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could in the future require material expenditures by the Company for the installation and operation of systems and equipment for remedial measures and in certain other respects. Also, certain laws allow for recovery of natural resource damages from responsible parties and ordering the implementation of interim remedies to abate an imminent and substantial endangerment to the environment. Potential expenditures for any such actions cannot be reasonably estimated.

In connection with the sale of Maxus’ former chemical subsidiary, Diamond Shamrock Chemicals Company (“Chemicals”), to Occidental Petroleum Corporation (“Occidental”) in 1986, Maxus agreed to indemnify Chemicals and Occidental from and against certain liabilities relating to the business or activities of Chemicals prior to the September 4, 1986 closing date (the “Closing Date”), including certain environmental liabilities relating to certain chemical plants and waste disposal sites used by Chemicals prior to the Closing Date.

In addition, under the agreement pursuant to which Maxus sold Chemicals to Occidental, Maxus is obligated to indemnify Chemicals and Occidental for 50% of certain environmental costs incurred on projects involving remedial activities relating to chemical plant sites or other property used in the conduct of the business of Chemicals as of the Closing Date and for any period of time following the Closing Date which relate to, result from or arise out of conditions, events or circumstances discovered by Chemicals and as to which Chemicals provided written notice prior to September 4, 1996, irrespective of when Chemicals incurs and gives notice of such costs, with Maxus’ aggregate exposure for this cost sharing being limited to $75 million. The total expended by the Company under this cost sharing arrangement was approximately $67.2 million as of June 30, 2004. The remaining portion of this cost sharing arrangement ($7.8 as of June 30, 2004) has been reserved.

Tierra has agreed to assume essentially all of Maxus’ aforesaid indemnity obligations to Occidental in respect of Chemicals.

At June 30, 2004, reserves for the environmental contingencies discussed herein totaled approximately $61.0 million. Management believes it has adequately reserved for all environmental contingencies, which are probable and can be reasonably estimated; however, changes in circumstances could result in changes, including additions, to such reserves in the future.

In the following discussion concerning plant sites and third party sites, references to the Company include, as appropriate and solely for ease of reference, references to Maxus and Tierra. As indicated above, Tierra is also a subsidiary of the Company and has assumed certain of Maxus’ obligations.

Newark, New Jersey. A consent decree, previously agreed upon by the U.S. Environmental Protection Agency (the “EPA”), the New Jersey Department of Environmental Protection and Energy (the “DEP”) and Occidental, as successor to Chemicals, was entered in 1990 by the United States District Court of New Jersey and requires implementation of a remedial action plan at Chemicals’ former Newark, New Jersey agricultural chemicals plant. In 1998, the EPA approved the remedial design. The construction of the approved remedy was substantially completed in early 2002. The facility is in an optimization phase, which includes testing and related operations and is expected to continue through 2004. This work is being supervised and paid for by Tierra pursuant to the above described indemnification obligation to Occidental. The Company has fully reserved the estimated costs required to complete the optimization phase and thereafter to conduct ongoing operation and maintenance of such remedy (at an average cost of approximately $1 million annually) for 9 years from and after January 1, 2004.

Passaic River, New Jersey. Studies have indicated that sediments of the Newark Bay watershed, including the Passaic River adjacent to the former Newark plant, are contaminated with hazardous chemicals from many sources. These studies suggest that the older and more contaminated sediments located adjacent to the former Newark plant generally are buried under more recent sediment deposits. Maxus, on behalf of Occidental, negotiated an agreement with the EPA under which Tierra is conducting further testing and studies to characterize contaminated sediment and biota in a six-mile portion of the Passaic River near the plant site. The stability of the sediments in the entire six-mile portion of the Passaic River study area is also being examined as a part of Tierra’s studies. The Company currently expects the testing and studies to be completed in 2005 and cost approximately $7.1 million after June 30, 2004, which amount has been fully reserved. Maxus and Tierra have been conducting similar studies under their own auspices for several years. In addition, the EPA and other agencies are addressing for the lower Passaic River in a cooperative effort designated as the Lower Passaic River Restoration Initiative (the “PRRI”). Tierra has agreed, along with approximately 30 other entities, to participate in a remedial investigation and feasibility study proposed in connection with the PRRI. Tierra’s estimated share of the cost of this remedial investigation and feasibility study is approximately $320,000 over the next three years, which amount has been fully reserved. As of June 30, 2004, there is an additional $2.0 million reserved in connection with continuing such other studies and related matters related to the Passaic River; however, given the DEP’s Directive No. 1 and an AOC (both discussed below), this reserve amount is currently being reassessed. Until these studies are completed and evaluated, the Company cannot reasonably forecast what remedial program, if any, will be proposed for the Passaic River or the Newark Bay watershed and, therefore, cannot estimate what additional costs, if any, will be required to be incurred. However, it is possible that additional work, including interim remedial measures, may be ordered with respect to the Passaic River.

On September 19, 2003, the DEP issued its Directive No. 1 for Natural Resource Injury Assessment and Interim Compensatory Restoration of Natural Resources for the Lower Passaic River (“Directive No. 1”). Directive No. 1 was served on approximately 66 entities, including Occidental and Maxus and certain of their respective related entities, and seeks to address natural resource damages allegedly resulting from almost 200 years of historic industrial and commercial development of the lower 17 miles of the Passaic River and a part of its watershed. Directive No. 1 asserts that the named entities are jointly and severally liable for the alleged natural resource damages without regard to fault. The DEP has asserted jurisdiction in this matter even though all or part of the lower Passaic River has been designated as a Superfund site and is a subject of the PRRI, a Congressional urban rivers restoration initiative designed to address urban rivers such as the Passaic through a joint federal, state, local and private sector cooperative effort. Directive No. 1 calls for the following actions: interim compensatory restoration, injury identification, injury quantification and value determination. Maxus and Tierra have filed a response to Directive No. 1 on behalf of themselves and Occidental, as successor to Chemicals, which sets forth both how these parties are complying with Directive No. 1 and certain defenses thereto. Settlement discussions between the DEP and the named entities have been held; however, no agreement has been reached or is assured.

On February 13, 2004, the EPA and Occidental entered into an administrative order on consent (the “AOC”) pursuant to which Tierra (on behalf of Occidental) has agreed to conduct testing and studies to characterize contaminated sediment and biota in the Newark Bay. The scope of the work plan is expected to be agreed upon during the third quarter of 2004. Once the work plan for and estimated cost of these studies have been determined, an appropriate reserve will be established.

Hudson County, New Jersey. Until 1972, Chemicals operated a chromite ore processing plant at Kearny, New Jersey (the “Kearny Plant”). According to the DEP, wastes from these ore processing operations were used as fill material at a number of sites in and near Hudson County. The DEP and Occidental, as successor to Chemicals, signed an administrative consent order with the DEP in 1990 for investigation and remediation work at certain chromite ore residue sites in Kearny and Secaucus, New Jersey. Tierra, on behalf of Occidental, is presently performing the work, and Tierra is funding Occidental’s share of the cost of investigation and remediation of these sites. Tierra, on behalf of Occidental, is required to provide financial assurance for performance of the work. Currently, the required financial assurance is provided through a letter of credit. This financial assurance may be reduced with the approval of the DEP following any annual cost review. While Tierra has participated in the cost of studies and is implementing interim remedial actions and conducting remedial investigations, the ultimate cost of remediation is uncertain. Tierra submitted its remedial investigation reports to the DEP in late 2001, and the DEP continues to review these reports. The results of the DEP’s review of these reports could increase the cost of any further remediation that may be required. The Company has reserved its best estimate of the remaining cost to perform the investigations and remedial work as being approximately $26.9 million as of June 30, 2004. Also, the DEP has indicated that it expects Occidental and Maxus to participate with the other chromium manufacturers in the funding of certain remedial activities with respect to a number of so-called “orphan” chrome sites located in Hudson County, New Jersey. Occidental and Maxus have declined participation as to those sites for which there is no evidence of the presence of residue generated by Chemicals. The State of New Jersey has expressed an increased interest in possibly instituting legal action seeking recovery of its expenditures in connection with these sites. The parties have settled the DEP’s claims of natural resource damages related to chromite ore residue both at said orphan sites and other known and unknown sites in Hudson and Essex Counties, New Jersey. While Maxus and Tierra expect settlement discussions to continue on the other aspects of the DEP’s claims, there can be no assurance of a negotiated resolution to these claims. In addition, in June 2004, the DEP expressed a desire that a sediments testing program be conducted on a portion of the Hackensack River near the former Kearny Plant. Tierra, on behalf of Occidental, and other parties are engaged in discussions with the DEP regarding this issue. The Governor of New Jersey issued an Executive Order requiring state agencies to provide specific justification for any state requirements more stringent than federal requirements. In 1998, the DEP proposed new soil action levels for chromium. While the proposal remains incomplete in certain regards, the DEP is currently reviewing the proposed action levels.

Painesville, Ohio. From about 1912 through 1976, Chemicals operated manufacturing facilities in Painesville, Ohio (the “Painesville Works”). The operations over the years involved several discrete but contiguous plant sites over an area of about 1,300 acres. The primary area of concern historically has been Chemicals’ former chromite ore processing plant (the “Chrome Plant”). For many years, the site of the Chrome Plant has been under the administrative control of the EPA pursuant to an administrative consent order under which Chemicals is required to maintain a clay cap over the Chrome Plant site and to conduct certain ground water and surface water monitoring. Certain other areas have previously been clay-capped, and one specific site, which was a waste disposal site from the mid-1960s until the 1970s, has been encapsulated and is being controlled and monitored. In 1995, the Ohio Environmental Protection Agency (the “OEPA”) issued its Director’s Final Findings and Order (the “Director’s Order”) by consent ordering that a remedial investigation and feasibility study (the “RIFS”) be conducted at the former Painesville Works area. Tierra has agreed to participate in the RIFS as required by the Director’s Order. Tierra submitted the remedial investigation report to the OEPA, which report was finalized in 2003. Tierra will submit required feasibility reports separately. As of June 30, 2004, it is estimated that the remaining cost of performing the RIFS will be approximately $0.5 million. In spite of the many remedial, maintenance and monitoring activities performed, the former Painesville Works site has been proposed for listing on the National Priority List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”); however, the EPA has stated that the site will not be listed so long as it is satisfactorily addressed pursuant to the Director’s Order and OEPA’s programs. The Company has reserved its estimated share of the cost to perform the RIFS and an additional $0.6 million (as of June 30, 2004) for operation and maintenance activities at this site. The scope and nature of any further investigation or remediation that may be required cannot be determined at this time; however, as the RIFS progresses, the Company will continuously assess the condition of the Painesville Works site and make any changes, including additions, to its reserve as may be required. Tierra has entered into an agreement with a developer for the possible development and use of all or portions of this site. While the developer is proceeding with its development plans, there can be no assurance that this site will be successfully developed or that any productive use can be made of all or a portion of this site.

Third Party Sites. Chemicals has also been designated as a potentially responsible party (“PRP”) by the EPA under CERCLA with respect to a number of third party sites where hazardous substances from Chemicals’ plant operations allegedly were disposed or have come to be located. Numerous PRPs have been named at substantially all of these sites. At several of these, Chemicals has no known exposure. Although PRPs are typically jointly and severally liable for the cost of investigations, cleanups and other response costs, each has the right of contribution from other PRPs and, as a practical matter, cost sharing by PRPs is usually effected by agreement among them. At a number of these sites, the ultimate response cost and Chemicals’ share of such costs cannot be estimated at this time. At June 30, 2004, the Company has reserved approximately $4.3 million in connection with its estimated share of costs related to these sites.

The Port of Houston Authority (the “Port”) sued a number of parties, including Occidental (as successor to Chemicals) and Maxus, alleging in excess of $25 million in damages to its property, plus the need for remediation at certain of its property, as a result of contamination allegedly emanating from a facility adjoining Greens Bayou formerly owned by Chemicals and at which DDT and certain other chemicals were manufactured. Chemicals conveyed the Greens Bayou facility to a company in which it owned a 50% interest in 1983 and later conveyed its interest in that company to Maxus. Subsequently in 1985, Maxus acquired a full ownership interest in the company and then conveyed all of its interest in such company to a third party. Tierra is handling this matter on behalf of Occidental. While some of the substances of concern may have been manufactured at the Greens Bayou facility prior to these conveyances, Tierra and Maxus believe that any contamination of the Port’s property that may have emanated from the Greens Bayou facility occurred after the conveyance of the company in 1985 or has been remediated. The Port’s claims have been settled for an initial payment of $30 million and certain other undertakings, including an agreement to remediate various properties in the vicinity of the Greens Bayou facility. The estimated cost of such remediation is not expected to exceed a total of $80 million. Pursuant to a cost sharing agreement among the defendants, Tierra (on behalf of Occidental) contributed $6.3 million toward the settlement, subject to the defendants’ agreement to arbitrate their respective obligations in connection with the settlement. The arbitration is expected to begin in the second half of 2004.

Legal Proceedings. In 1998, a subsidiary of Occidental filed a lawsuit in state court in Ohio seeking a declaration of the parties’ rights with respect to obligations for certain costs allegedly related to Chemicals’ Ashtabula, Ohio facility, as well as certain other costs. Both Maxus and Occidental filed motions for partial summary judgment. In 2002, the court granted Occidental’s and denied Maxus’ respective motions for partial summary judgment. Maxus believes the court erred and has appealed.

In 2001, the Texas State Comptroller assessed Midgard Energy Company, a subsidiary of the Company, approximately $26 million in Texas state franchise taxes, plus penalty and interest (currently estimated to be in excess of $50 million), for periods from 1997 back to 1984. The basis for the assessments essentially is the Comptroller’s attempt to characterize certain debt as capital contributions. The Company believes the assessment is without substantial merit and has challenged the assessment through administrative appeals procedures.

In 2001, the Texas State Comptroller also assessed Maxus Corporate Company, a former subsidiary of the Company that was merged into Maxus in December 1998, approximately $1.4 million in Texas state sales taxes for the period of September 1, 1995 through December 31, 1998, plus penalty and interest (currently estimated to be more than $1 million). On March 31, 2004, the administrative law judge issued a proposed decision that would affirm approximately $1 million of such assessment, plus penalty and interest. The Company believes the proposed decision is erroneous and, when the decision is issued in final form, intends to challenge it in a court action, where there would be a trial de novo.

In 2002, Occidental sued Maxus and Tierra in state court in Dallas, Texas seeking a declaration that Maxus and Tierra have the obligation under the agreement pursuant to which Maxus sold Chemicals to Occidental to defend and indemnify Occidental from and against certain historical obligations of Chemicals, including claims related to “Agent Orange” and vinyl chloride monomer (VCM), notwithstanding the fact that (a) said agreement contains a 12-year cut-off for defense and indemnity obligations with respect to most litigation, and (b) Tierra is not a party to said agreement. Both Maxus and Tierra, on the one hand, and Occidental, on the other, filed motions for summary judgment in this action. The court granted Maxus and Tierra’s motion, and overruled Occidental’s motion, on July 19, 2004. Once a final judgment has been entered, Occidental will have the right to appeal this decision. In a related development, in June 2003, the U.S. Supreme Court affirmed, by a four to four vote, a decision of the Second Circuit Court of Appeals, which held that the 1984 settlement of the claims of Vietnam veterans does not preclude certain Vietnam veterans from asserting claims alleging injury due to Agent Orange exposure. While Maxus believes there are a number of valid defenses to any claims that may be asserted by Vietnam veterans who are not bound by the terms of the 1984 settlement, it also believes that Occidental is responsible for any Agent Orange lawsuits filed after the September 4, 1986 cut-off date.

In May 2003, the U.S. Internal Revenue Service (“IRS”) proposed adjustments to the taxable income of Maxus (for 1994, 1995 and 1996) and the Company (for 1997) which would result in an aggregate of approximately $24.3 million in additional income taxes. Maxus and the Company believe that most of these adjustments are without substantial merit, and they have protested the IRS position on these matters. On January 30, 2004, the IRS proposed adjustments to the taxable income of the Company related to an additional $7.7 million in withholding taxes the IRS contends should have been withheld from an interest payment to YPF International Ltd. in 1997. The Company believes this adjustment is without substantial merit and has challenged same.

The Company, including its subsidiaries, is a party to various other lawsuits, the outcomes of which are not expected to have a material adverse affect on the Company’s financial condition. The Company has established reserves for legal contingencies in situations where a loss is probable and can be reasonably estimated.

The Company has entered into various operating agreements and capital commitments associated with the exploration and development of its oil and gas properties. Such contractual, financial and/or performance commitments are not material.

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