-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KtfwnqdT6YGQVmTRxHSVTDtW1qiNyfPTldwQCmHwimepCCP+xTttOmSCm/qCFOIJ Oer186O2M1QSCjeK4rwDQw== 0000716039-01-500016.txt : 20010815 0000716039-01-500016.hdr.sgml : 20010815 ACCESSION NUMBER: 0000716039-01-500016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNOCAL CORP CENTRAL INDEX KEY: 0000716039 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 953825062 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08483 FILM NUMBER: 1708035 BUSINESS ADDRESS: STREET 1: 2141 ROSECRANS AVE STREET 2: STE 4000 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107267600 MAIL ADDRESS: STREET 1: 2141 ROSECRANS AVE STREET 2: STE 4000 CITY: EL SEGUNDO STATE: CA ZIP: 90245 10-Q 1 q22001_10q.txt 2ND QUARTER 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ---------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- ------------------- Commission file number 1-8483 UNOCAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-3825062 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2141 ROSECRANS AVENUE, SUITE 4000, EL SEGUNDO, CALIFORNIA 90245 (Address of principal executive offices) (Zip Code) (310) 726-7600 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Number of shares of Common Stock,$1 par value, outstanding as of July 31, 2001: 243,583,207 TABLE OF CONTENTS
PART I PAGE Item 1. Financial Statements Consolidated Earnings............................................ 1 Consolidated Balance Sheet........................................ 2 Consolidated Cash Flows........................................... 3 Notes to Financial Statements..................................... 4 Operating Highlights ............................................... 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 24 Item 3 Quantative and Qualitative Disclosures about Market Risk............ 35 PART II Item 1 Legal Proceedings................................................... 37 Item 4 Submission of Matters to a Vote of Security Holders................. 37 Item 6 Exhibits and Reports on Form 8-K.................................... 38 SIGNATURES.................................................................. 39 EXHIBIT INDEX............................................................... 40
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED EARNINGS UNOCAL CORPORATION (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------------------------------- Millions of dollars except per share amounts 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ 1,684 $ 2,025 $ 3,890 $ 3,866 Interest, dividends and miscellaneous income 11 126 19 143 Gain on sales of assets 1 65 1 63 - ----------------------------------------------------------------------------------------------------------------------- Total revenues 1,696 2,216 3,910 4,072 Costs and other deductions Crude oil, natural gas and product purchases 537 1,144 1,524 2,195 Operating expense 329 288 659 524 Selling, administrative and general expense 27 37 71 85 Depreciation, depletion and amortization 268 224 513 430 Dry hole costs 47 37 87 51 Exploration expense 32 37 66 86 Interest expense 48 53 97 106 Property and other operating taxes 20 17 41 30 Distributions on convertible preferred securities of subsidiary trust 8 8 16 16 - ----------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 1,316 1,845 3,074 3,523 Earnings from equity investments 49 32 91 57 - ----------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 429 403 927 606 - ----------------------------------------------------------------------------------------------------------------------- Income taxes 180 159 370 242 Minority interests 14 (6) 30 (10) - ----------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 235 250 527 374 Discontinued operations Gain on disposal (net of tax) 12 14 16 23 - ----------------------------------------------------------------------------------------------------------------------- Earnings from discontinued operations 12 14 16 23 Cumulative effect of accounting change (net of tax) - - (1) - - ----------------------------------------------------------------------------------------------------------------------- Net earnings $ 247 $ 264 $ 542 $ 397 ======================================================================================================================= Basic earnings per share of common stock (a) Continuing operations $ 0.98 $ 1.03 $ 2.17 $ 1.54 Discontinued operations 0.04 0.05 0.06 0.09 - ----------------------------------------------------------------------------------------------------------------------- Net earnings $ 1.02 $ 1.08 $ 2.23 $ 1.63 - ----------------------------------------------------------------------------------------------------------------------- Diluted earnings per share of common stock (b) Continuing operations $ 0.95 $ 1.00 $ 2.11 $ 1.51 Discontinued operations 0.04 0.05 0.06 0.09 - ----------------------------------------------------------------------------------------------------------------------- Net earnings $ 0.99 $ 1.05 $ 2.17 $ 1.60 - ----------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share of common stock $ 0.20 $ 0.20 $ 0.40 $ 0.40 - ----------------------------------------------------------------------------------------------------------------------- (a) Basic weighted average shares outstanding (in thousands) 243,508 242,875 243,339 242,789 (b) Diluted weighted average shares outstanding (in thousands) 256,899 256,245 256,655 255,758 See Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION June 30, December 31, ----------------------------------------- Millions of dollars 2001 (a) 2000 - --------------------------------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 540 $ 235 Accounts and notes receivable 998 1,299 Inventories 76 88 Deferred income taxes 177 155 Other current assets 21 25 - --------------------------------------------------------------------------------------------------------------------- Total current assets 1,812 1,802 Investments and long-term receivables 1,444 1,379 Properties - net (b) 7,179 6,433 Deferred income taxes 116 231 Other assets 167 165 - --------------------------------------------------------------------------------------------------------------------- Total assets $ 10,718 $ 10,010 ===================================================================================================================== Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 796 $ 1,022 Taxes payable 236 282 Interest payable 55 55 Current portion of environmental liabilities 144 124 Current portion of long-term debt and capital leases 189 114 Other current liabilities 250 248 - --------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,670 1,845 Long-term debt and capital leases 2,770 2,392 Deferred income taxes 611 618 Accrued abandonment, restoration and environmental liabilities 563 554 Other deferred credits and liabilities 994 968 Minority interests 433 392 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely parent debentures 522 522 Common stock ($1 par value, shares authorized: 750,000,000 (c)) 254 254 Capital in excess of par value 538 522 Unearned portion of restricted stock issued (22) (21) Retained earnings 2,913 2,468 Accumulated other comprehensive income (loss) (76) (53) Notes receivable - key employees (41) (40) Treasury stock - at cost (d) (411) (411) - --------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 3,155 2,719 - --------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 10,718 $ 10,010 ===================================================================================================================== (a) Unaudited (b) Net of accumulated depreciation, depletion and amortization of: $ 11,215 $ 10,745 (c) Number of shares outstanding (in thousands) 243,586 243,045 (d) Number of shares (in thousands) 10,623 10,623 See Notes to the Consolidated Financial Statements.
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CONSOLIDATED CASH FLOWS UNOCAL CORPORATION (UNAUDITED) For the Six Months Ended June 30, --------------------------------- Millions of dollars 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net earnings $ 542 $ 397 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation, depletion and amortization 513 430 Dry hole costs 87 51 Deferred income taxes 82 48 Gain on sales of assets (pre-tax) (1) (64) Gain on disposal of discontinued operations (pre-tax) (25) - Earnings applicable to minority interests 30 (10) Other 62 44 Working capital and other changes related to operations Accounts and notes receivable 312 (20) Inventories 12 31 Accounts payable (265) (103) Taxes payable (46) 20 Other (59) (56) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,244 768 - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures (includes dry hole costs) (824) (558) Major acquisitions (417) (161) Proceeds from sales of assets 23 67 Proceeds from sale of discontinued operations 7 25 - -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,211) (627) - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Long-term borrowings 467 58 Reduction of long-term debt and capital lease obligations (101) (231) Minority interests (10) (14) Proceeds from issuance of common stock 13 2 Dividends paid on common stock (97) (97) Loans to key employees - (32) Other - (1) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 272 (315) - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 305 (174) - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 235 332 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 540 $ 158 ========================================================================================================================== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest (net of amount capitalized) $ 98 $ 113 Income taxes (net of refunds) $ 326 $ 182 See Notes to the Consolidated Financial Statements.
-3- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) General The consolidated financial statements included in this report are unaudited and, in the opinion of management, include all adjustments necessary for a fair presentation of financial position and results of operations. All adjustments are of a normal recurring nature. Such financial statements are presented in accordance with the Securities and Exchange Commission's disclosure requirements for Form 10-Q. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes filed with the Commission in Unocal Corporation's 2000 Annual Report on Form 10-K. For the purpose of this report, Unocal Corporation (Unocal) and its consolidated subsidiaries, including Union Oil Company of California (Union Oil), are referred to as the "Company". The consolidated financial statements of the Company include the accounts of subsidiaries in which a controlling interest is held. Investments in entities without a controlling interest are accounted for by the equity method. Under the equity method, the investments are stated at cost plus the Company's equity in undistributed earnings and losses after acquisition. Income taxes estimated to be payable when earnings are distributed are included in deferred income taxes. Results for the six months ended June 30, 2001, are not necessarily indicative of future financial results. Segment data and certain other items in the prior year financial statements have been reclassified to conform to the 2001 presentation: |X| The Pipelines business has been combined with certain activities of the Company's gas storage businesses in Canada, which were previously reported in the Exploration and Production segment, into a new segment called Midstream. |X| The Carbon and Minerals businesses are no longer disclosed as a separate segment and are now reported in the Corporate and Other heading. (2) Accounting Changes ADOPTION OF NEW ACCOUNTING STANDARDS - Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) and Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (SFAS 138). These standards require that all derivative instruments be recorded on the balance sheet at their fair values. Changes in the fair values of derivative instruments are reported in current-period earnings unless they are designated and qualify as effective hedges. In accordance with the transition provisions of SFAS 133, the Company recorded a one-time after-tax charge of approximately $1 million during the first quarter of 2001 in its consolidated earnings statement, representing the cumulative effect of the accounting change, and an after-tax unrealized loss of approximately $59 million to accumulated other comprehensive loss in its consolidated balance sheet, of which $28 million is expected to be reclassified to earnings during the current year. The transition amounts represented accumulated changes in the fair values of derivative instruments that were previously off balance sheet and used to hedge certain future commodity sales (e.g. commodity swaps, options). Accumulated losses in fair value of these derivative instruments will be substantially offset by corresponding gains on the hedged commodity sales when those sales occur. Amounts pertaining to the derivative contracts of acquired companies that were previously capitalized under purchase accounting rules were not impacted. -4- ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - The objectives of the Company's risk management policies include reducing the overall volatility of the Company's cash flows, preserving revenues and pursuing outright pricing positions in hydrocarbon derivative financial instruments. As part of its overall risk management strategy, the Company enters into various derivative instrument contracts to offset portions of its exposures to changes in interest rates, changes in foreign currency exchange rates, and fluctuations in crude oil and natural gas prices. At the inception of a derivative contract, the Company may choose to designate and document a derivative as a hedge of a certain exposure. In general, the Company enters into derivative instruments to hedge two types of exposures: cash flow exposures and fair value exposures. Hedges of cash flow exposures are generally undertaken to reduce cash flow volatility associated with forecasted transactions. They may also be used to reduce volatility associated with cash flows to be paid related to recognized liabilities. Hedges of fair value exposures are undertaken to hedge recognized assets or liabilities or unrecognized firm commitments against changes in fair value. On the date that a hedge is established, the Company designates and documents the derivative as either a cash flow hedge or a fair value hedge. Changes in the values of derivatives not designated and documented as hedges are recorded in current-period earnings. Changes in the values of derivatives that qualify for, and are designated and effective as cash flow hedges are deferred and recorded as components of accumulated other comprehensive income until the hedged transactions occur and are recognized in earnings. The ineffective portions of cash flow hedge derivatives' changes in values are recognized immediately in earnings as components of sales revenues. During the second quarter of 2001, the Company changed its methodology for calculating the effectiveness of options purchased as cash flow hedges to conform with the April 2001 interpretation of SFAS 133 by the Financial Accounting Standards Board's "Derivatives Implementation Group". Most gains and losses associated with the time value of cash flow hedging options will be included in the effectiveness calculations and, generally, deferred as components of other comprehensive income until the hedged transactions are recognized in earnings. Previously, these gains and losses had been excluded from the measurement of hedge effectiveness and recognized in sales revenues. Changes in the values of derivatives that qualify for, and are designated and effective as, fair value hedges are recognized in current-period earnings as components of the line items reflecting the underlying hedged transactions. Changes in the fair values of the underlying hedged items (e.g.recognized assets, liabilities or unrecognized firm commitments) are also recognized in current-period earnings and offset the changes in the values of the corresponding hedging derivatives. Any resulting fair value hedge ineffectiveness is recognized in current-period earnings as the difference between the offsetting changes in values of the derivative and the underlying hedged item. The Company documents its risk management objectives, its strategies for undertaking various hedge transactions and the relationships between hedging instruments and hedged items. Derivatives designated as cash flow hedges are linked to forecasted transactions. Derivatives identified as fair value hedges are linked to specific assets, liabilities or firm commitments. At hedge inceptions and on an on-going basis, the Company assesses whether changes in the values of derivatives used in hedging activities are highly effective in offsetting changes in the values of the hedged items. The Company discontinues hedge accounting prospectively when either (1) it determines that a derivative is not highly effective as a hedge, (2) the derivative is sold, exercised or otherwise terminated, (3) management elects to remove the derivative's hedge designation, (4) the hedged transaction is no longer expected to occur, or (5) a hedged item no longer meets the definition of a firm commitment. When a hedged forecasted transaction is no longer expected to occur, the derivative continues to be carried on the balance sheet at its fair value and all gains and losses that were previously deferred in accumulated other comprehensive income are recognized immediately in earnings. When a hedged item no longer meets the definition of a firm commitment, the derivative continues to be carried on the balance sheet at its fair value and any asset or liability that was recorded on the balance sheet for the change in value of the hedged firm commitment are removed from the balance sheet and recognized immediately in current-period earnings. In all other situations where hedge accounting is discontinued, the derivatives continue to be carried on the balance sheet at their fair values and any prospective changes in their fair values are recognized in current-period earnings. Deferred gains and losses already recorded in accumulated other comprehensive income remain until the forecasted transactions occur, at which time those gains and losses are recognized in earnings. -5- (3) Major Acquisitions In May 2001, the Company's Pure Resources, Inc. (Pure), subsidiary completed its cash acquisition of all the outstanding shares of common stock of Hallwood Energy Corporation (Hallwood) for $12.50 per share and all the outstanding shares of Series A Cumulative Preferred Stock of Hallwood at a price of $10.84 per share. The total transaction was valued at approximately $271 million, including assumed debt of $87 million, which was subsequently refinanced in May 2001 (see note 11), and other obligations. The acquisition was accounted for as a purchase and was funded through the combination of a new line of credit and borrowings under Pure's existing revolving credit facilities. This acquisition added to Pure's positions in its business areas of the San Juan and Permian Basins and the Gulf Coast region. In January 2001, Pure acquired oil and gas properties, certain general and limited oil and gas partnership interests and fee mineral and royalty interests from International Paper Company. The total cost of the acquisition was approximately $267 million in cash. Included in the transaction were total proved reserves of approximately 25 million barrels of oil equivalent and ownership in 6 million gross fee mineral acres (3.2 million net) along with participation in several offshore exploration programs. The transaction was funded from Pure's credit facilities (see note 11). This acquisition expanded Pure's business areas into the Gulf Coast region and offshore in the Gulf of Mexico. (4) Restructuring Costs Activities related to the restructuring plan adopted in the first quarter of 2000 are completed. The amount of unpaid benefits remaining on the consolidated balance sheet at June 30, 2001 is immaterial and is scheduled to be paid over the next few months. (5) Other Financial Information During the second quarters of 2001 and 2000, approximately 25 percent and 53 percent, respectively, of total sales and operating revenues were attributable to the resale of crude oil, natural gas and natural gas liquids purchased from others in connection with the Company's trading and marketing activities. For the six months ended June 30, 2001 and 2000, these percentages were approximately 32 percent and 53 percent, respectively. Related purchase costs are classified as expense in the crude oil, natural gas and product purchases category on the consolidated earnings statement. The lower resale activity in both the second quarter and six months periods of 2001 as compared to the same periods a year ago reflect decreases primarily related to the marketing and trading of crude oil and condensate. Capitalized interest totaled $6 million and $3 million for the second quarters of 2001 and 2000, respectively, and $11 million and $5 million for the six months ended 2001 and 2000, respectively. (6) Income Taxes Income taxes on earnings from continuing operations for the second quarter and first six months of 2001 were $180 million and $370 million, respectively, compared with $159 million and $242 million for the comparable periods of 2000. The effective income tax rates for the second quarter and first six months of 2001 were 43 percent and 41 percent, respectively, compared with 39 percent and 39 percent for the comparable periods of 2000. The higher income tax rates in 2001 reflected the effects of changes in the mix of foreign versus domestic earnings, currency-related adjustments in Thailand and adjustments related to prior year U.S. income tax matters. -6- (7) Discontinued Operations In 2001, the Company recorded its initial pre-tax gain of $25 million ($16 million after-tax) related to a participation agreement tied to its former West Coast refining, marketing and transportation assets, which were sold in 1997. The participation agreement covers price differences between California Air Resources Board Phase 2 gasoline and conventional gasoline. The maximum potential payments under this participation agreement are capped at $100 million and extend to 2003. The 2000 results reflect the Company's former agricultural products business, which was sold later in that year. (8) Earnings Per Share The following are reconciliations of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for earnings from continuing operations for the second quarters and the six months ended June 30, 2001 and 2000:
Earnings Shares Per Share Millions except per share amounts (Numerator) (Denominator) Amount - --------------------------------------------------------------------------------------------------------------------------- Three months ended June 30, 2001 Earnings from continuing operations $ 235 243.5 Basic EPS $ 0.98 ============= Effect of dilutive securities Options and common stock equivalents 1.1 -------------------------------- 235 244.6 $ 0.96 Distributions on subsidiary trust preferred securities (after-tax) 7 12.3 -------------------------------- Diluted EPS $ 242 256.9 $ 0.95 ============= Three months ended June 30, 2000 Earnings from continuing operations $ 250 242.9 Basic EPS $ 1.03 ============= Effect of dilutive securities Options and common stock equivalents 1.1 -------------------------------- 250 244.0 $ 1.02 Distributions on subsidiary trust preferred securities (after-tax) 7 12.3 -------------------------------- Diluted EPS $ 257 256.3 $ 1.00 ============= Six months ended June 30, 2001 Earnings from continuing operations $ 527 243.3 Basic EPS $ 2.17 ============= Effect of dilutive securities Options and common stock equivalents 1.1 -------------------------------- 527 244.4 $ 2.16 Distributions on subsidiary trust preferred securities (after-tax) 13 12.3 -------------------------------- Diluted EPS $ 540 256.7 $ 2.11 ============= Six months ended June 30, 2000 Earnings from continuing operations $ 374 242.8 Basic EPS $ 1.54 ============= Effect of dilutive securities Options and common stock equivalents 0.7 -------------------------------- 374 243.5 $ 1.54 Distributions on subsidiary trust preferred securities (after-tax) 13 12.3 -------------------------------- Diluted EPS $ 387 255.8 $ 1.51 ============= - ---------------------------------------------------------------------------------------------------------------------------
-7- Not included in the computation of diluted EPS at June 30, 2001, were options to purchase approximately 5.0 million shares of common stock. These options were not included in the computation as the exercise prices were greater than the year-to-date average market price of the common shares. The exercise prices of these options ranged from $36.16 to $45.25 per share. These options will expire periodically through 2011. The diluted EPS computation at June 30, 2000 did not include options outstanding to purchase approximately 7.3 million shares of common stock because their exercise prices were greater than the year-to-date average market price of $31.58 for the common shares. The exercise prices of these options ranged from $32.16 to $51.01 per share. (9) Comprehensive Income The Company's comprehensive income was:
For the Three Months For the Six Months Ended June 30, Ended June 30, --------------------------------------------- Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Net earnings $247 $264 $542 $397 Cumulative effect of change in accounting principle SFAS 133 adoption (a) - - (59) - Change in unrealized loss on hedging instruments (b) 41 - 31 - Reclassification adjustment for settled hedging contracts (c) 2 - 19 - Change in foreign currency translation adjustments 15 (8) (16) (7) - ------------------------------------------------------------------------------------------------------------------ Comprehensive income $305 $256 $517 $390 ================================================================================================================== (a) Net of tax effect of: - - 36 - (b) Net of tax effect of: (24) - (19) - (c) Net of tax effect of: (1) - (11) -
(10) Restricted Cash Of the total amounts of Cash and Cash Equivalents reported at June 30, 2001, cash in the amount of $28 million was restricted as to usage or withdrawal, compared to $33 million that was restricted as of December 31, 2000. Under the terms of the Company's limited-recourse project financing for its share of the Azerbaijan International Operating Company Early Oil Project, the Company's share of principal and interest payments to the lenders are payable only out of the proceeds from the Company's sale of crude oil from the project. In keeping with the terms of the financing agreements, $4 million at June 30, 2001, of the Company's oil sales proceeds (cash) were reserved for debt principal and interest obligations falling due within the next 180 days. In addition, at June 30, 2001, the Company had reserved $24 million in cash, which was placed in December 2000 with a trustee to ultimately be used in settlement of claims arising out of the valuation of the royalty owner's portion of crude oil produced from certain federal leases. Per the terms of the trust agreement the trustee invests the cash in acceptable investments and will deliver to the Company any cash balances remaining in the trust after final settlement of the claims. The Company anticipates final settlement and disbursement of all funds during the second half of 2001. (11) Long Term Debt and Credit Agreements During the first six months of 2001, the Company's consolidated debt, including the current portion, increased by $453 million. This was substantially due to an increase of $467 million in long term debt by the Company's Pure subsidiary to fund two of its acquisitions (see note 3). In June 2001, Pure issued in a private placement $350 million in unsecured senior notes, which bear interest at 7.125 percent and mature in 10 years. The holders of the senior notes hold registration rights which require Pure to register the notes by the end of 2001. Pure used the proceeds to repay a portion of its senior credit facilities and to repay interim financing associated with the Hallwood acquisition (see note 3). -8- The remainder of the increase in Pure's debt consisted of borrowings under two separate $250 million unsecured credit facilities. At June 30, 2001, $168 million was outstanding under the five year revolving credit facility due September 29, 2005. In addition, $20 million was outstanding under the 364 day revolving credit facility, which converts in September 2001 to a term loan due September 29, 2002. (12) Accrued Abandonment, Restoration and Environmental Liabilities At June 30, 2001, the Company had accrued $475 million for the estimated future costs to abandon and remove wells and production facilities. The total costs for these abandonments are predominantly accrued for on a unit-of-production basis and are estimated to be approximately $640 million. This estimate was derived in large part from abandonment cost studies performed by independent third party firms and is used to calculate the amount to be amortized. The Company's reserve for environmental remediation obligations at June 30, 2001 totaled $232 million, of which $144 million was included in current liabilities. (13) Commitments and Contingencies The Company has certain contingent liabilities with respect to material existing or potential claims, lawsuits and other proceedings, including those involving environmental, tax and other matters, certain of which are discussed more specifically below. The Company accrues liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, the Company's estimates of the outcomes of these matters and its experience in contesting, litigating and settling other matters. As the scope of the liabilities becomes better defined, there will be changes in the estimates of future costs, which could have a material effect on the Company's future results of operations and financial condition or liquidity. Environmental matters - The Company is subject to loss contingencies pursuant to federal, state and local environmental laws and regulations. These include existing and possible future obligations to investigate the effects of the release or disposal of certain petroleum, chemical and mineral substances at various sites; to remediate or restore these sites; to compensate others for damage to property and natural resources, for remediation and restoration costs and for personal injuries; and to pay civil penalties and, in some cases, criminal penalties and punitive damages. These obligations relate to sites owned by the Company or others and are associated with past and present operations, including sites at which the Company has been identified as a potentially responsible party (PRP) under the federal Superfund laws and comparable state laws. Liabilities are accrued when it is probable that future costs will be incurred and such costs can be reasonably estimated. However, in many cases, investigations are not yet at a stage where the Company is able to determine whether it is liable or, even if liability is determined to be probable, to quantify the liability or estimate a range of possible exposure. In such cases, the amounts of the Company's liabilities are indeterminate due to the potentially large number of claimants for any given site or exposure, the unknown magnitude of possible contamination, the imprecise and conflicting engineering evaluations and estimates of proper clean-up methods and costs, the unknown timing and extent of the corrective actions that may be required, the uncertainty attendant to the possible award of punitive damages, the recent judicial recognition of new causes of action, the present state of the law, which often imposes joint and several and retroactive liabilities on PRPs, the fact that the Company is usually just one of a number of companies identified as a PRP, or other reasons. As disclosed in note 12, at June 30, 2001, the Company had accrued $232 million for estimated future environmental assessment and remediation costs at various sites where liabilities for such costs are probable. At those sites where investigations or feasibility studies have advanced to the stage of analyzing feasible alternative remedies and/or ranges of costs, the Company estimates that it could incur possible additional remediation costs aggregating approximately $230 million. -9- Tax matters - The Company believes it has adequately provided in its accounts for tax items and issues not yet resolved. Several prior material tax issues are unresolved. Resolution of these tax issues impact not only the year in which the items arose, but also the company's tax situation in other tax years. With respect to 1979-1984 taxable years, all issues raised for these years have now been settled, with the exception of the effect of the carryback of a 1993 net operating loss (NOL) to tax year 1984 and resultant credit adjustments. The 1985-1990 taxable years are before the Appeals Division of the Internal Revenue Service (IRS). All issues raised with respect to those years have now been settled, with the exception of the effect of the 1993 NOL carryback and resultant adjustments. The settlements were subject to review by the Joint Committee on Taxation of the U.S. Congress. The Joint Committee has reviewed the settled issues with respect to 1979-1990 taxable years and no additional issues have been raised. While all tax issues for the 1979-1990 taxable years have been agreed and reviewed by the Joint Committee, these taxable years will remain open due to the 1993 NOL carryback. The 1993 NOL results from certain specified liability losses which occurred during 1993 and which resulted in a tax refund of $73 million. Consequently, these tax years will remain open until the specified liability loss, which gave rise to the 1993 NOL, is finally determined by the IRS and is either agreed to with the IRS or otherwise concluded in the Tax Court proceeding. In 1999, the United States Tax Court granted Unocal's motion to amend the pleadings in its Tax Court cases to place the 1993 NOL carryback in issue. The 1991-1992 taxable years are now before the Appeals Division of the IRS. The 1993-1997 taxable years are under examination by the IRS. Pure Resources, Inc. Employment and Severance Agreements - Under circumstances specified in the employment and/or severance agreements entered into between the Company's Pure subsidiary and its officers, each covered officer will have the right to require Pure to purchase its common shares currently held or subsequently obtained by the exercise of any option held by the officer at a calculated "net asset value" per share. The net asset value per share is calculated by reference to each common share's pro rata amount of the present value of Pure's proved reserves discounted at 10 percent, times 110 percent, less funded debt, as defined. At June 30, 2001, Pure estimated that the amount which it would have to repurchase under these agreements was approximately $144 million, which is reflected in other deferred credits and liabilities on the consolidated balance sheet. The repurchase amount will fluctuate with the market value of Pure's common stock and/or changes in the net asset value per share. Other matters - The Company has a five-year lease agreement relating to its Discoverer Spirit deepwater drill ship. The future remaining minimum lease payment obligation was approximately $323 million at June 30, 2001. The drillship has a minimum daily rate of approximately $210,000. The Company's Molycorp subsidiary, working cooperatively and collaboratively with the New Mexico Environmental Department and other state agencies, has secured permits covering discharges from its Questa, New Mexico, molybdenum mine. This process involved the posting by Molycorp of two performance bonds totaling $152 million that are intended to provide financial assurance of completion of preliminary closure plans (only required upon cessation of operations) and other obligations required under the terms of the permits. The amount of the performance bonds were based on estimations provided by the state of New Mexico agencies. Unocal has indemnified the insurance company that issued the bonds with respect to all amounts that may be drawn against them. The Company also has certain other contingent liabilities with respect to litigation, claims, and contractual agreements arising in the ordinary course of business. Although these contingencies could result in expenses or judgments that could be material to the Company's results of operations for a given reporting period, on the basis of management's best assessment of the ultimate amount and timing of these events, such expenses or judgments are not expected to have a material adverse effect on the Company's consolidated financial condition or liquidity. -10- (14) Financial Instruments and Commodity Hedging Fair values of debt and other long-term instruments - The estimated fair value of the Company's long-term debt at June 30, 2001, including the current portion, was approximately $3.060 billion. Fair values were based on the discounted amounts of future cash outflows using the rates offered to the Company for debt with similar remaining maturities. The estimated fair value of the mandatorily redeemable convertible preferred securities of the Company's subsidiary trust was $505 million at June 30, 2001. The fair value was based on the trading prices of the preferred securities on June 29, 2001, as reported to the Company. Commodity hedging activities - During the second quarter of 2001, the Company recognized $5 millon in after-tax losses for the ineffectiveness of both cash flow and fair value hedges. At June 30, 2001, the Company's various subsidiaries had approximately $10 million after-tax deferred in accumulated other comprehensive income related to cash flow hedges for future commodity sales for the period beginning July 2001 through October 2004. Of this amount, approximately $7 million in after-tax gains are expected to be reclassified to earnings during the next twelve months. -11- (15) Supplemental Condensed Consolidating Financial Information Unocal guarantees all the publicly held securities issued by its 100 percent-owned subsidiaries Unocal Capital Trust and Union Oil. Such guarantees are full and unconditional and no other subsidiaries of Unocal or Union Oil guarantee these securities. The following tables present condensed consolidating financial information for (a) Unocal (Parent), (b) the Trust, (c) Union Oil (Parent) and (d) on a combined basis, the subsidiaries of Union Oil. Virtually all of the Company's operations are conducted by Union Oil and its subsidiaries.
CONDENSED CONSOLIDATED EARNINGS STATEMENT For the three months ended June 30, 2001 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ - $ 487 $ 1,604 $ (407) $ 1,684 Interest, dividends and miscellaneous income - 9 4 8 (10) 11 Gain on sales of assets - - 1 - - 1 - ----------------------------------------------------------------------------------------------------------------------------- Total revenues - 9 492 1,612 (417) 1,696 Costs and other deductions Purchases, operating and other expenses 1 - 260 1,101 (417) 945 Depreciation, depletion and amortization - - 103 165 - 268 Dry hole costs - - 24 23 - 47 Interest expense 9 1 40 8 (10) 48 Distributions on convertible preferred securities - 8 - - - 8 - ----------------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 10 9 427 1,297 (427) 1,316 Equity in earnings of subsidiaries 252 - 202 - (454) - Earnings from equity investments - - 10 39 - 49 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 242 - 277 354 (444) 429 - ----------------------------------------------------------------------------------------------------------------------------- Income taxes (4) - 37 147 - 180 Minority interests - - - 5 9 14 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 246 - 240 202 (453) 235 Earnings from discontinued operations - - 12 - - 12 Cumulative effect of accounting change - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 246 $ - $ 252 $ 202 $ (453) $ 247 =============================================================================================================================
-12-
CONDENSED CONSOLIDATED EARNINGS STATEMENT For the three months ended June 30, 2000 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ - $ 554 $ 1,836 $ (365) $ 2,025 Interest, dividends and miscellaneous income - 9 129 (3) (9) 126 Gain on sales of assets - - 66 (1) - 65 - ----------------------------------------------------------------------------------------------------------------------------- Total revenues - 9 749 1,832 (374) 2,216 Costs and other deductions Purchases, operating and other expenses - - 409 1,479 (365) 1,523 Depreciation, depletion and amortization - - 93 131 - 224 Dry hole costs - - 7 30 - 37 Interest expense 9 1 53 (1) (9) 53 Distributions on convertible preferred securities - 8 - - - 8 - ----------------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 9 9 562 1,639 (374) 1,845 Equity in earnings of subsidiaries 267 - 157 - (424) - Earnings from equity investments - - 9 20 3 32 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 258 - 353 213 (421) 403 - ----------------------------------------------------------------------------------------------------------------------------- Income taxes (3) - 85 77 - 159 Minority interests - - 1 (7) - (6) - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 261 - 267 143 (421) 250 Earnings from discontinued operations - - - 14 - 14 - ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 261 $ - $ 267 $ 157 $ (421) $ 264 =============================================================================================================================
-13-
CONDENSED CONSOLIDATED EARNINGS STATEMENT For the six months ended June 30, 2001 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ - $ 1,180 $ 3,686 $ (976) $ 3,890 Interest, dividends and miscellaneous income 5 17 3 13 (19) 19 Gain on sales of assets - - 1 - - 1 - ----------------------------------------------------------------------------------------------------------------------------- Total revenues 5 17 1,184 3,699 (995) 3,910 Costs and other deductions Purchases, operating and other expenses 2 - 645 2,711 (997) 2,361 Depreciation, depletion and amortization - - 199 314 - 513 Dry hole costs - - 34 53 - 87 Interest expense 17 1 85 13 (19) 97 Distributions on convertible preferred securities - 16 - - - 16 - ----------------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 19 17 963 3,091 (1,016) 3,074 Equity in earnings of subsidiaries 551 - 413 - (964) - Earnings from equity investments - - 8 83 - 91 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 537 - 642 691 (943) 927 - ----------------------------------------------------------------------------------------------------------------------------- Income taxes (5) - 106 269 - 370 Minority interests - - - 9 21 30 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 542 - 536 413 (964) 527 Earnings from discontinued operations - - 16 - - 16 Cumulative effect of accounting change - - (1) - - (1) - ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 542 $ - $ 551 $ 413 $ (964) $ 542 =============================================================================================================================
-14-
CONDENSED CONSOLIDATED EARNINGS STATEMENT For the six months ended June 30, 2000 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ - $ 1,010 $ 3,539 $ (683) $ 3,866 Interest, dividends and miscellaneous income 10 17 126 9 (19) 143 Gain on sales of assets - - 63 - - 63 - ----------------------------------------------------------------------------------------------------------------------------- Total revenues 10 17 1,199 3,548 (702) 4,072 Costs and other deductions Purchases, operating and other expenses 1 - 722 2,881 (684) 2,920 Depreciation, depletion and amortization - - 179 251 - 430 Dry hole costs - - 13 38 - 51 Interest expense 17 1 105 2 (19) 106 Distributions on convertible preferred securities - 16 - - - 16 - ----------------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 18 17 1,019 3,172 (703) 3,523 Equity in earnings of subsidiaries 401 - 292 - (693) - Earnings from equity investments - - 21 36 - 57 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 393 - 493 412 (692) 606 - ----------------------------------------------------------------------------------------------------------------------------- Income taxes (3) - 92 153 - 242 Minority interests - - - (10) - (10) - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 396 - 401 269 (692) 374 Earnings from discontinued operations - - - 23 - 23 - ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 396 $ - $ 401 $ 292 $ (692) $ 397 =============================================================================================================================
-15-
CONDENSED CONSOLIDATED BALANCE SHEET Period ended June 30, 2001 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ - $ - $ 306 $ 234 $ - $ 540 Accounts and notes receivable - - 135 863 - 998 Inventories - - 8 68 - 76 Other current assets - - 156 42 - 198 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets - - 605 1,207 - 1,812 Investments and long-term receivables 4,068 - 4,086 955 (7,665) 1,444 Properties - net - - 2,083 5,096 - 7,179 Other assets 54 541 391 1,649 (2,352) 283 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $4,122 $ 541 $ 7,165 $ 8,907 $ (10,017) $ 10,718 ============================================================================================================================= Liabilities and Stockholders' Equity Current liabilities Accounts payable $ - $ - $ 240 $ 556 $ - $ 796 Current portion of long-term debt and capital leases - - 180 9 - 189 Other current liabilities 46 3 230 406 - 685 - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 46 3 650 971 - 1,670 Long-term debt and capital leases - - 2,101 669 - 2,770 Deferred income taxes - - (13) 624 - 611 Accrued abandonment, restoration and environmental liabilities - - 263 300 - 563 Other deferred credits and liabilities 541 - 416 2,398 (2,361) 994 Minority interests - - - 294 139 433 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely parent debentures - 522 - - - 522 Stockholders' equity 3,535 16 3,748 3,651 (7,795) 3,155 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $4,122 $ 541 $ 7,165 $ 8,907 $ (10,017) $ 10,718 =============================================================================================================================
-16-
CONDENSED CONSOLIDATED BALANCE SHEET Year ended December 31, 2000 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 1 $ - $ 84 $ 150 $ - $ 235 Accounts and notes receivable - - 165 1,134 - 1,299 Inventories - - 13 75 - 88 Other current assets - - 127 53 - 180 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets 1 - 389 1,412 - 1,802 Investments and long-term receivables 3,620 - 3,765 781 (6,787) 1,379 Properties - net - - 1,988 4,445 - 6,433 Other assets 56 541 646 1,153 (2,000) 396 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $3,677 $ 541 $ 6,788 $ 7,791 $ (8,787) $ 10,010 ============================================================================================================================= Liabilities and Stockholders' Equity Current liabilities Accounts payable $ - $ - $ 283 $ 739 $ - $ 1,022 Current portion of long-term debt and capital leases - - 105 9 - 114 Other current liabilities 42 3 233 431 - 709 - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 42 3 621 1,179 - 1,845 Long-term debt and capital leases - - 2,181 211 - 2,392 Deferred income taxes - - (10) 628 - 618 Accrued abandonment, restoration and environmental liabilities - - 254 300 - 554 Other deferred credits and liabilities 541 - 467 1,952 (1,992) 968 Minority interests - - - 287 105 392 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely parent debentures - 522 - - - 522 Stockholders' equity 3,094 16 3,275 3,234 (6,900) 2,719 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $3,677 $ 541 $ 6,788 $ 7,791 $ (8,787) $ 10,010 =============================================================================================================================
-17-
CONDENSED CONSOLIDATED CASH FLOWS Period ended June 30, 2001 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities $ 83 $ - $ 572 $ 589 $ - $1,244 Cash Flows from Investing Activities Capital expenditures and acquisitions (includes dry hole costs) - - (373) (868) - (1,241) Proceeds from sales of assets and discontinued operations - - 28 2 - 30 - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities - - (345) (866) - (1,211) - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Change in long-term debt and capital leases - - (5) 371 - 366 Dividends paid on common stock (97) - - - - (97) Minority interests - - - (10) - (10) Other 13 - - - - 13 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (84) - (5) 361 - 272 - ----------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (1) - 222 84 - 305 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 1 - 84 150 - 235 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ - $ - $ 306 $ 234 $ - $ 540 =============================================================================================================================
CONDENSED CONSOLIDATED CASH FLOWS Period ended June 30, 2000 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities $103 $ - $ 161 $ 504 $ - $ 768 Cash Flows from Investing Activities Capital expenditures and acquisitions (includes dry hole costs) - - (227) (492) - (719) Proceeds from sales of assets and discontinued operations 25 - 68 (1) - 92 - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities 25 - (159) (493) - (627) - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Change in long-term debt and capital leases - - (159) (14) - (173) Dividends paid on common stock (97) - - - - (97) Minority interests - - - (14) - (14) Other (31) - - - - (31) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (128) - (159) (28) - (315) - ----------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents - - (157) (17) - (174) - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 1 - 162 169 - 332 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1 $ - $ 5 $ 152 $ - $ 158 =============================================================================================================================
-18- Segment Data The Company has made changes in the reporting of its segments from the reporting utilized in the 2000 Annual Report on Form 10-K. The Company's reportable segments are now: Exploration and Production, Global Trade, Midstream, and Geothermal and Power Operations. General corporate overhead, unallocated costs and other miscellaneous operations, including real estate, carbon and minerals and those businesses that were sold, are included under the Corporate and Other heading. See also Management`s Discussion and Analysis in Item 2 for further descriptions of the new segments.
-------------------------------------------------------------------- Segment Information Exploration & Production Global For the Three Months North America International Trade ended June 30, 2001 Millions of dollars Lower 48 Alaska Canada Far East Other -------------------------------------------------------------------- Sales & operating revenues $ 167 $ 63 $ 97 $ 269 $ 39 $ 925 Other income (loss) (a) - - 2 (3) - 6 Inter-segment revenues 406 - - 55 26 1 -------------------------------------------------------------------- Total 573 63 99 321 65 932 Earnings from equity investments 8 - - 8 - - Earnings (loss) from continuing operations 142 13 14 113 5 4 Earnings from discontinued operations - - - - - - Cumulative effect of accounting change - - - - - - -------------------------------------------------------------------- Net earnings (loss) 142 13 14 113 5 4 Assets (at June 30, 2001) 3,316 315 935 2,337 764 390 --------------------------------------------------------------------
-------------------------------------------------------------------------------- Midstream Geothermal Corporate & Other Total & Power Admin Net Environmental Operations & Interest & General Expense Litigation Other (b) -------------------------------------------------------------------------------- Sales & operating revenues $ 39 $ 45 $ - $ - $ - $ 40 $ 1,684 Other income (loss) (a) 1 4 - 7 - (5) 12 Inter-segment revenues 2 - - - - (490) - -------------------------------------------------------------------------------- Total 42 49 - 7 - (455) 1,696 Earnings from equity investments 19 - - - - 14 49 Earnings (loss) from continuing operations 18 2 (21) (32) (16) (7) 235 Earnings from discontinued operations - - - - - 12 12 Cumulative effect of accounting change - - - - - - - -------------------------------------------------------------------------------- Net earnings (loss) 18 2 (21) (32) (16) 5 247 Assets (at June 30, 2001) 440 608 - - - 1,613 10,718 -------------------------------------------------------------------------------- (a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets. (b) Includes eliminations and consolidation adjustments.
-19-
-------------------------------------------------------------------- Segment Information Exploration & Production Global For the Three Months North America International Trade ended June 30, 2000 Millions of dollars Lower 48 Alaska Canada Far East Other -------------------------------------------------------------------- Sales & operating revenues $ 33 $ 59 $ 20 $ 239 $ 37 $ 1,531 Other income (loss) (a) 67 - (1) (2) 1 - Inter-segment revenues 372 16 - 44 41 1 -------------------------------------------------------------------- Total 472 75 19 281 79 1,532 Earnings (loss) from equity investments 1 - - - - - Earnings (loss) from continuing operations 134 24 (11) 88 19 6 Earnings from discontinued operations - - - - - - -------------------------------------------------------------------- Net earnings (loss) 134 24 (11) 88 19 6 Assets (at December 31, 2000) 2,701 315 1,019 2,251 603 655 --------------------------------------------------------------------
-------------------------------------------------------------------------------- Midstream Geothermal Corporate & Other Total & Power Admin Net Environmental Operations & Interest & General Expense Litigation Other (b) -------------------------------------------------------------------------------- Sales & operating revenues $ 13 $ 44 $ - $ - $ - $ 49 $ 2,025 Other income (loss) (a) - (1) - 8 - 119 191 Inter-segment revenues 3 - - - - (477) - -------------------------------------------------------------------------------- Total 16 43 - 8 - (309) 2,216 Earnings (loss) from equity investments 17 (1) - - - 15 32 Earnings (loss) from continuing operations 15 5 (21) (37) (33) 61 250 Earnings from discontinued operations - - - - - 14 14 -------------------------------------------------------------------------------- Net earnings (loss) 15 5 (21) (37) (33) 75 264 Assets (at December 31, 2000) 416 574 - - - 1,476 10,010 -------------------------------------------------------------------------------- (a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets. (b) Includes eliminations and consolidation adjustments.
-20-
-------------------------------------------------------------------- Segment Information Exploration & Production Global For the Six Months North America International Trade ended June 30, 2001 Millions of dollars Lower 48 Alaska Canada Far East Other -------------------------------------------------------------------- Sales & operating revenues $ 328 $ 135 $ 129 $ 501 $ 74 $ 2,428 Other income (loss) (a) 1 - 1 (6) (1) (1) Inter-segment revenues 972 - - 110 61 1 -------------------------------------------------------------------- Total 1,301 135 130 605 134 2,428 Earnings from equity investments 14 - - 19 - - Earnings (loss) from continuing operations 383 32 11 219 27 7 Earnings from discontinued operations - - - - - - Cumulative effect of accounting change - - - - - - -------------------------------------------------------------------- Net earnings (loss) 383 32 11 219 27 7 Assets (at June 30, 2001) 3,316 315 935 2,337 764 390 --------------------------------------------------------------------
-------------------------------------------------------------------------------- Midstream Geothermal Corporate & Other Total & Power Admin Net Environmental Operations & Interest & General Expense Litigation Other (b) -------------------------------------------------------------------------------- Sales & operating revenues $ 139 $ 89 $ - $ - $ - $ 67 $ 3,890 Other income (loss) (a) 2 7 - 13 - 4 20 Inter-segment revenues 4 - - - - (1,148) - -------------------------------------------------------------------------------- Total 145 96 - 13 - (1,077) 3,910 Earnings from equity investments 28 - - - - 30 91 Earnings (loss) from continuing operations 27 3 (44) (65) (50) (23) 527 Earnings from discontinued operations - - - - - 16 16 Cumulative effect of accounting change - - - - - (1) (1) -------------------------------------------------------------------------------- Net earnings (loss) 27 3 (44) (65) (50) (8) 542 Assets (at June 30, 2001) 440 608 - - - 1,613 10,718 -------------------------------------------------------------------------------- (a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets. (b) Includes eliminations and consolidation adjustments.
-21-
-------------------------------------------------------------------- Segment Information Exploration & Production Global For the Six Months North America International Trade ended June 30, 2000 Millions of dollars Lower 48 Alaska Canada Far East Other -------------------------------------------------------------------- Sales & operating revenues $ 57 $ 120 $ 64 $ 455 $ 66 $ 2,905 Other income (loss) (a) 65 - (1) (4) (1) - Inter-segment revenues 673 33 - 112 55 2 -------------------------------------------------------------------- Total 795 153 63 563 120 2,907 Earnings (loss) from equity investments 3 - - - 1 - Earnings (loss) from continuing operations 197 47 (8) 170 17 4 Earnings from discontinued operations - - - - - - -------------------------------------------------------------------- Net earnings (loss) 197 47 (8) 170 17 4 Assets (at December 31, 2000) 2,701 315 1,019 2,251 603 655 --------------------------------------------------------------------
-------------------------------------------------------------------------------- Midstream Geothermal Corporate & Other Total & Power Admin Net Environmental Operations & Interest & General Expense Litigation Other (b) -------------------------------------------------------------------------------- Sales & operating revenues $ 26 $ 83 $ - $ - $ - $ 90 $ 3,866 Other income (loss) (a) 1 2 - 14 - 130 206 Inter-segment revenues 6 - - - - (881) - -------------------------------------------------------------------------------- Total 33 85 - 14 - (661) 4,072 Earnings (loss) from equity investments 32 (1) - - - 22 57 Earnings (loss) from continuing operations 31 14 (43) (73) (38) 56 374 Earnings from discontinued operations - - - - - 23 23 -------------------------------------------------------------------------------- Net earnings (loss) 31 14 (43) (73) (38) 79 397 Assets (at December 31, 2000) 416 574 - - - 1,476 10,010 -------------------------------------------------------------------------------- (a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets. (b) Includes eliminations and consolidation adjustments.
OPERATING HIGHLIGHTS Effective with the first quarter of 2001, the Company began reporting all production pursuant to production sharing contracts on the net-economic interests basis, which excludes host country shares. In previous reporting, production had included host country shares in Indonesia and the Democratic Republic of Congo. The Company also began reporting natural gas production on a dry basis, with natural gas liquids now included with crude oil and condensate production volumes. The amounts in the table on the following page reflect these restatements: -22-
OPERATING HIGHLIGHTS (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------- -------------------- 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------- North America Net Daily Production Crude oil, condensate and natural gas liquids (thousand barrels) Lower 48 (a) 59 52 57 54 Alaska 24 27 24 27 Canada (a) 15 17 15 17 - --------------------------------------------------------------------------------------------------- Total crude oil, condensate and natural gas liquids 98 96 96 98 Natural gas - dry basis (million cubic feet) Lower 48 (a) 954 726 911 719 Alaska 93 135 115 143 Canada (a) 85 92 112 96 - --------------------------------------------------------------------------------------------------- Total natural gas 1,132 953 1,138 958 North America Average Prices (b) Crude oil, condensate and natural gas liquids (per barrel) Lower 48 $ 24.57 $ 25.14 $ 25.47 $ 25.10 Alaska $ 22.27 $ 23.79 $ 22.55 $ 23.24 Canada $ 20.84 $ 21.48 $ 20.65 $ 20.09 Average $ 23.45 $ 24.12 $ 23.96 $ 23.70 Natural gas (per mcf) Lower 48 $ 4.62 $ 3.41 $ 5.69 $ 2.96 Alaska $ 1.20 $ 1.20 $ 1.20 $ 1.20 Canada $ 2.48 $ 1.73 $ 3.65 $ 1.67 Average $ 4.16 $ 2.91 $ 5.01 $ 2.55 - --------------------------------------------------------------------------------------------------- International Net Daily Production Crude oil, condensate and natural gas liquids (thousand barrels) Far East 48 47 49 47 Other 19 18 19 18 - --------------------------------------------------------------------------------------------------- Total crude oil, condensate and natural gas liquids 67 65 68 65 Natural gas - dry basis (million cubic feet) Far East 908 817 851 790 Other 69 57 63 59 - --------------------------------------------------------------------------------------------------- Total natural gas 977 874 914 849 International Average Prices (b) Crude oil, condensate and natural gas liquids (per barrel) Far East $ 24.91 $ 24.40 $ 24.57 $ 24.06 Other $ 27.51 $ 26.38 $ 26.36 $ 26.19 Average $ 25.61 $ 25.07 $ 25.10 $ 24.66 Natural gas (per mcf) Far East $ 2.54 $ 2.31 $ 2.51 $ 2.30 Other $ 2.92 $ 2.80 $ 2.90 $ 2.76 Average $ 2.56 $ 2.35 $ 2.54 $ 2.34 - --------------------------------------------------------------------------------------------------- Worldwide Net Daily Production (a) Crude oil, condensate and ngls (thousand barrels) 165 161 164 163 Natural gas - dry basis (million cubic feet) 2,109 1,827 2,052 1,807 Barrels oil equivalent (thousands) 516 466 506 464 Worldwide Average Prices (b) Crude oil, condensate and ngls (per barrel) $ 24.33 $ 24.53 $ 24.45 $ 24.08 Natural gas (per mcf) $ 3.41 $ 2.64 $ 3.89 $ 2.45 - --------------------------------------------------------------------------------------------------- (a) Production includes 100 percent of production of consolidated subsidiaries and proportional shares of production of equity investees. (b) Average prices include hedging gains and losses but exclude gains or losses on derivative positions not accounted for as hedges, the ineffective portion of hedges and other Global Trade margins.
-23- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the consolidated financial condition and results of operations of Unocal should be read in conjunction with Management's Discussion and Analysis in Item 7 of the Company's 2000 Annual Report on Form 10-K and in Item 2 of Part I of the Company's First Quarter 2001 Quarterly Report on Form 10-Q. The Pipelines business segment has been combined with certain activities of the Company's gas storage businesses in Canada, which were previously reported in the Exploration and Production segment, into a new segment called Midstream. The Carbon and Minerals businesses are no longer disclosed as a separate segment and are now reported in the Corporate and Other heading. See note 16 to the consolidated financial statements in Item 1 of this report for revisions in the Company's reportable segments. CONSOLIDATED RESULTS
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ------------------------ Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------ Earnings from continuing operations $ 235 $ 250 $ 527 $ 374 Earnings from discontinued operations 12 14 16 23 Cumulative effect of accounting change - - (1) - - ------------------------------------------------------------------------------------------------------------ Net earnings $ 247 $ 264 $ 542 $ 397 ============================================================================================================
Earnings from continuing operations totaled $235 million in the second quarter of 2001, which was a decrease of $15 million from the same period a year ago. The second quarter 2001 results benefited from higher worldwide average natural gas prices and higher worldwide natural gas production compared to the same period in 2000. The Company's worldwide average natural gas price, including realized hedging activities, was $3.41 per thousand cubic feet (mcf) in the second quarter of 2001, which was an increase of 77 cents per mcf, or 29 percent, from the same period a year ago. The Company's worldwide natural gas production was 2,109 million cubic feet per day (mmcf/d) in the second quarter of 2001, which was an increase of 15 percent from the same period a year ago. The increase was primarily due to higher natural gas production from the U.S. Lower 48 and Far East. These positive results in the second quarter of 2001 were more than offset by special items that benefited the results of the second quarter of 2000. These items included a $55 million after-tax gain related to payments received pursuant to a judgement in its reformulated gasoline patent infringement case, a $42 million after-tax gain related to the formation of Pure Resources, Inc. (Pure), and a $21 million after-tax insurance recovery related to environmental issues. Sales and operating revenues were $1,684 million for the second quarter of 2001, which was a decrease of $341 million from the same period a year ago. This decrease was primarily due to lower marketing and trading activities of crude oil and condensate by the Company's Global Trade segment which more than offset the increase in revenues generated by the Exploration and Production segment. Earnings from continuing operations totaled $527 million for the first six months of 2001, which was an increase of $153 million from the same period a year ago. This increase was primarily due to higher worldwide average natural gas prices and increased natural gas production. The Company's worldwide average natural gas price, including realized hedging activities, was $3.89 per mcf for the first six months of 2001, which was an increase of $1.44 per mcf, or 59 percent, from the same period a year ago. The Company's worldwide natural gas production increased by 14 percent from the same period a year ago, primarily due to higher natural gas production from the U.S. Lower 48 and Far East. These positive results were partially offset by higher dry hole costs and higher depreciation, depletion and amortization expense. The first six months of 2000 results included the second quarter special item benefits described above. -24- Earnings from discontinued operations were $12 million and $16 million in the second quarter and first six months periods of 2001, respectively, compared with $14 million and $23 million for the same periods a year ago. The Company recorded pre-tax gains of $18 million and $25 million in the second quarter and first six months periods of 2001, respectively, related to a participation agreement tied to its former West Coast refining, marketing and transportation assets, which were sold in 1997. The participation agreement covers price differences between California Air Resources Board Phase 2 gasoline and conventional gasoline. The maximum potential payments under this participation agreement are capped at $100 million and extend to 2003. The second quarter and six months periods of 2000 results reflected the Company's former agricultural products business, which was sold later in that year. In 2001, the Company recorded a one-time non-cash $1 million after-tax charge consisting of the cumulative effect of change in accounting principle related to the initial adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative instruments and Hedging Activities". Special items represent certain significant transactions, presented in net earnings, that management determines to be unrelated to or not representative of the Company's ongoing operations. The following table is a reconciliation of consolidated adjusted (excluding special items) after-tax earnings to net earnings for the quarterly and six months periods ended June 30:
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ------------------------- Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (a) $ 228 $ 170 $ 568 $ 309 Special items: Continuing operations Gain on asset sales - 42 - 42 Environmental and litigation provisions/settlements (14) (29) (45) (33) Executive stock purchase program - (9) - (9) Insurance benefits related to environmental issues - 21 - 21 Trading derivatives- non-hedging (Northrock) 21 - 4 - Reformulated gasoline patent case - 55 - 55 Restructuring costs - - - (11) - ------------------------------------------------------------------------------------------------------------- Total special items from continuing operations 7 80 (41) 65 Discontinued operations Gain on disposal - Agricultural products - 14 - 23 Gain on disposal - Refining and marketing 12 - 16 - - ------------------------------------------------------------------------------------------------------------- Total special items from discontinued operations 12 14 16 23 Cumulative effect of accounting change - - (1) - - ------------------------------------------------------------------------------------------------------------- Net earnings (a) $ 247 $ 264 $ 542 $ 397 ============================================================================================================= (a) Includes minority interests of: $ (14) $ 6 $ (30) $ 10
-25- EXPLORATION AND PRODUCTION The Company engages in oil and gas exploration, development and production worldwide. North America - Included in this category are oil and gas operations in the U.S. Lower 48, Alaska and Canada. The emphasis of the U.S. Lower 48 operations is on the onshore, continental shelf and deepwater areas of the Gulf of Mexico region. The U.S. Lower 48 also includes the consolidated results of Pure Resources, Inc. (Pure), a 65-percent owned subsidiary, which operates primarily in the Permian and San Juan Basins in West Texas and New Mexico, the Gulf Coast and the Gulf of Mexico. A substantial portion of the crude oil and natural gas produced in the U.S. Lower 48 operations, excluding those of Pure, is sold to the Company's Global Trade business segment. The remainder of North America production, including the production of Pure and the Company's Northrock Resources Ltd. (Northrock) Canadian subsidiary, is sold to third parties. In Alaska, natural gas production, pursuant to agreements with Agrium, Inc. (Agrium), is sold to Agrium's fertilizer plant in Kenai. In addition, Northrock and Pure take pricing positions in hydrocarbon derivative instruments in support of their oil and gas operations.
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ------------------------- Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (loss) (before special items) Lower 48 (a) $ 142 $ 92 $ 383 $ 155 Alaska 13 23 32 47 Canada (b) (7) (11) 7 (8) - ------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (before special items) (a) (b) 148 104 422 194 Special items: Gain on asset sales (Lower 48) - 42 - 42 Litigation provisions (Alaska) - 1 - - Trading derivatives- non-hedging (Northrock) 21 - 4 - - ------------------------------------------------------------------------------------------------------------- Total special items 21 43 4 42 - ------------------------------------------------------------------------------------------------------------- After-tax earnings (a) (b) $ 169 $ 147 $ 426 $ 236 ============================================================================================================= (a) Includes minority interests of: $ (15) $ (6) $ (32) $ (11) (b) Includes minority interests of: $ - $ 12 $ - $ 20
After-tax earnings totaled $169 million in the second quarter of 2001, which was an increase of $22 million from the same period a year ago. This increase was primarily due to higher North America average natural gas prices and higher natural gas production. Average North America natural gas prices, including realized hedging activities, were $4.16 per mcf in the second quarter of 2001, which was an increase of $1.25 per mcf, or 43 percent, from the same period a year ago. North America average net daily natural gas production was 1,132 mmcf/d in the second quarter of 2001 compared to 953 mmcf/d in the same period a year ago, which was an increase of 19 percent, primarily behind strong results from the Lower 48. The increase in the Lower 48 was from the Company's production on Ship Shoal 295 Block (Muni field) in the Gulf of Mexico, which began production in the third quarter of 2000, as well as newly acquired properties in Mobile Bay and other Gulf of Mexico shelf areas and the production increases by Pure. These positive results were partially offset by higher depreciation, depletion and amortization expense and higher dry hole costs from the Gulf of Mexico deepwater drilling program. The second quarter 2001 results also benefited from gains related to non-hedging commodity derivative positions of Northrock in Canada versus losses in the same period a year ago. The second quarter 2000 results included a $42 million after-tax gain related to the formation of Pure. -26- After-tax earnings totaled $426 million for the first six months of 2001, which was an increase of $190 million from the same period a year ago. This increase was primarily due to higher North America average natural gas prices and higher natural gas production. Average North America natural gas prices, including realized hedging activities, were $5.01 per mcf in the first six months of 2001, which was an increase of $2.46 per mcf, or 96 percent, from the same period a year ago. North America average net daily natural gas production was 1,138 mmcf/d for the first six months of 2001 compared to 958 mmcf/d in the same period a year ago, which was an increase of 19 percent, primarily behind the strong results from the Lower 48. The first six months of 2001 also benefited from gains related to non-hedging commodity derivative positions of Northrock in Canada versus losses in the same period a year ago. These positive results were partially offset by higher depreciation, depletion and amortization expense and higher dry hole costs from the Gulf of Mexico deepwater drilling program and Gulf of Mexico shelf. The first six months of 2000 results included the $42 million after-tax gain related to the formation of Pure. International - Unocal's International operations include oil and gas exploration and production activities outside of North America. The Company operates or participates in production operations in Thailand, Indonesia, Myanmar, Bangladesh, the Netherlands, Azerbaijan, the Democratic Republic of Congo and Brazil. International operations also include the Company's exploration activities and the development of energy projects primarily in Asia, Latin America and West Africa.
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ------------------------- Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (before special items) Far East $ 113 $ 88 $ 219 $ 170 Other 5 19 27 17 - ------------------------------------------------------------------------------------------------------------ Adjusted after-tax earnings (before special items) 118 107 246 187 Special items: - - - - - ------------------------------------------------------------------------------------------------------------ After-tax earnings $ 118 $ 107 $ 246 $ 187 ============================================================================================================
After-tax earnings totaled $118 million in the second quarter of 2001, which was an increase of $11 million from the same period a year ago. The increase was primarily due to higher natural gas production volumes and higher natural gas prices. Natural gas production increased 12 percent in the second quarter of 2001 compared to the same period a year ago, primarily in the Far East, boosted by strong electricity demand in the Thailand market. The average net daily natural gas production in the Far East was 908 mmcf/d in the second quarter of 2001 compared to 817 mmcf/d for the same period a year ago, which was an increase of 11 percent. The average natural gas price for International operations was $2.56 per mcf in the second quarter of 2001, which was an increase of 21 cents per mcf, or nine percent, from the same period a year ago. The second quarter of 2001 results also had lower dry hole costs compared to the same period a year ago. These positive results were partially offset by lower crude oil sales volumes due to timing of liftings and higher effective tax rates, primarily due to a change in the Thai baht/U.S. dollar exchange rate. After-tax earnings totaled $246 million for the first six months of 2001, which was an increase of $59 million from the same period a year ago. The increase was primarily due to higher natural gas prices and natural gas production volumes in the Far East. The average natural gas price for International operations was $2.54 per mcf for the first six months of 2001, which was an increase of 20 cents per mcf, or nine percent, from the same period a year ago. Natural gas production increased about eight percent for the first six months of 2001 compared to the same period a year ago, primarily in the Far East. The average net daily natural gas production in the Far East was 851 mmcf/d in the first six months of 2000 compared to 790 mmcf/d for the same period a year ago, which was an increase of eight percent. -27- GLOBAL TRADE The Global Trade segment conducts most of the Company's worldwide crude oil, condensate, natural gas and refined products trading and marketing activities, excluding those of Pure and Northrock. It is also responsible for commodity-specific risk management activities on behalf of most of the Company's Exploration and Production segment, excluding Pure. Global Trade also purchases crude oil, condensate and natural gas from certain of the Company's royalty owners, joint venture partners and other unaffiliated oil and gas producing and trading companies for resale. In addition, Global Trade takes pricing positions in hydrocarbon derivative instruments.
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ------------------------- Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (before special items) $ 4 $ 6 $ 7 $ 4 Special items: - - - - - ------------------------------------------------------------------------------------------------------------ After-tax earnings (loss) $ 4 $ 6 $ 7 $ 4 ============================================================================================================
After-tax results totaled $4 million in the second quarter of 2001, which was a decrease of $2 million from the same period a year ago. The decrease in the second quarter of 2001 was primarily due to lower results from non-hedging commodity derivative positions related to crude oil. For the six months ended June 30, 2001, after-tax results totaled $7 million, which was an increase of $3 million from the same period a year ago. The increase was primarily due to higher results from non-hedging commodity derivative positions related to natural gas. MIDSTREAM The Midstream segment is comprised of the Pipelines business, which principally encompasses the Company's equity interests in affiliated petroleum pipeline companies and wholly-owned pipeline systems throughout the U.S., and the Company's North America gas storage business.
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ------------------------- Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (before special items) $ 18 $ 15 $ 27 $ 31 Special items: - - - - - ------------------------------------------------------------------------------------------------------------ After-tax earnings $ 18 $ 15 $ 27 $ 31 ============================================================================================================
After-tax earnings totaled $18 million for the second quarter of 2001, which was an increase of $3 million from the same period a year ago. The increase was primarily due to improved results from the Company's North America gas storage business. For the six months ended June 30, 2001, after-tax earnings totaled $27 million, which was a decrease of $4 million from the same period a year ago. The decrease was primarily due to a $6 million asset write-down related to a Colonial Pipeline Company investment. -28- GEOTHERMAL AND POWER OPERATIONS The Geothermal and Power Operations segment produces geothermal steam for power generation, with operations in the Philippines and Indonesia. The segment's activities also include the operation of power plants in Indonesia and equity interests in gas-fired power plants in Thailand. The Company's non-exploration and production business development activities, primarily power-related, are also included in this segment.
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ------------------------- Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (before special items) $ 2 $ 5 $ 3 $ 14 Special items: - - - - - ------------------------------------------------------------------------------------------------------------ After-tax earnings $ 2 $ 5 $ 3 $ 14 ============================================================================================================
After-tax earnings totaled $2 million and $3 million in the second quarter and first six months of 2001, respectively, which were decreases of $3 million and $11 million, respectively, from the same periods a year ago. The decreases were primarily due to higher receivable provisions related to operations in Indonesia. CORPORATE AND OTHER Corporate and Other includes general corporate overhead, miscellaneous operations (including real estate activities, carbon and minerals) and other corporate unallocated costs. Net interest expense represents interest expense, net of interest income and capitalized interest.
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ------------------------- Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings effect (before special items) Administrative and general expense $ (21) $ (21) $ (44) $ (43) Net interest expense (a) (32) (37) (65) (73) Environmental and litigation expense (2) (3) (5) (6) Other (a) (7) (6) (23) 1 - ------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings effect (before special items) (a) (62) (67) (137) (121) Special items: Environmental and litigation provisions (14) (30) (45) (33) Other Executive stock purchase program - (9) - (9) Insurance benefits related to environmental issues - 21 - 21 Reformulated gasoline patent case - 55 - 55 Restructuring costs - - - (11) - ------------------------------------------------------------------------------------------------------------- Total special items (14) 37 (45) 23 - ------------------------------------------------------------------------------------------------------------- After-tax earnings effect (a) $ (76) $ (30) $ (182) $ (98) ============================================================================================================= (a) Includes minority interests of: $ 1 $ - $ 2 $ 1
The after-tax earnings effect was a loss of $76 million in the second quarter of 2001 compared to a loss of $30 million in the same period a year ago. The second quarter 2000 results benefited from a $55 million after-tax gain related to payments received pursuant to a judgement in the Company's reformulated gasoline patent infringement case and a $21 million after-tax insurance recovery related to environmental issues. Environmental and litigation provisions in the second quarter of 2001 were lower than the second quarter of 2000. Net interest expense was also lower in the second quarter of 2001 from the same period a year ago primarily due to higher capitalized interest. -29- The after-tax earnings effect was a loss of $182 million for the first six months of 2001 compared to a loss of $98 million from the same period a year ago. The results of the six months period in 2000 benefited from the $55 million after-tax gain related to payments received in the Company's reformulated gasoline patent infringement case and the $21 million after-tax insurance recovery. Environmental and litigation provisions were higher in the first six months of 2001 compared to the same period a year ago, primarily due to higher estimated costs related to the cleanup of former Company operated sites and facilities sold with retained liabilities. Net interest expense was also lower for the first six months of 2001, compared to the same period a year ago primarily due to a lower balance on a limited-recourse loan and higher capitalized interest. The Company also made a $10 million pre-tax cash contribution in 2001, included in the Other category, to fund a charitable foundation. FINANCIAL CONDITION AND CAPITAL EXPENDITURES
At At At June 30, December 31, June 30, ---------------------------------------------------- Millions of dollars 2001 2000 2000 - ---------------------------------------------------------------------------------------------------------------- Current ratio 1.1:1 1.0:1 0.9:1 Total debt and capital leases $ 2,959 $ 2,506 $ 2,784 Trust convertible preferred securities 522 522 522 Stockholders' equity 3,155 2,719 2,455 ---------------------------------------------------- Total capitalization $ 6,636 $ 5,747 $ 5,761 ==================================================== Total debt/total capitalization 45% 44% 48% Floating-rate debt/total debt 6% 3% 8% - ----------------------------------------------------------------------------------------------------------------
For the first six months of 2001, net cash flow provided by operating activities was $1,244 million compared with $768 million in the same period a year ago. This increase primarily reflected the effects of higher worldwide average natural gas prices and higher worldwide natural gas production. Cash flow generated by operating activities reflected a reduction of commodity prices during the first six months of the year, lower crude oil trading activity by the Company's Global Trade business segment and the collection, in June 2001, of $73 million from the Petroleum Authority of Thailand in settlement of its "take-or-pay" obligation for natural gas purchases from the Company's Yadana project in Myanmar. Pre-tax proceeds from asset sales, including those classified as discontinued operations, were $30 million for the first six months of 2001. The proceeds included $12 million from the sale of certain oil and gas properties, $11 million from the sale of miscellaneous assets and a $7 million payment associated with a participation agreement involving certain gasoline margins realized by the Company's former West Coast refining, marketing and transportation assets, which were sold in 1997. Capital expenditures for the first six months of 2001 were $824 million, compared with $558 million in the same period a year ago. The higher capital expenditures in 2001 were primarily due to higher exploratory expenditures and property acquisitions in the Gulf of Mexico and Brazil. The capital expenditures amount for the first six months of 2001 excluded Pure's acquisition of properties from International Paper Company for $267 million and Pure's cash outlay of $150 million, as of June 30, 2001, for the acquisition of Hallwood Energy Corporation (see note 3 to the consolidated financial statements in Item 1 of this report). Capital expenditures for the first six months of 2000 excluded $161 million related to the Northrock acquisition. For the full year 2001, total capital expenditures, excluding major acquisitions, are currently expected to be approximately $1.7 billion. Of this total, about 56 percent is expected to be spent in support of North American exploration and development (E&P) programs, including the Company's Gulf of Mexico deepwater drilling program, and about 36 percent is expected to be spent for International E&P projects, with the remainder of the capital for non-E&P and Corporate-related expenditures. -30- Cash on hand plus cash generated from operating activities and asset sales have been and are expected to remain sufficient to cover the Company's operating expenses, ongoing capital expenditure program (exclusive of major acquisitions), scheduled dividend payments and repayment of maturing debt during the remainder of 2001. The Company's long-term debt, including the current portion, was $2.96 billion at June 30, 2001, compared with $2.51 billion at year-end 2000. This increase reflected the borrowings made by Pure to fund its acquisition of properties from International Paper Company and the purchase of Hallwood Energy Corporation. The Company has substantial borrowing capacity (including $1 billion of undrawn credit facilities available under its bank credit agreement) to meet unanticipated cash requirements. ENVIRONMENTAL MATTERS At June 30, 2001, the Company's reserves for environmental remediation obligations totaled $232 million, of which $144 million was included in current liabilities. During the first six months of 2001, cash payments of $41 million were applied against the reserve and $60 million in provisions were added to the reserve balance. The increase in the reserve provisions was primarily for the anticipated cleanup at former Company operated facilities and facilities sold with retained liabilities. The Company also estimated that it possibly could incur additional remediation costs aggregating approximately $230 million (as discussed in note 13 to the consolidated financial statements in Item 1 of this report). The Company's total environmental reserve amount is grouped into the following four categories.
Reserve Summary At June 30, Millions of dollars 2001 - ---------------------------------------------------------------------------- Superfund and similar sites $ 14 Active company facilities 45 Company facilities sold with retained liabilities and former company-operated sites 83 Inactive or closed company facilities 90 - ---------------------------------------------------------------------------- Total reserves $ 232 ============================================================================
-31- OUTLOOK Certain of the statements in this discussion, as well as other forward-looking statements within this document, contain estimates and projections of amounts of or increases / decreases in future revenues, earnings, cash flows, capital expenditures, assets, liabilities and other financial items and of future levels of or increases / decreases in reserves, production, sales including related costs and prices, and other statistical items; plans and objectives of management regarding the Company's future operations, products and services; and certain assumptions underlying such estimates, projection plans and objectives. While these forward-looking statements are made in good faith, future operating, market, competitive, legal, economic, political, environmental, and other conditions and events could cause actual results to differ materially from those in the foward-looking statements. See pages 47 through 49 of Management's Discussion and Analysis in Item 7 of the Company's 2000 Annual Report on Form 10-K for a discussion of certain of such conditions and events. Volatile energy prices continue to impact financial results in the year 2001. The Company expects energy prices to remain volatile due to changes in climate conditions, worldwide demand, crude oil and natural gas inventory levels, production quotas set by OPEC and other factors. The Company expects adjusted (excluding special items) after-tax earnings to be between 50 and 60 cents per share for the third quarter of 2001, assuming average NYMEX benchmark commodity prices of $25.70 per barrel of crude oil and $3.00 per MMBtu for natural gas. The Company also expects adjusted after-tax earnings for the full year of 2001 to be between $3.20 and $3.40 per share, assuming average NYMEX benchmark commodity prices of $27 per barrel of crude oil and $4.50 per MMBtu for natural gas. The third quarter and full year forecasts are also dependent on the Company's deepwater drilling results and other factors. The Company expects net daily worldwide production for the third quarter of 2001 to average between 515,000 and 525,000 Barrels of Oil Equivalent (BOE). For full-year 2001, the Company expects net worldwide daily production of about 505,000 to 515,000 BOE. The Company made a discovery on the Trident prospect, located on Alaminos Canyon Block 903 in the Gulf of Mexico, with the Discoverer Spirit drillship. The well was drilled in 9,687 feet of water to a total depth of 20,500 feet. The well encountered more than 300 feet of hydrocarbon-bearing pay section and additional zones of interest. The Company has a 59.5 percent working interest in the seven block prospect. The Company is now engaged in the extended evaluation of the discovery and evaluating the location for the first appraisal well. The Discoverer Spirit drillship is now drilling a delineation well on the discovery at the Mad Dog prospect on Green Canyon Block 826. In the Cook Inlet, Alaska, the Company drilled two development oil wells from the King Salmon platform in the McArthur River field. One of the wells, the K-13, came on production in early July and is producing about 7,100 b/d. The Company holds a 56 percent working interest in this production zone in the McArthur River field. In July 2001, the Company's Northrock subsidiary successfully completed the acquisition of all the common shares of Tethys Energy, Inc., a Canadian exploration and production company. Each shareholder of Tethys received C$4.25 (US$2.76) for each share deposited. The cash consideration for the transaction was approximately C$145 million (US$95 million) in addition to C$30 million (US$20 million) in assumed debt. -32- The Company expects its Thailand operations to continue to perform strongly. Gas demand in the Kingdom of Thailand continues to rise due to increased power consumption and as it continues to convert its power plants from imported fuel oil to indigenous natural gas. The Company began producing crude oil from its Plamuk field, located in the Pattani Basin in the Gulf of Thailand, in late July 2001. Crude production from the neighboring Yala field will be added once the production application is approved by the Thai government. The Plamuk field is currently producing about 2,500 b/d to 3,000 b/d and the production from the two fields is expected to ramp up to 15,000 b/d to 18,000 b/d in the first quarter of 2002. The Company has a 71.25 percent working interest in these fields. In Myanmar, average daily gas production is expected to exceed the daily contract quantity of 525 mmcf/d for the rest of 2001. The Company is involved in a multiple well delineation drilling program on the Ranggas prospect offshore East Kalimantan in Indonesia. The Ranggas discovery, announced in January 2001, is located in the Rapak Production Sharing Contract area in which the Company holds an 80 percent working interest. In Brazil, deepwater drilling continues on the Lagosta prospect in Block BES-2, where the Company has a 30 percent working interest. The Company drilled two deepwater wells in its operated Block BC-9, where it has a 35 percent working interest. The Kitty Hawk and Eagle wells were drilled in the second quarter 2001 and did not encounter commercial quantities of hydrocarbons. The wells were subsequently plugged and abandoned. In addition, the Company completed its acquisition of an interest in the Pescada-Arabaiana oil and gas project in the Potiguar basin in May 2001 and the Company began recording its share of oil and gas production starting in the second quarter of 2001. In Gabon, the Company is participating in a multi-well program. The first two wells were drilled on the Astrid Block, the Renee #1 and the Judy #1 prospects, and did not encounter commercial quantities of hydrocarbons. The Company anticipates drilling two more wells late in 2001 or early 2002. As of June 30, 2001, the Company had a gross receivable balance of approximately $343 million related to its geothermal operations in Indonesia. Approximately $141 million was related to Gunung Salak electric generating Units 1, 2, and 3, of which $140 million represented past due amounts and accrued interest resulting from partial payments for March 1998 through June 2001. Although invoices generally have not been paid in full, amounts that have been paid have been received in a timely manner in accordance with the steam sales contract. The remaining $202 million primarily relates to Salak electric generating Units 4, 5 and 6. Provisions covering a portion of these receivables have been recorded. The Company continues to pursue collection of the outstanding receivables. The Company has entered into eight licensing agreements that grant motor gasoline refiners, blenders and importers (including CITGO Petroleum Corporation, Tesoro Petroleum Corporation and units of The Williams Companies, Inc.) the right to make cleaner-burning gasolines using formulations patented by the Company. The terms of the licensing agreements are confidential. The Company continues to negotiate with other refiners, blenders and importers on licensing agreements for the Company's cleaner-burning gasoline patents. In February and March 2001, petitions were filed with the U.S. Patent and Trademark Office (PTO) by Washington, D.C., law firms, acting on behalf of unnamed parties, requesting reexamination of two of the Company's patents (the `126 and `393 patents, respectively). In May, the PTO denied the request for reexamination of the `126 patent and granted the petition to reexamine the `393 patent. -33- The Company anticipates that the PTO will initially reject all or some of the claims of the `393 patent, as such rejections occur in the overwhelming majority of cases where reexamination is granted. Subsequently, the Company will be able to present information and arguments in support of the validity of its patent claims. The reexamination process is expected to take several months, but the Company believes the `393 patent claims are valid and non-obvious and expects the patent to be sustained by the PTO. In March 2001, ExxonMobil Corporation requested the U.S. Federal Trade Commission (FTC) to conduct an investigation into certain alleged unfair competition practices allegedly engaged in by the Company in connection with its patents. ExxonMobil alleges that the Company engaged in anticompetitive conduct in the regulatory processes that established California and federal standards for reformulated gasolines (RFG) and thus gained "monopoly profits" in the RFG market. ExxonMobil requests that the FTC use its authority to fashion an appropriate remedy. On August 13, 2001, the Company received notice that the FTC is conducting an investigation in conjuction with this matter. In mid-September 2001, the U.S. District Court in Los Angeles is scheduled to hear the Company's motion for the award of additional damages with respect to the defendants' infringement of the `393 patent from August 1996 through December 2000. The Company will request that the court apply the 5.75 cents per gallon awarded in the original 1997 trial to the defendants' infringing volumes produced since August 1996. The defendants' motions that these damage proceedings be stayed pending the outcome of the `393 reexamination or, alternatively, that the court allow additional evidence on damages are scheduled to be heard on the same date. Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," SFAS No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 143 "Accounting for Asset Retirement Obligations". SFAS No. 141 eliminates the pooling method of accounting for a business combination, except for qualifying business combinations that were initiated prior to July 1, 2001, and requires that all combinations be accounted for using the purchase method. SFAS No. 142, which is effective for fiscal years beginning after December 15, 2001, addresses accounting for identifiable intangible assets, eliminates the amortization of goodwill and provides specific steps for testing the impairment of goodwill. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred as a capitalized cost of the long-lived asset and to depreciate it over its useful life. The Company is currently in the process of evaluating the impact that SFAS No. 142 and 143 will have on its financial position and results of operations. -34- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk generally represents the risk that losses may occur in the values of financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices. As part of its overall risk management strategies, the Company uses derivative financial instruments to manage and reduce risks associated with these factors. The Company also pursues outright pricing positions in certain hydrocarbon derivative instruments, such as futures contracts. Interest Rate Risk - From time to time the Company temporarily invests its excess cash in interest-bearing securities issued by high-quality issuers. Company policies limit the amount of investment in securities of any one financial institution. Due to the short time the investments are outstanding and their general liquidity, these instruments are classified as cash equivalents in the consolidated balance sheet and do not represent a material interest rate risk to the Company. The Company's primary market risk exposure for changes in interest rates relates to the Company's long-term debt obligations. The Company manages its exposure to changing interest rates principally through the use of a combination of fixed and floating rate debt. Interest rate risk sensitive derivative financial instruments, such as swaps or options may also be used depending upon market conditions. The Company evaluated the potential effect that near term changes in interest rates would have had on the fair value of its interest rate risk sensitive financial instruments at June 30, 2001. Assuming a ten percent decrease in the Company's weighted average borrowing costs at June 30, 2001, the potential increase in the fair value of the Company's debt obligations and associated interest rate derivative instruments, including the Company's net interests in the debt obligations and associated interest rate derivative instruments of its subsidiaries, would have been approximately $117 million at June 30, 2001. Foreign Exchange Rate Risk - The Company conducts business in various parts of the world and in various foreign currencies. To limit the Company's foreign currency exchange rate risk related to operating income, foreign sales agreements generally contain price provisions designed to insulate the Company's sales revenues against adverse foreign currency exchange rates. In most countries, energy products are valued and sold in U.S. dollars and foreign currency operating cost exposures have not been significant. In other countries, the Company is paid for product deliveries in local currencies but at prices indexed to the U.S. dollar. These funds, less amounts retained for operating costs, are converted to U.S. dollars as soon as practicable. The Company's Canadian subsidiaries are paid in Canadian dollars for their crude oil and natural gas sales. From time to time the Company may purchase foreign currency options or enter into foreign currency swap or foreign currency forward contracts to limit the exposure related to its foreign currency debt or other obligations. At June 30, 2001, the Company had various foreign currency swaps and foreign currency forward contracts outstanding to hedge its debt and other local currency obligations in Canada, Thailand and The Netherlands. The Company evaluated the effect that near term changes in foreign exchange rates would have had on the fair value of the Company's combined foreign currency position related to its outstanding foreign currency swaps and forward contracts. Assuming an adverse change of ten percent in foreign exchange rates at June 30, 2001, the potential decrease in fair value of the Company's foreign currency forward contracts, foreign-currency denominated debt, foreign currency swaps and foreign currency forward contracts of its subsidiaries, would have been approximately $10 million at June 30, 2001. -35- Commodity Price Risk - The Company is a producer, purchaser, marketer and trader of certain hydrocarbon commodities such as crude oil and condensate, natural gas and refined products and is subject to the associated price risks. The Company uses hydrocarbon price-sensitive derivative instruments (hydrocarbon derivatives), such as futures contracts, swaps and options to mitigate its overall exposure to fluctuations in hydrocarbon commodity prices. The Company may also enter into hydrocarbon derivatives to hedge contractual delivery commitments and future crude oil and natural gas production against price exposure. The Company also actively trades hydrocarbon derivatives, primarily exchange regulated futures and options contracts, subject to internal policy limitations. The Company uses a variance-covariance value at risk model to assess the market risk of its hydrocarbon derivatives. Value at risk represents the potential loss in fair value the Company would experience on its hydrocarbon derivatives, using calculated volatilities and correlations over a specified time period with a given confidence level. The Company's risk model is based upon historical data and uses a three-day time interval with a 97.5-percent confidence level. The model includes offsetting physical positions for hydrocarbon derivatives related to the Company's fixed price pre-paid crude oil and pre-paid natural gas sales. The model also includes the Company's net interests in its subsidiaries' crude oil and natural gas hydrocarbon derivatives and forward sales contracts. Based upon the Company's risk model, the value at risk related to hydrocarbon derivatives held for purposes other than trading was approximately $12 million at June 30, 2001. The value at risk related to hydrocarbon derivatives held for trading purposes was approximately $10 million at June 30, 2001. -36- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There is incorporated by reference: the information with respect to certain legal proceedings pending or threatened against the Company previously reported in Item 3 of Unocal's Annual Report on Form 10-K for the year ended December 31, 2000 and in Item 1 of Part II of Unocal's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001; the information regarding environmental remediation reserves in note 12 to the consolidated financial statements in Item 1 of Part I of this report; the discussion of such reserves in the Environmental Matters section of Management's Discussion and Analysis in Item 2 of Part I; and the information regarding certain legal proceedings and other contingent liabilities in note 13 to the consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The 2001 Annual Meeting of Stockholders of Unocal was held on May 21, 2001. The following actions were taken by the stockholders at the Annual Meeting, for which proxies were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended: 1. The four nominees proposed by the board of directors were elected as directors by the following votes for three-year terms expiring at the 2004 Annual Meeting of Stockholders, or until their successors are duly elected and qualified: Name Votes For Votes Withheld Frank C. Herringer 215,009,977 4,153,753 Charles R. Larson 214,901,597 4,262,133 Marina v.N. Whitman 214,927,684 4,236,046 Charles R. Williamson 215,073,307 4,090,423 2. A proposal to ratify the appointment of PricewaterhouseCoopers LLP as Unocal's independent accountants for 2001 was passed by a vote of 216,364,714 for versus 1,803,259 against and 995,757 abstentions. There were no broker non-votes. 3. A proposal to approve the 2001 Directors' Deferred Compensation and Stock Award Plan was passed by a vote of 193,387,663 for versus 23,876,365 against and 1,899,702 abstentions. There were no broker non-votes. 4. A stockholder proposal to urge the Board of Directors to adopt, implement and enforce a code of conduct based on the International Labor Organization's Conventions on Workplace Human Rights failed to pass, with a vote of 42,872,530 for versus 140,453,276 against and 11,808,298 abstentions. There were 24,029,626 broker non-votes. 5. A stockholder proposal to link compensation and bonus packages of Unocal's executives to the Company's ethical and social performance failed to pass, with a vote of 30,044,283 for versus 161,899,934 against and 3,189,887 abstentions. There were 24,029,626 broker non-votes. 6. A stockholder proposal to require the Board to provide a report four months from the date of the Annual Meeting describing its efforts, criteria and process of achieving Board inclusiveness failed to pass, with a vote of 27,797,705 for versus 160,971,396 against and 6,365,002 abstentions. There were 24,029,627 broker non-votes. -37- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: The Exhibit Index on page 39 of this report lists the exhibits that are filed as part of this report. (b) Reports on Form 8-K: Filed during the second quarter of 2001: (1) Current Report on Form 8-K, dated March 27, 2001, and filed April 5, 2001, for the purpose of reporting, under Item 5, Unocal Bylaw amendments, filed as an exhibit under Item 7, and effective March 27, 2001. There were no filings during the third quarter of 2001 to the date hereof. -38- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNOCAL CORPORATION (Registrant) Dated: August 14, 2001 By: /s/JOE D. CECIL --------------------------------- Joe D. Cecil Vice President and Comptroller (Duly Authorized Officer Principal Accounting Officer) -39- EXHIBIT INDEX 10.1 2001 Directors' Deferred Compensation and Stock Award Plan (incorporated by reference to Exhibit B to Unocal's Proxy Statement dated April 9, 2001, for its 2001 Annual Meeting of Stockholders, File No. 1-8483). 10.2 Amendment to Long Term Incentive Plan of 1998, as amended (subject to stockholder approval). 10.3 Form of Nonqualified Stock Option Grant under the Long Term Incentive Plan of 1998, effective July 27, 2001 (subject to stockholder approval), between Unocal and each of Charles R. Williamson (as to 450,000 shares of Unocal Common Stock), Timothy H. Ling (as to 240,000 shares of Unocal Common Stock) and Dennis P.R. Codon (as to 150,000 shares of Unocal Common Stock), each with an exercise price of $35.355 per share. 12.1 Statement regarding computation of ratio of earnings to fixed charges of Unocal Corporation for the six months ended June 30, 2001 and 2000. 12.2 Statement regarding computation of ratio of earnings to fixed charges of Union Oil Company of California for the six months ended June 30, 2001 and 2000. Copies of exhibits will be furnished upon request. Requests should be addressed to the Corporate Secretary. -40- EX-10 3 q22001_ex10-2.txt AMENDMENT TO LTIP EXHIBIT 10.2 Amendment to Long Term Incentive Plan of 1998, as amended (Subject to stockholder approval) Effective upon stockholder approval on or before July 25, 2002 of an amendment or amendments to the Plan including the following change, the second sentence of Section 7 of the Plan shall be revised to read as follows: "No person may be granted during any 12-month period Options to acquire more than 600,000 shares of Stock under this Plan. EX-10 4 q22001_ex10-3.txt NONQUALIFIED STOCK OPTION GRANT Exhibit 10.3 UNOCAL CORPORATION NONQUALIFIED STOCK OPTION UNDER THE LONG-TERM INCENTIVE PLAN OF 1998 UNOCAL CORPORATION (hereinafter called the "Company"), desiring to provide an incentive to the success of the Company and its subsidiaries, hereby grants to (INSERT NAME OF EMPLOYEE) (hereinafter called the "Option Holder"), and the Option Holder hereby accepts, the option to purchase shares of the Common Stock, $1.00 par value, of the Company (hereinafter "shares") during the Option Period (the "Option") subject to the Long Term Incentive Plan of 1998, as amended (the "Plan") and upon the following terms and conditions: A. Amount And Term Of Option 1. This grant is conditioned upon the shareholders of the Company approving on or before July 26, 2002 an amendment (whether singly or in combination with other changes) to the Plan which amends Section 7 thereof in a manner consistent with Attachment A. If the shareholders of the Company do not approve such an amendment on or prior to July 26, 2002 this grant shall be null and void and this Option shall terminate. 2. The exercise price is $_____ per share, subject to adjustment as contemplated by Section 12 of the Plan and paragraphs B.7 and C.3 below. 3. The Option Period shall be TEN (10) years, commencing with the date this Option is granted. This Option is a Nonqualified Stock Option. The date of grant is July 27, 2001. 4. The total number of shares which may be purchased pursuant to this Option shall be (ENTER #OF SHARES), subject to adjustment as contemplated by Section 12 of the Plan and paragraphs B.7 and C.3 below. This Option shall become exercisable in accordance with the following schedule: 50% of the shares may be purchased on or after July 27, 2002 75% of the shares may be purchased on or after July 27, 2003 100% of the shares may be purchased on or after July 27, 2004 The Option Holder must be employed by the Company or a subsidiary as of each of the above dates for the incremental portion of this Option to become exercisable. B. Non-Transferability And Lapse Of Option/Termination of Employment 1. Except as otherwise expressly authorized by the Management Development and Compensation Committee of the Board (the "Committee"), this Option shall not be transferable by the Option Holder except by beneficiary designation, will or the laws of descent and distribution and shall be exercisable during the Option Holder's lifetime only by the Option Holder, or Option Holder's guardian or legal representative, except as the Committee may hereafter expressly permit pursuant to Section 11(e) of the Plan. -1- 2. For purposes of this Option, the employment of the Option Holder shall be deemed to continue uninterrupted in the event that during the Option Period the Option Holder is on authorized sick leave or such other leave as is approved by the Committee. 3. If (a) the employment of the Option Holder by the Company or any of its subsidiaries terminates within the Option Period (1) because of retirement at or after attaining age 65, (2) because of permanent and total disability, or (3) at the convenience of the Company, in its sole discretion, and not because of voluntary resignation or performance inadequacy, and (b) the Option Holder shall not have then fully --- exercised this Option, then Option Holder shall have the right to exercise this Option for not more than the number of shares (subject to adjustment as provided in paragraphs C.1 and C.2 of this Option and the Plan) which Option Holder was entitled to purchase under this Option on the date of such termination of employment. Such exercise right shall lapse and this Option shall terminate on the earlier of the third anniversary of that date or the end of the Option Period. 4. If the Option Holder dies during the Option Period without having fully exercised this Option, this Option may be exercised within the Option Period but not later than fifteen (15) months after the date of the death of the Option Holder. If the Option Holder terminates employment because of retirement at or after age 65 pursuant to the Company retirement plan then in effect or permanent and total disability without having fully exercised this Option, the Option may be exercised within the Option Period but not after the later of three (3) years following such termination, fifteen (15) months after the death of the Option Holder or fifteen (15) months after the death of the Option Holder's spouse. Exercise of an Option held by a deceased Option Holder shall be by the person, persons, trust or trusts duly designated by the Option Holder in a form approved by the Company or, in the absence of a designation, entitled by will or the laws of descent and distribution to receive the benefits specified in this Agreement and under the Plan in the event of the Option Holder's death, and shall mean the Option Holder's executor or administrator if no other such person or entity is designated or authorized to act under the circumstances. The Option may not be exercised for more shares than the number of shares (subject to adjustment) that Option Holder was entitled to purchase on the date of death of the Option Holder. 5. If the Option Holder's employment with the Company and/or a subsidiary terminates other than in the circumstances described in paragraph B.3 or B.4 above, this Option shall lapse and terminate as of the date of such termination of employment. 6. The Committee may at its sole discretion elect to reinstitute any lapsed Options upon the rehire of a terminated Option Holder. -2- 7. If any Option or other right to acquire Stock hereunder is not exercised prior to or in connection with (i) a dissolution of the Company, or (ii) a merger, reorganization, consolidation or similar event that the Company does not survive, or (iii) a merger, reorganization, consolidation or similar event approved by the Board (as constituted and acting prior to the event), the Committee may provide that the Option or right will terminate, subject to any provision that has been expressly made by the Board (as so constituted) or by the Committee pursuant to paragraph C.3, through a plan of reorganization or otherwise for the survival, assumption, exchange or other settlement of the Option or right. C. Adjustments To Option Shares In addition to adjustments authorized by Section 12 of the Plan: 1. If the shares then subject to this Option are split, including a split in the form of a dividend payable in such shares, then the number of shares then subject to this Option (and the number of shares reserved for issuance pursuant thereto) shall be increased, and the exercise price decreased, proportionately, without any change in the aggregate purchase price thereof. 2. If the shares then subject to this Option are the subject of a reverse stock split, then the number of shares then subject to this Option (and the number of shares reserved for issuance thereafter pursuant thereto) shall be decreased, and the exercise price increased, proportionately, without any change in the aggregate purchase price thereof. 3. Subject to paragraph B.7, if the outstanding shares of the Company of the class then subject to this Option shall be changed into or exchanged for a different number or class of shares of stock of the Company or of another entity, whether through reorganization, recapitalization, split-up, spin off, combination of shares, merger or consolidation, then there shall be, in such manner and to such extent (if any) as the Committee deems appropriate in the circumstances, substituted for each such share then subject to this Option (and for each share reserved for issuance pursuant thereto), the number and class of shares of stock or other securities, cash or property (or combination thereof) into which each such outstanding share of the Company shall be so changed or exchanged, all without any change in the aggregate purchase price for the shares then subject to this Option. D. Manner of Exercise 1. This Option may be exercised from time to time, in accordance with its terms, by written notice thereof signed by the Option Holder and delivered to the Secretary of the Company at its head office in the City of El Segundo, State of California. Such notice shall state the number of shares being purchased, be accompanied by payment of the full option price for such number of shares and payment for any applicable withholding tax (unless otherwise provided for). Payment may be in the form of cash or shares of the common stock of the Company (provided the shares have been owned at least six (6) months, if originally acquired from the Company). Additionally, this Option may be exercised in accordance with such other arrangements, including "cashless" exercise procedures, as are approved from time to time by the Board or the Committee. To the extent exercisable, an Option shall be exercisable for all or a part of whole shares, but not as to any fractional interest. -3- 2. The issuance of shares upon the exercise of this Option and subsequent transfer thereof shall be subject to all applicable laws, rules and regulations with respect to the issuance and sale of such shares, and to such approvals by governmental agencies as may be required. 3. The Option Holder shall be entitled to the privileges of stock ownership only as to such shares as are issued or delivered hereunder and subject to any limitation under paragraph D.2 above. 4. Upon the occurrence of a Change in Control Event (as such term is defined below), each Option will become immediately exercisable. As used herein, "Change in Control Event" means any of the following: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")(a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section D.4; (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or -4- (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination will beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) will beneficially own, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. E. Miscellaneous 1. This Option is granted pursuant to the Plan and is subject to all of the terms and provisions of the Plan. 2. As further consideration for the granting of this Option, the Option Holder agrees to continue in the employment of the Company or one or more of its subsidiaries at the pleasure of the Company or such subsidiary for a continuous period of at least one (1) year from date hereof at the salary rate in effect on the date hereof or at such changed rate as may be fixed from time to time by the Company or such subsidiary. Except as permitted by Section 7(d)(iv) of the Plan, the Option Holder agrees during such employment to devote Option Holder's entire time, energy and skills to the service and interests of the Company or such subsidiary, to promote its interest, and to act in accord with the regular policies of the Company and its subsidiaries. 3. This Option shall not confer upon the Option Holder any right with respect to continuance of employment by the Company or any subsidiary, nor shall it interfere in any way with Option Holder's status as an "at will" employee or with the right of the Company or any subsidiary to terminate employment at any time for any reason, with or without cause. -5- 4. Notwithstanding any other provision hereof, in the event of a public tender for all or any portion of the stock of the Company or in the event that a proposal to merge, consolidate, or otherwise combine with another company is submitted for shareholder approval, the Committee may in its sole discretion declare previously granted options to be immediately exercisable. 5. The headings of this Agreement are solely for convenience and shall not be given any effect in interpreting this Agreement. 6. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. IN WITNESS WHEREOF, The Company has granted this Option, at El Segundo, California effective on July 27, 2001, which date is the date of grant of this Option. UNOCAL CORPORATION By: ______________________________ ACCEPTED: _____________________________ Option Holder PRINT NAME: ____________________________ DATE: ________________ -6- Attachment A Amendment to Long Term Incentive Plan of 1998, as amended (subject to shareholder approval) Effective upon shareholder approval on or before July 25, 2002 of an amendment or amendments to the Plan including the following change, the second sentence of Section 7 of the Plan shall be revised to read as follows: "No person may be granted during any 12-month period Options to acquire more than 600,000 shares of Stock under this Plan. NOTATIONS AS TO PARTIAL EXERCISE OF OPTION - -------------------------------------------------------------------- Number of Balance of Date of Shares Shares on Exercise Exercised Option - -------------------------------------------------------------------- EX-12 5 q22001_ex12-1.txt UNOCAL RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12.1
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES For the Six Months Ended June 30, ----------------------------- Millions of dollars 2001 2000 - --------------------------------------------------------------------------------------------------------------- Earnings from continuing operations $ 527 $ 374 Provision for income taxes 370 242 Minority Interests 30 (10) Distributions (less than) greater than earnings from equity investments 31 (21) - --------------------------------------------------------------------------------------------------------------- Earnings subtotal 958 585 Fixed charges included in earnings: Interest expense 97 106 Distribution on convertible preferred securities 16 16 Interest portion of rentals 10 12 - --------------------------------------------------------------------------------------------------------------- Fixed charges subtotal 123 134 Earnings from continuing operations available before fixed charges $1,081 $ 719 =============================================================================================================== Fixed charges: Fixed charges included in earnings $ 123 $ 134 Capitalized interest 11 5 - --------------------------------------------------------------------------------------------------------------- Total fixed charges $ 134 $ 139 - --------------------------------------------------------------------------------------------------------------- Ratio of earnings from operations to fixed charges 8.1 5.2 - ---------------------------------------------------------------------------------------------------------------
EX-12 6 q22001_ex12-2.txt UNION OIL RATION OF EARNINGS TO FIXED CHARGES EXHIBIT 12.2
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES For the Six Months Ended June 30, ----------------------------- Millions of dollars 2001 2000 - --------------------------------------------------------------------------------------------------------------- Earnings from continuing operations $ 539 $ 381 Provision for income taxes 372 242 Minority Interests 30 (10) Distributions (less than) greater than earnings from equity investments 31 (21) - --------------------------------------------------------------------------------------------------------------- Earnings subtotal 972 592 Fixed charges included in earnings: Interest expense 97 106 Interest portion of rentals 10 12 - --------------------------------------------------------------------------------------------------------------- Fixed charges subtotal 107 118 Earnings from continuing operations available before fixed charges $1,079 $ 710 =============================================================================================================== Fixed charges: Fixed charges included in earnings $ 107 $ 118 Capitalized interest 11 5 - --------------------------------------------------------------------------------------------------------------- Total fixed charges $ 118 $ 123 - --------------------------------------------------------------------------------------------------------------- Ratio of earnings from operations to fixed charges 9.1 5.8 - ---------------------------------------------------------------------------------------------------------------
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