YPF S.A. — Interim / Quarterly Report 2006

Dec 5, 2006

	YPF Holdings, Inc. and Subsidiaries (A Wholly Owned Subsidiary of YPF S.A.) Consolidated Financial Statements as of June 30, 2006 and December 31, 2005, and for the Three-Month and Six-Month Periods Ended June 30, 2006 and 2005, and Independent Accountants’ Review Report

CLIENT PREFERS DASHES IN LIEU OF BLANKS

YPF HOLDINGS, INC. AND SUBSIDIARIES

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

TABLE OF CONTENTS

Page

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT 1

CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2006
AND DECEMBER 31, 2005, AND FOR THE THREE-MONTH AND
SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED):

Balance Sheets 2–3

Statements of Operations 4

Statements of Cash Flows 5

Notes to Consolidated Financial Statements 6–15

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

Deloitte & Touche LLP
Suite 2300
333 Clay Street
Houston, TX 77002-4196
USA

Tel: +1 713 982 2000
Fax: +1 713 982 2001
www.deloitte.com

To the Board of Directors of
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, 2006, and the related consolidated statements of operations and cash flows for the three-month and six-month periods ended June 30, 2006 and 2005, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the Company’s management.

A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit 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.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

The financial statements for the year ended December 31, 2005, were audited by us, and we expressed an unqualified opinion on them in our report dated May 10, 2006, but we have not performed any auditing procedures since that date.

As discussed in Note 1 to the financial statements, in November 2006, the Company received a financial support commitment from YPF S.A.

November 10, 2006

Member of

Deloitte Touche Tohmatsu

YPF HOLDINGS, INC. AND SUBSIDIARIES

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 (UNAUDITED) AND DECEMBER 31, 2005, AND

FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)

(See independent accountants’ review report)

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. Additionally, the Company manages certain environmental and pension obligations for certain wholly owned subsidiaries as listed below.

YPF S.A. (“YPF”) owns 100% of the Company’s shares. YPF is a wholly owned subsidiary of Repsol YPF.

The consolidated financial statements as of and for the six-month period ended June 30, 2006, include following wholly owned subsidiaries (collectively referred to hereafter as “Subsidiaries”), Tierra Solutions Inc. (“Tierra”), Maxus Energy Corporation (“Maxus”), and RYTTSA USA, Inc. RYTTSA USA, Inc. merged into Maxus effective December 2005.

In November 2006, the Company received a support letter from YPF stating that YPF would provide necessary financing, if required, to allow the Company to continue to operate through June 30, 2007. The respective support letter has been provided in connection with uncertainties, including, negative stockholder’s equity of $182.7 million, a net loss for the six months ended June 30, 2006, of $36.6 million, and a working capital deficit of $143.8 million as of June 30, 2006. These matters raise substantial doubt as to the Company’s ability to continue as a going concern, absent such parent support as noted above.

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. 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, 2006 and 2005, 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, 2006 and 2005, should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2005.

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.

Capitalized costs relating to producing properties are depleted on the unit-of-production method. Proved developed reserves are used in computing unit rates for drilling and development costs and total proved reserves for depletion rates of leasehold, platform, and pipeline costs.

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 and at least annually 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.

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.

Restricted Cash—The restricted cash balance represents bank deposits used to pay workers compensation claims for one of the Company’s subsidiaries and security deposits for letters of credit and auto leases. The letters of credit are used as security with various governmental agencies and as support for bonds posted with governmental agencies or insurance companies. Restricted cash where the restriction ends in twelve months or less has been classified as current assets on the balance sheet.

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.

Reclassifications—Certain reclassifications have been made to conform prior-year presentation to the current-year presentation.

1. RELATED-PARTY TRANSACTIONS

The Company performs geological and geophysical exploration activities and provides payroll and financial services for affiliated companies. As of June 30, 2006 and December 31, 2005, the Company had accounts receivable from those affiliated companies related to these services of $11.8 million and $9.7 million, net allowance for uncollectible accounts of $9.0 million and $7.2 million, respectively.

On August 1, 2005, the Company entered into a credit agreement with YPF. As of June 30, 2006, the balance payable to YPF was $128.6 million. The interest rate is LIBOR +0.40% per annum.

1. EMPLOYEE BENEFIT PLANS

Pensions—The Company has a number of trustee noncontributory pension plans covering substantially all 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 for the six-month periods ended June 30, 2006 and 2005, is as follows (in thousands):

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 as of the date of the last actuarial report for the six-month periods ended June 30, 2006 and 2005, is as follows (in thousands):

The Company records unrealized gains and losses relating to the future minimum pension liability to other comprehensive loss on the balance sheet. At June 30, 2006, the balance of other comprehensive loss is $55.1 million.

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, 2006, 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, 2006, the Company had $458.6 million of net operating loss carryforwards, which will begin to expire in 2022.

At June 30, 2006, 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.

1. COMMITMENTS AND LIABILITIES

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, 2006 and December 31, 2005, 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, possible dredging requirements, 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 (together with its subsidiary Occidental Chemical 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. Tierra has agreed to assume essentially all of Maxus’ aforesaid indemnity obligations to Occidental in respect of Chemicals.

At June 30, 2006, reserves for the environmental contingencies discussed herein totaled approximately $87.0 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 for Chemicals’ former Newark, New Jersey agricultural chemicals plant. The approved remedy has been completed and paid for by Tierra pursuant to the above described indemnification obligation to Occidental. This project is in the operation and maintenance phase. Following the completion of an assessment of this project by the EPA in the second quarter of 2006, the Company increased its reserve for the estimated costs of operating and maintaining such remedy to amount believed to be sufficient to cover a period of 30 years from and after January 1, 2006. The amount of such reserve was approximately $17.6 million as of June 30, 2006.

Passaic River/Newark Bay, 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 has conducted 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 was also examined as a part of Tierra’s studies. While some work remains, these studies were substantially completed in 2005. In addition,

• • Maxus and Tierra have been conducting similar studies under their own auspices for several years.
• The EPA and other agencies are addressing the lower Passaic River in a joint federal, state, local, and private sector cooperative effort designated as the Lower Passaic River Restoration Project (the “PRRP”). Tierra, along with approximately 42 other entities, participated in an initial remedial investigation and feasibility study (“RIFS”) in connection with the PRRP. The parties and a number of additional parties are discussing the possibility of further work with the EPA and how the costs of any such work will be allocated among them.
• In 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 PRRP. Directive No. 1 calls for the following actions: interim compensatory restoration, injury identification, injury quantification, and value determination. Maxus and Tierra responded to Directive No. 1 setting forth good faith defenses. Settlement discussions between the DEP and the named entities have been held; however, no agreement has been reached or is assured.
• In 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 EPA has approved a work plan that includes sampling in Newark Bay. Tierra began field work on this study in October 2005. After the data has been collected in the initial study, a determination will be made as to what additional work, if any, might be required.
• In December 2005, the DEP issued a directive to Tierra, Maxus, and Occidental directing said parties to pay the State of New Jersey’s costs of developing a Source Control Dredge Plan focused on allegedly dioxin-contaminated sediment in the lower six-mile portion of the Passaic River. The development of this Plan is estimated by the DEP to cost approximately $2.3 million. This directive was issued even though this portion of the lower Passaic River has been designated as a Superfund site and is a subject of the PRRP. The DEP has advised the recipients that (a) it is engaged in discussions with the EPA regarding the subject matter of the directive, and (b) they are not required to respond to the directive until otherwise notified.
• Also in December 2005, the DEP sued the Company, Tierra, Maxus and several affiliated entities, in addition to Occidental, in connection with dioxin contamination allegedly emanating from Chemicals’ former Newark plant and contaminating the lower 17-mile portion of the Passaic River, Newark Bay, other nearby waterways and surrounding areas. The DEP seeks unspecified damages for injuries to so-called “uplands resources” and for other matters. The DEP also seeks punitive damages. The Company and its subsidiary, CLH Holdings Inc., have filed papers seeking dismissal, as have Repsol YPF, S.A. and YPF S.A., and the remaining defendants who have been served have made appropriate responsive pleadings and/or filings.

As of June 30, 2006, there is a total of approximately $6.1 million reserved in connection with the foregoing matters related to the Passaic River, the Newark Bay and surrounding area. Studies are ongoing with respect to the Passaic River and the Newark Bay watershed. Until these studies are completed and evaluated, the Company 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 and/or the Newark Bay. In addition, at such time as more is known about the aforesaid directives and litigation, additional costs may be required to be incurred or additional reserves may need to 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 providing financial assurance in the amount of $20 million for performance of the work. 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 2001, and the DEP continues to review these reports. In addition,

• • In May 2005, the DEP took two actions in connection with the chrome sites in Hudson and Essex Counties. First, the DEP issued a directive to Maxus, Occidental and two other chromium manufacturers (the “Respondents”) directing them to arrange for the cleanup of chromite ore residue at three sites in Jersey City and the conduct of a study by paying the DEP a total of $19.55 million. While the Company believes that Maxus is improperly named and there is little or no evidence that Chemicals’ chromite ore residue was sent to any of these sites, the DEP claims the Respondents are jointly and severally liable without regard to fault. Second, the State filed a lawsuit against Occidental and two other entities in state court in Hudson County seeking, among other things, cleanup of various sites where chromite ore residue is allegedly located, recovery of past costs incurred by the State at such sites (including in excess of $2.3 million dollars allegedly spent for investigations and studies) and, with respect to certain costs at 18 sites, treble damages. The DEP claims that the defendants are jointly and severally liable, without regard to fault, for much of the damages alleged. The parties have engaged in preliminary discussion regarding possible settlement; however, there is no assurance that these discussions will be successful.
• In 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.
• By letter dated November 10, 2005, several environmental groups sent a notice of intent to sue the owner of the property adjacent (the “Adjacent Property”) to the former Kearny Plant and five other parties, including Tierra, under the Resource Conservation and Recovery Act. The stated purpose of the lawsuit, if filed, would be to require the noticed parties to carry out measures to abate alleged endangerments to health and the environment emanating from the Adjacent Property. The parties have entered into an agreement that addresses the concerns of the environmental groups, and these groups have agreed, at least for now, not to file suit.

As of June 30, 2006, there is a total of approximately $24.2 million reserved in connection with the foregoing chrome-related matters. Soil action levels for chromium in New Jersey have not been finalized, and the DEP is currently reviewing the proposed action levels. The cost of addressing these chrome-related matters could increase depending upon the final soil action levels, the DEP’s response to Tierra’s reports and other developments.

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 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. In addition, the OEPA has approved certain work, including the remediation of the site of a former cement plant, remediation of a former aluminum smelting plant and work associated with the development plans discussed below (the “Remediation Work”). The Remediation Work has begun. As the OEPA approves additional projects for the site of the former Painesville Works, additional amounts may need to be reserved. Over 10 years ago, the former Painesville Works site was 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 site has not been listed. The Company has reserved a total of approximately $9.7 million as of June 30, 2006, for its estimated share of the cost to perform the RIFS, the Remediation Work and other 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—Pursuant to settlement agreements with the Port of Houston Authority (the “Port”) and other parties, Tierra and Maxus are participating (on behalf of Chemicals) in the remediation at property adjoining Chemicals’ former Greens Bayou facility where DDT and certain other chemicals were manufactured. At June 30, 2006, the Company has reserved approximately $24.5 million for its estimated share of future remediation activities associated with the Greens Bayou facility.

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, 2006, the Company has reserved approximately $3.0 million in connection with its estimated share of costs related to these sites.

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. Maxus understands that Occidental’s claims total approximately $6 million, exclusive of claims for interest and attorneys’ fees. The case is currently set for trial in 2007.

In 2001, the Texas State Comptroller 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. In August 2004, the administrative law judge issued a decision affirming approximately $1 million of such assessment, plus penalty and interest. The Company believes the decision is erroneous, has paid the revised tax assessment, penalty and interest (a total of approximately $1.8 million) under protest. Maxus filed suit in Texas state court in December 2004 challenging the administrative decision. The matter will be reviewed by a trial de novo in the court action.

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. This matter was tried in May 2006. Following trial, judgment was entered against Maxus. Maxus has filed a motion for new trial and is considering its post-judgment options, including filing of an appeal. In developments related to the “Agent Orange” litigation that may be impacted by this lawsuit, the U.S. district court granted the defendants’ motions for summary judgment, and the plaintiffs’ appealed the judgments to the Second Circuit Court of Appeals. At June 30, 2006, the Company has reserved $4.75 million.

In May 2003, the U.S. Internal Revenue Service (“IRS”) assessed Maxus (for 1994, 1995 and 1996) and the Company (for 1997) an aggregate of approximately $24.3 million in additional income taxes. Maxus and the Company believe that most of these assessments are without substantial merit, and they have protested this assessment. In January 2004, the IRS assessed the Company 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 assessment is without substantial merit and has challenged same. The Company has reached agreement with the IRS to settle all of these matters, with a refund of $7.5 million (including interest) paid to the Company in September 2006.

Maxus has agreed to defend Occidental, as successor to Chemicals, in respect of the Malone Services Company Superfund Site in Galveston County, Texas. This site is a former waste disposal site where Chemicals is alleged to have sent waste products prior to September 1986. It is the subject of enforcement activities by the EPA. Although Occidental is one of many PRPs that have been identified and have agreed to an Administrative Order on Consent, Tierra (which is handling this matter on behalf of Maxus) presently believes the degree of Occidental’s alleged involvement as successor to Chemicals is relatively small.

In March 2005, Maxus agreed to defend Occidental, as successor to Chemicals, in respect of an action seeking the contribution of costs incurred in connection with the remediation of the Turtle Bayou waste disposal site in Liberty County, Texas. The plaintiffs alleged that certain wastes attributable to Chemicals found their way to the Turtle Bayou site. Trial in the liability phase of this matter was held in May 2005, and following the death of the original trial judge, additional proceedings were held in February 2006. The new judge has determined Occidental and other parties are severally, and not jointly, liable for waste products disposed of at this site. The Court has scheduled further proceedings to allocate responsibility for damages. The Company is considering the potential impact of the court’s determination.

In June 2005, the EPA designated Maxus as PRP at the Milwaukee Solvay Coke & Gas Site in Milwaukee, Wisconsin. The basis for this designation is Maxus’ alleged status as the successor to Pickands Mather & Co. and Milwaukee Solvay Coke Co., companies that the EPA has asserted are former owners or operators of such site. A RIFS in respect of this site is expected to commence in the second half of 2006. Maxus’ has reserved approximately $1 million as of June 30, 2006, for its estimated share of the costs of the RIFS. Maxus lacks sufficient information to determine additional exposure or costs, if any, it might have in respect of this site.

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, except perhaps those commitments related to the development of the Neptune Prospect located in the vicinity of the Atwater Valley Area, Blocks 573, 574, 575, 617, and 618.

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