-----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, HPzxF0rl1L4e31LrA/dWgUFE6Cco8CUehuBWYQ7e2kxcA+mulcZ15N99H/5H9xP0 tKiAZDoN1S5SjfqceYlNdQ== 0000716039-01-500022.txt : 20020410 0000716039-01-500022.hdr.sgml : 20020410 ACCESSION NUMBER: 0000716039-01-500022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1789563 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 q32001_10q.txt UNOCAL'S 3RD 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 September 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 October 31, 2001: 243,991,498 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 ............................................... 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 25 Item 3 Quantative and Qualitative Disclosures About Market Risk............ 38 PART II Item 1 Legal Proceedings................................................... 40 Item 5 Other Information................................................... 40 Item 6 Exhibits and Reports on Form 8-K.................................... 41 SIGNATURES.................................................................. 42 EXHIBIT INDEX............................................................... 43
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED EARNINGS UNOCAL CORPORATION (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, ----------------------------------------------------- Millions of dollars except per share amounts 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ 1,573 $ 2,333 $ 5,463 $ 6,199 Interest, dividends and miscellaneous income 8 9 27 152 Gain (loss) on sales of assets (2) 5 (1) 68 - ----------------------------------------------------------------------------------------------------------------------------- Total revenues 1,579 2,347 5,489 6,419 Costs and other deductions Crude oil, natural gas and product purchases 617 1,377 2,141 3,572 Operating expense 352 322 1,011 846 Selling, administrative and general expense 25 21 96 106 Depreciation, depletion and amortization 270 239 783 669 Dry hole costs 53 47 140 98 Exploration expense 37 48 103 134 Interest expense 48 53 145 159 Property and other operating taxes 19 20 60 50 Distributions on convertible preferred securities of subsidiary trust 8 8 24 24 - ----------------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 1,429 2,135 4,503 5,658 Earnings from equity investments 37 44 128 101 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 187 256 1,114 862 - ----------------------------------------------------------------------------------------------------------------------------- Income taxes 77 67 447 309 Minority interests 8 13 38 3 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 102 176 629 550 Discontinued operations Gain on disposal (net of tax) - 14 16 37 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from discontinued operations - 14 16 37 Cumulative effect of accounting change (net of tax) - - (1) - - ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 102 $ 190 $ 644 $ 587 ============================================================================================================================= Basic earnings per share of common stock (a) Continuing operations $ 0.42 $ 0.72 $ 2.59 $ 2.27 Discontinued operations - 0.06 0.06 0.15 - ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 0.42 $ 0.78 $ 2.65 $ 2.42 - ----------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share of common stock (b) Continuing operations $ 0.42 $ 0.71 $ 2.53 $ 2.23 Discontinued operations - 0.06 0.06 0.14 - ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 0.42 $ 0.77 $ 2.59 $ 2.37 - ----------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share of common stock $ 0.20 $ 0.20 $ 0.60 $ 0.60 - ----------------------------------------------------------------------------------------------------------------------------- (a) Basic weighted average shares outstanding (in thousands) 243,601 242,888 243,426 242,822 (b) Diluted weighted average shares outstanding (in thousands) 244,566 256,005 256,812 255,774 See Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION September 30, December 31, ------------------------------------- Millions of dollars 2001 (a) 2000 - ------------------------------------------------------------------------------------------------------------------------ Assets Current assets Cash and cash equivalents $ 371 $ 235 Accounts and notes receivable 953 1,299 Inventories 92 88 Deferred income taxes 154 155 Other current assets 32 25 - ------------------------------------------------------------------------------------------------------------------------ Total current assets 1,602 1,802 Investments and long-term receivables 1,446 1,379 Properties - net (b) 7,344 6,433 Deferred income taxes 133 231 Other assets 171 165 - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 10,696 $ 10,010 ======================================================================================================================== Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 894 $ 1,022 Taxes payable 258 282 Dividends payable 49 49 Interest payable 48 55 Current portion of environmental liabilities 117 124 Current portion of long-term debt and capital leases 9 114 Other current liabilities 154 199 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 1,529 1,845 Long-term debt and capital leases 2,850 2,392 Deferred income taxes 663 618 Accrued abandonment, restoration and environmental liabilities 595 554 Other deferred credits and liabilities 893 968 Minority interests 443 392 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 539 522 Unearned portion of restricted stock issued (20) (21) Retained earnings 2,966 2,468 Accumulated other comprehensive income (86) (53) Notes receivable - key employees (41) (40) Treasury stock - at cost (d) (411) (411) - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 3,201 2,719 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 10,696 $ 10,010 ======================================================================================================================== (a) Unaudited (b) Net of accumulated depreciation, depletion and amortization of: $ 11,457 $ 10,745 (c) Number of shares outstanding (in thousands) 243,621 243,045 (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 Nine Months Ended September 30, ---------------------------- Millions of dollars 2001 2000 - -------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net earnings $ 644 $ 587 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation, depletion and amortization 783 669 Dry hole costs 140 98 Deferred income taxes 113 (41) (Gain) loss on sales of assets (pre-tax) 1 (68) Gain on disposal of discontinued operations (pre-tax) (25) (23) Earnings applicable to minority interests 38 3 Other 115 158 Working capital and other changes related to operations Accounts and notes receivable 360 (178) Inventories (4) 11 Accounts payable (194) 133 Taxes payable (24) 69 Other (167) (161) - -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,780 1,257 - -------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures (includes dry hole costs) (1,257) (872) Major acquisitions (536) (161) Proceeds from sales of assets 26 97 Proceeds from sale of discontinued operations 25 267 - -------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,742) (669) - -------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Long-term borrowings 467 45 Reduction of long-term debt and capital lease obligations (221) (266) Minority interests (17) (19) Proceeds from issuance of common stock 14 4 Dividends paid on common stock (146) (146) Loans to key employees - (32) Other 1 1 - -------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 98 (413) - -------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 136 175 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 235 332 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 371 $ 507 ======================================================================================================== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest (net of amount capitalized) $ 150 $ 176 Income taxes (net of refunds) $ 354 $ 282 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 nine months ended September 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. -4- (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 income in its consolidated balance sheet, of which $28 million is expected to be reclassified to the consolidated earnings statement during 2001. 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. 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 then 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 -5- in current-period earnings as the difference between the offsetting changes in values of the derivative and theunderlying 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. Effective July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations," which eliminated 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. Any Goodwill acquired in a business combination under the provisions of SFAS No. 141 shall be accounted for in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," which allows for the nonamortization of any purchased goodwill prior to the effective adoption date of SFAS No. 142. The Company will adopt all the other provisions of SFAS No. 142 effective January 1, 2002. (3) Major Acquisitions In July 2001, the Company's Northrock Resources Ltd. (Northrock) Canadian subsidiary completed its cash acquisition of all the outstanding shares of common stock of Tethys for $2.76 (C$4.25) per share. The asset base of Tethys was complementary to Northrock's operations in Western Canada, providing significant operational synergies with existing activity in Northrock's West-Central Alberta and Southeast Saskatchewan core areas. The results of Tethys' operations have been included in the consolidated financial statements since the acquisition date of July 17, 2001. The cash value of the transaction was approximately $93 million, which included acquired identifiable assets of $121 million, goodwill of $30 million, assumed debt of $20 million, net negative working capital and other obligations of $4 million and a liability for deferred income taxes of $34 million. The assumed debt was repaid at the end of July subsequent to the acquisition. The acquisition was accounted for as a purchase and was funded using cash on hand. None of the goodwill amount recorded is expected to be deductible for income tax purposes. 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 10), and other obligations. The acquisition was accounted for as a purchase and was funded through the combination of a new Pure line of credit and borrowings under Pure's existing revolving credit facilities, none of which are guaranteed by the Company. This acquisition added to Pure's positions in its business areas of the San Juan and Permian Basins and the Gulf Coast region. -6- 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 $271 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 10). This acquisition expanded Pure's business areas into the Gulf Coast region and offshore in the Gulf of Mexico. (4) Other Financial Information During the third quarters of 2001 and 2000, approximately 32 percent and 55 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 nine months ended September 30, 2001 and 2000, these percentages were approximately 32 percent and 54 percent, respectively. Related purchase costs were classified as expenses in the crude oil, natural gas and product purchases category on the consolidated earnings statement. The lower resale activity in both the third quarter and nine months periods of 2001, compared to the same periods a year ago, reflected decreases primarily related to the marketing and trading of crude oil and condensate. Capitalized interest totaled $8 million and $4 million for the third quarters of 2001 and 2000, respectively, and $19 million and $9 million for the nine months ended 2001 and 2000, respectively. The increases were primarily due to the capitalized interest related to the West Seno oil and gas development project in the deepwater Kutei Basin, offshore East Kalimantan, Indonesia. (5) Income Taxes Income taxes on earnings from continuing operations for the third quarter and nine months periods of 2001 were $77 million and $447 million, respectively, compared with $67 million and $309 million for the comparable periods of 2000. The effective income tax rates for the third quarter and nine months periods of 2001 were 43 percent and 42 percent, respectively, compared with 28 percent and 36 percent for the comparable periods of 2000. The higher effective income tax rate for the third quarter of 2001, compared to the same period a year ago, reflected the effects of changes in the mix of foreign versus domestic earnings, currency-related adjustments in Thailand, and adjustments made in the third quarter of 2000 related to prior year U.S. and Canadian tax matters. The higher effective income tax rate for the nine months period of 2001, compared to the same period a year ago, reflected the effects of currency-related adjustments in Thailand and an adjustment made in 2000 related to prior year Canadian tax matters. (6) 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 reflected the Company's former agricultural products business, which was sold later in that year. -7- (7) 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 third quarters and the nine months ended September 30, 2001 and 2000:
Earnings Shares Per Share Millions except per share amounts (Numerator) (Denominator) Amount - --------------------------------------------------------------------------------------------------------------------------- Three months ended September 30, 2001 Earnings from continuing operations $ 102 243.6 Basic EPS 0.42 ============= Effect of dilutive securities Options and common stock equivalents 1.0 -------------------------------- Diluted EPS 102 244.6 $ 0.42 ============= Distributions on subsidiary trust preferred securities (after-tax) 7 12.3 -------------------------------- Antidilutive $ 109 256.9 $ 0.42 Three months ended September 30, 2000 Earnings from continuing operations $ 176 242.9 Basic EPS $ 0.72 ============= Effect of dilutive securities Options and common stock equivalents 0.8 -------------------------------- 176 243.7 $ 0.72 Distributions on subsidiary trust preferred securities (after-tax) 7 12.3 -------------------------------- Diluted EPS $ 183 256.0 $ 0.71 ============= Nine months ended September 30, 2001 Earnings from continuing operations $ 629 243.4 Basic EPS $ 2.59 ============= Effect of dilutive securities Options and common stock equivalents 1.1 -------------------------------- 629 244.5 $ 2.57 Distributions on subsidiary trust preferred securities (after-tax) 20 12.3 -------------------------------- Diluted EPS $ 649 256.8 $ 2.53 ============= Nine months ended September 30, 2000 Earnings from continuing operations $ 550 242.8 Basic EPS $ 2.27 ============= Effect of dilutive securities Options and common stock equivalents 0.7 -------------------------------- 550 243.5 $ 2.26 Distributions on subsidiary trust preferred securities (after-tax) 20 12.3 -------------------------------- Diluted EPS $ 570 255.8 $ 2.23 =============
Not included in the computation of diluted EPS for the period ended September 30, 2001 and 2000, were options outstanding to purchase approximately 5.2 million and 7.4 million shares, respectively, 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 diluted EPS computation for the three months ended September 30, 2001 and 2000, did not include options outstanding to purchase approximately 6.3 million and 6.9 million shares, respectively, of common stock because their exercise prices were greater than the average market prices of the common shares during the respective quarters. -8- (8) Comprehensive Income The Company's comprehensive income was:
For the Three Months For the Nine Months Ended September 30, Ended September 30, --------------------------------------------------- Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ Net earnings $ 102 $ 190 $ 644 $ 587 Cumulative effect of change in accounting principle SFAS 133 adoption (a) - - (59) - Change in unrealized loss on hedging instruments (b) 17 - 43 - Reclassification adjustment for settled hedging contracts (c) (3) - 23 - Change in foreign currency translation adjustments (24) (8) (40) (15) - ------------------------------------------------------------------------------------------------------------------------ Comprehensive income $ 92 $ 182 $ 611 $ 572 ======================================================================================================================== (a) Net of tax effect of: - - 36 - (b) Net of tax effect of: (10) - (25) - (c) Net of tax effect of: 2 - (14) -
(9) Restricted Cash Of the total amounts of cash and cash equivalents reported at September 30, 2001, cash in the amount of $29 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, $5 million at September 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 September 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 owners' portions of crude oil produced from certain federal and Indian land 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 by the end of 2001. (10) Long Term Debt and Credit Agreements During the nine months period of 2001, the Company's consolidated debt, including the current portion, increased by $353 million. This was substantially due to an increase of $467 million in long term debt incurred 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 notes were issued at a discount to their face value. Pursuant to a registration rights agreement, Pure registered the notes in the fourth quarter 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). At September 30, 2001, Pure had $188 million outstanding under a 364-day revolving credit facility due September 29, 2002, and had nothing outstanding under its five-year revolving credit facility due September 29, 2005. Each of these unsecured credit agreements provides a $250 million line of credit. None of the Pure debt is guaranteed by the Company. During the third quarter of 2001, the Company retired $61 million of medium-term notes, $39 million of 8.75 percent notes, which matured as scheduled during the quarter, and $20 million of long-term debt assumed in the Tethys acquisition (see note 3). -9- (11) Accrued Abandonment, Restoration and Environmental Liabilities At September 30, 2001, the Company had accrued $476 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 September 30, 2001 totaled $236 million, of which $117 million was included in current liabilities. (12) 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 11, at September 30, 2001, the Company had accrued $236 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 $250 million. -10- 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 circumstances under which certain officers may exercise this right include the termination of the officer without cause prior to May 25, 2003, termination for any reason after May 24, 2003, a change in control of either Pure or Unocal and other events specified in the agreements. 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, as defined, times 110 percent, less funded debt, as defined. At September 30, 2001, Pure estimated that the amount which it would have to repurchase under these agreements was approximately $114 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. -11- Other matters - The Company has a five-year lease agreement relating to its Discoverer Spirit deepwater drillship, with a remaining term of approximately four years at September 30, 2001. The drillship has a minimum daily rate of approximately $210,000. In August 2001, the Company signed a sublease agreement with a third party for a minimum period of 200 days. Under the provisions of the agreement, the third party will assume the lease payments to the lessor during the sublease period. The sublease period is expected to begin in early 2002 after the Company completes its current drilling of a well in the Gulf of Mexico deep water. The future remaining minimum lease payment obligation excluding the minimum sublease 200-day period was approximately $260 million at September 30, 2001. 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 amounts 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. (13) 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 September 30, 2001, including the current portion, was approximately $3.065 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 $499 million at September 30, 2001. The fair value was based on the trading prices of the preferred securities on September 28, 2001, as reported to the Company. Commodity hedging activities - During the third quarter of 2001, the Company recognized $2 million in after-tax gains for the ineffectiveness of both cash flow and fair value hedges. During the nine months period of 2001, the Company recognized $3 million in after-tax losses for the ineffectiveness of both cash flow and fair value hedges. At September 30, 2001, the Company had approximately $3 million of after-tax deferred losses in accumulated other comprehensive income on the consolidated balance sheet related to cash flow hedges for future commodity sales for the period beginning October 2001 through October 2004. Of this amount, approximately $10 million in after-tax gains are expected to be reclassified to the consolidated earnings statement during the next twelve months. -12- (14) 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 September 30, 2001 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ - $ 360 $ 1,479 $ (266) $ 1,573 Interest, dividends and miscellaneous income 1 8 - 8 (9) 8 Gain (loss)on sales of assets - - (3) 1 - (2) - ----------------------------------------------------------------------------------------------------------------------------- Total revenues 1 8 357 1,488 (275) 1,579 Costs and other deductions Purchases, operating and other expenses 1 - 253 1,068 (272) 1,050 Depreciation, depletion and amortization - - 102 168 - 270 Dry hole costs - - 15 38 - 53 Interest expense 8 - 39 10 (9) 48 Distributions on convertible preferred securities - 8 - - - 8 - ----------------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 9 8 409 1,284 (281) 1,429 Equity in earnings of subsidiaries 107 - 147 - (254) - Earnings from equity investments - - 2 35 - 37 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 99 - 97 239 (248) 187 - ----------------------------------------------------------------------------------------------------------------------------- Income taxes (3) - (10) 90 - 77 Minority interests - - - 2 6 8 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 102 - 107 147 (254) 102 Earnings from discontinued operations - - - - - - Cumulative effect of accounting change - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 102 $ - $ 107 $ 147 $ (254) $ 102 =============================================================================================================================
-13-
CONDENSED CONSOLIDATED EARNINGS STATEMENT For the three months ended September 30, 2000 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ - $ 486 $ 2,227 $ (380) $ 2,333 Interest, dividends and miscellaneous income - 8 5 5 (9) 9 Gain on sales of assets - - 1 4 - 5 - ----------------------------------------------------------------------------------------------------------------------------- Total revenues - 8 492 2,236 (389) 2,347 Costs and other deductions Purchases, operating and other expenses 1 - 299 1,877 (389) 1,788 Depreciation, depletion and amortization - - 94 145 - 239 Dry hole costs - - 26 21 - 47 Interest expense 8 - 50 4 (9) 53 Distributions on convertible preferred securities - 8 - - - 8 - ----------------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 9 8 469 2,047 (398) 2,135 Equity in earnings of subsidiaries 197 - 215 - (412) - Earnings from equity investments - - 11 33 - 44 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 188 - 249 222 (403) 256 - ----------------------------------------------------------------------------------------------------------------------------- Income taxes (3) - 54 16 - 67 Minority interests - - (2) 5 10 13 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 191 - 197 201 (413) 176 Earnings from discontinued operations - - - 14 - 14 - ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 191 $ - $ 197 $ 215 $ (413) $ 190 =============================================================================================================================
-14-
CONDENSED CONSOLIDATED EARNINGS STATEMENT For the nine months ended September 30, 2001 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ - $ 1,540 $ 5,165 $ (1,242) $ 5,463 Interest, dividends and miscellaneous income 6 25 3 21 (28) 27 Gain (loss) on sales of assets - - (2) 1 - (1) - ----------------------------------------------------------------------------------------------------------------------------- Total revenues 6 25 1,541 5,187 (1,270) 5,489 Costs and other deductions Purchases, operating and other expenses 3 - 898 3,779 (1,269) 3,411 Depreciation, depletion and amortization - - 301 482 - 783 Dry hole costs - - 49 91 - 140 Interest expense 25 1 124 23 (28) 145 Distributions on convertible preferred securities - 24 - - - 24 - ----------------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 28 25 1,372 4,375 (1,297) 4,503 Equity in earnings of subsidiaries 658 - 560 - (1,218) - Earnings from equity investments - - 10 118 - 128 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 636 - 739 930 (1,191) 1,114 - ----------------------------------------------------------------------------------------------------------------------------- Income taxes (8) - 96 359 - 447 Minority interests - - - 11 27 38 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 644 - 643 560 (1,218) 629 Earnings from discontinued operations - - 16 - - 16 Cumulative effect of accounting change - - (1) - - (1) - ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 644 $ - $ 658 $ 560 $ (1,218) $ 644 =============================================================================================================================
-15-
CONDENSED CONSOLIDATED EARNINGS STATEMENT For the nine months ended September 30, 2000 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ - $ 1,496 $ 5,766 $ (1,063) $ 6,199 Interest, dividends and miscellaneous income 10 25 131 14 (28) 152 Gain on sales of assets - - 64 4 - 68 - ----------------------------------------------------------------------------------------------------------------------------- Total revenues 10 25 1,691 5,784 (1,091) 6,419 Costs and other deductions Purchases, operating and other expenses 2 - 1,021 4,758 (1,073) 4,708 Depreciation, depletion and amortization - - 273 396 - 669 Dry hole costs - - 39 59 - 98 Interest expense 25 1 155 6 (28) 159 Distributions on convertible preferred securities - 24 - - - 24 - ----------------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 27 25 1,488 5,219 (1,101) 5,658 Equity in earnings of subsidiaries 598 - 507 - (1,105) - Earnings from equity investments - - 32 69 - 101 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 581 - 742 634 (1,095) 862 - ----------------------------------------------------------------------------------------------------------------------------- Income taxes (6) - 146 169 - 309 Minority interests - - (2) (5) 10 3 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 587 - 598 470 (1,105) 550 Earnings from discontinued operations - - - 37 - 37 - ----------------------------------------------------------------------------------------------------------------------------- Net earnings $ 587 $ - $ 598 $ 507 $ (1,105) $ 587 =============================================================================================================================
-16-
CONDENSED CONSOLIDATED BALANCE SHEET Period ended September 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 $ 1 $ - $ 195 $ 175 $ - $ 371 Accounts and notes receivable - - 100 853 - 953 Inventories - - 4 88 - 92 Other current assets - - 144 42 - 186 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets 1 - 443 1,158 - 1,602 Investments and long-term receivables 4,097 - 4,214 964 (7,829) 1,446 Properties - net - - 2,094 5,250 - 7,344 Other assets 53 541 284 1,727 (2,301) 304 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $4,151 $ 541 $ 7,035 $ 9,099 $ (10,130) $ 10,696 ============================================================================================================================= Liabilities and Stockholders' Equity Current liabilities Accounts payable $ - $ - $ 232 $ 662 $ - $ 894 Current portion of long-term debt and capital leases - - - 9 - 9 Other current liabilities 41 3 208 374 - 626 - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 41 3 440 1,045 - 1,529 Long-term debt and capital leases - - 2,181 669 - 2,850 Deferred income taxes - - (16) 679 - 663 Accrued abandonment, restoration and environmental liabilities - - 293 302 - 595 Other deferred credits and liabilities 541 - 383 2,275 (2,306) 893 Minority interests - - - 296 147 443 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely parent debentures - 522 - - - 522 Stockholders' equity 3,569 16 3,754 3,833 (7,971) 3,201 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $4,151 $ 541 $ 7,035 $ 9,099 $ (10,130) $ 10,696 =============================================================================================================================
-17-
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 =============================================================================================================================
-18-
CONDENSED CONSOLIDATED CASH FLOWS Period ended September 30, 2001 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities $132 $ - $ 694 $ 954 $ - $1,780 Cash Flows from Investing Activities Capital expenditures and major acquisitions (includes dry hole costs) - - (526) (1,267) - (1,793) Proceeds from sales of assets and discontinued operations - - 47 4 - 51 - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities - - (479) (1,263) - (1,742) - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Change in long-term debt and capital leases - - (105) 351 - 246 Dividends paid on common stock (146) - - - - (146) Minority interests - - - (17) - (17) Other 14 - 1 - - 15 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (132) - (104) 334 - 98 - ----------------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents - - 111 25 - 136 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 1 - 84 150 - 235 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1 $ - $ 195 $ 175 $ - $ 371 =============================================================================================================================
CONDENSED CONSOLIDATED CASH FLOWS Period ended September 30, 2000 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities $174 $ - $ 273 $ 810 $ - $1,257 Cash Flows from Investing Activities Capital expenditures and major acquisitions (includes dry hole costs) - - (361) (672) - (1,033) Proceeds from sales of assets and discontinued operations - - 352 12 - 364 - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities - - ( 9) (660) - (669) - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Change in long-term debt and capital leases - - (180) (41) - (221) Dividends paid on common stock (146) - - - - (146) Minority interests - - - (19) - (19) Other (28) - 1 - - (27) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (174) - (179) (60) - (413) - ----------------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents - - 85 90 - 175 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 1 - 162 169 - 332 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1 $ - $ 247 $ 259 $ - $ 507 =============================================================================================================================
-19- (15) 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, 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 Trade For the Three Months North America International ended September 30, 2001 Millions of dollars Lower 48 Alaska Canada Far East Other ----------------------------------------------------------------------- Sales & operating revenues $ 158 $ 86 $ 59 $ 254 $ 35 $ 861 Other income (loss) (a) - - (2) (3) 7 - Inter-segment revenues 265 - - 45 23 - ----------------------------------------------------------------------- Total 423 86 57 296 65 861 Earnings (loss) from equity investments (2) - - 10 2 - Earnings from continuing operations 51 17 6 109 2 3 Earnings from discontinued operations - - - - - - Cumulative effect of accounting change - - - - - - ----------------------------------------------------------------------- Net earnings 51 17 6 109 2 3 Assets (at September 30, 2001) 3,337 333 1,025 2,433 768 325 -----------------------------------------------------------------------
----------------------------------------------------------------------------------- Midstream Geothermal Corporate & Other Total & Power Admin Net Environmental Operations & Interest & General Expense Litigation Other (b) ----------------------------------------------------------------------------------- Sales & operating revenues $ 48 $ 46 $ - $ - $ - $ 26 $ 1,573 Other income (loss) (a) - 6 - 6 - (8) 6 Inter-segment revenues 2 - - - - (335) - ----------------------------------------------------------------------------------- Total 50 52 - 6 - (317) 1,579 Earnings (loss) from equity investments 17 (2) - - - 12 37 Earnings (loss) from continuing operations 13 2 (19) (31) (28) (23) 102 Earnings from discontinued operations - - - - - - - Cumulative effect of accounting change - - - - - - - ----------------------------------------------------------------------------------- Net earnings (loss) 13 2 (19) (31) (28) (23) 102 Assets (at September 30, 2001) 455 629 - - - 1,391 10,696 ----------------------------------------------------------------------------------- (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 Trade For the Three Months North America International ended September 30, 2000 Millions of dollars Lower 48 Alaska Canada Far East Other ----------------------------------------------------------------------- Sales & operating revenues $ 102 $ 60 $ 9 $ 272 $ 39 $ 1,758 Other income (loss) (a) - - 1 1 4 (4) Inter-segment revenues 378 15 - 56 28 5 ----------------------------------------------------------------------- Total 480 75 10 329 71 1,759 Earnings (loss) from equity investments 10 - - 8 (1) - Earnings (loss) from continuing operations 104 22 16 120 15 (1) Earnings from discontinued operations - - - - - - ----------------------------------------------------------------------- Net earnings (loss) 104 22 16 120 15 (1) 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 $ 36 $ - $ - $ - $ 44 $ 2,333 Other income (a) 1 4 - 7 - - 14 Inter-segment revenues 2 - - - - (484) - ----------------------------------------------------------------------------------- Total 16 40 - 7 - (440) 2,347 Earnings from equity investments 16 - - - - 11 44 Earnings (loss) from continuing operations 16 4 (19) (36) (17) (48) 176 Earnings from discontinued operations - - - - - 14 14 ----------------------------------------------------------------------------------- Net earnings (loss) 16 4 (19) (36) (17) (34) 190 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.
-21-
----------------------------------------------------------------------- Segment Information Exploration & Production Trade For the Nine Months North America International ended September 30, 2001 Millions of dollars Lower 48 Alaska Canada Far East Other ----------------------------------------------------------------------- Sales & operating revenues $ 486 $ 221 $ 188 $ 755 $ 109 $ 3,289 Other income (loss) (a) 1 - (1) (9) 6 (1) Inter-segment revenues 1,237 - - 155 84 1 ----------------------------------------------------------------------- Total 1,724 221 187 901 199 3,289 Earnings from equity investments 12 - - 29 2 - Earnings from continuing operations 434 49 17 328 29 10 Earnings from discontinued operations - - - - - - Cumulative effect of accounting change - - - - - - ----------------------------------------------------------------------- Net earnings 434 49 17 328 29 10 Assets (at September 30, 2001) 3,337 333 1,025 2,433 768 325 -----------------------------------------------------------------------
----------------------------------------------------------------------------------- Midstream Geothermal Corporate & Other Total & Power Admin Net Environmental Operations & Interest & General Expense Litigation Other (b) ----------------------------------------------------------------------------------- Sales & operating revenues $ 187 $ 135 $ - $ - $ - $ 93 $ 5,463 Other income (loss) (a) 2 13 - 19 - (4) 26 Inter-segment revenues 6 - - - - (1,483) - ----------------------------------------------------------------------------------- Total 195 148 - 19 - (1,394) 5,489 Earnings (loss) from equity investments 45 (2) - - - 42 128 Earnings (loss) from continuing operations 40 5 (63) (96) (78) (46) 629 Earnings from discontinued operations - - - - - 16 16 Cumulative effect of accounting change - - - - - (1) (1) ----------------------------------------------------------------------------------- Net earnings (loss) 40 5 (63) (96) (78) (31) 644 Assets (at September 30, 2001) 455 629 - - - 1,391 10,696 ----------------------------------------------------------------------------------- (a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets. (b) Includes eliminations and consolidation adjustments.
-22-
----------------------------------------------------------------------- Segment Information Exploration & Production Trade For the Nine Months North America International ended September 30, 2000 Millions of dollars Lower 48 Alaska Canada Far East Other ----------------------------------------------------------------------- Sales & operating revenues $ 159 $ 180 $ 73 $ 727 $ 105 $ 4,663 Other income (loss) (a) 65 - - (3) 3 (4) Inter-segment revenues 1,051 48 - 168 83 7 ----------------------------------------------------------------------- Total 1,275 228 73 892 191 4,666 Earnings from equity investments 13 - - 8 - - Earnings from continuing operations 301 69 8 290 32 3 Earnings from discontinued operations - - - - - - ----------------------------------------------------------------------- Net earnings 301 69 8 290 32 3 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 $ 39 $ 119 $ - $ - $ - $ 134 $ 6,199 Other income (a) 2 6 - 21 - 130 220 Inter-segment revenues 8 - - - - (1,365) - ----------------------------------------------------------------------------------- Total 49 125 - 21 - (1,101) 6,419 Earnings (loss) from equity investments 48 (1) - - - 33 101 Earnings (loss) from continuing operations 47 18 (62) (109) (55) 8 550 Earnings from discontinued operations - - - - - 37 37 ----------------------------------------------------------------------------------- Net earnings (loss) 47 18 (62) (109) (55) 45 587 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 production and price data in the table on the following page reflect these reclassifications: -23-
OPERATING HIGHLIGHTS (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, ---------------------- ---------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------- North America Net Daily Production Crude oil, condensate and natural gas liquids (thousand barrels) Lower 48 (a) 60 53 58 53 Alaska 26 25 25 26 Canada (a) 16 16 15 17 - ------------------------------------------------------------------------------------------------------------- Total crude oil, condensate and natural gas liquids 102 94 98 96 Natural gas - dry basis (million cubic feet) Lower 48 (a) 939 777 922 740 Alaska 83 128 104 138 Canada (a) 92 96 105 98 - ------------------------------------------------------------------------------------------------------------- Total natural gas 1,114 1,001 1,131 976 North America Average Prices (b) Crude oil, condensate and natural gas liquids (per barrel) Lower 48 $ 23.11 $ 28.45 $ 24.63 $ 26.27 Alaska $ 21.58 $ 25.70 $ 22.18 $ 24.02 Canada $ 20.89 $ 26.89 $ 20.74 $ 22.43 Average $ 22.37 $ 27.45 $ 23.39 $ 24.97 Natural gas (per mcf) Lower 48 $ 2.97 $ 4.26 $ 4.76 $ 3.42 Alaska $ 1.57 $ 1.20 $ 1.30 $ 1.20 Canada $ 2.76 $ 2.66 $ 3.40 $ 1.98 Average $ 2.85 $ 3.69 $ 4.29 $ 2.94 - ------------------------------------------------------------------------------------------------------------- International Net Daily Production Crude oil, condensate and natural gas liquids (thousand barrels) Far East 49 47 49 47 Other 19 18 19 18 - ------------------------------------------------------------------------------------------------------------- Total crude oil, condensate and natural gas liquids 68 65 68 65 Natural gas - dry basis (million cubic feet) Far East 833 816 845 799 Other 66 52 64 56 - ------------------------------------------------------------------------------------------------------------- Total natural gas 899 868 909 855 International Average Prices (b) Crude oil, condensate and natural gas liquids (per barrel) Far East $ 23.04 $ 28.30 $ 24.02 $ 25.45 Other $ 25.27 $ 29.24 $ 26.04 $ 27.24 Average $ 23.65 $ 28.57 $ 24.60 $ 25.96 Natural gas (per mcf) Far East $ 2.62 $ 2.44 $ 2.54 $ 2.37 Other $ 2.80 $ 2.86 $ 2.90 $ 2.79 Average $ 2.63 $ 2.47 $ 2.57 $ 2.40 - ------------------------------------------------------------------------------------------------------------- Worldwide Net Daily Production (a) Crude oil, condensate and natural gas liquids (thousand barrels) 170 159 166 161 Natural gas - dry basis (million cubic feet) 2,013 1,869 2,040 1,831 Barrels oil equivalent (thousands) 506 470 506 466 Worldwide Average Prices (b) Crude oil, condensate and natural gas liquids (per barrel) $ 22.87 $ 27.90 $ 23.89 $ 25.37 Natural gas (per mcf) $ 2.75 $ 3.11 $ 3.51 $ 2.68 - ------------------------------------------------------------------------------------------------------------- (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 Trade margins.
-24- 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 and Second Quarter 2001 Quarterly Reports on Form 10-Q. Effective with the first quarter of 2001, the Pipelines business segment was 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 15 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 Nine Months Ended September 30, Ended September 30, ----------------------- ------------------------ Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------ Earnings from continuing operations $ 102 $ 176 $ 629 $ 550 Earnings from discontinued operations - 14 16 37 Cumulative effect of accounting change - - (1) - - ------------------------------------------------------------------------------------------------------------ Net earnings $ 102 $ 190 $ 644 $ 587 ============================================================================================================
Earnings from continuing operations totaled $102 million in the third quarter of 2001, which was a decrease of $74 million from the same period a year ago. The decrease was primarily due to lower worldwide average prices for natural gas and crude oil, condensate and natural gas liquids (liquids), a higher effective tax rate due to a change in the Thai baht/U.S. dollar exchange rate and higher receivable provisions related to geothermal operations in Indonesia. These negative factors were partially offset by higher worldwide natural gas production. The Company's worldwide average price for natural gas, including realized hedging activities, was $2.75 per thousand cubic feet (mcf) in the third quarter of 2001, which was a decrease of 36 cents per mcf, or 12 percent, from the same period a year ago. The Company's worldwide average price for liquids, including realized hedging activities, was $22.87 per barrel in the third quarter of 2001, which was a decrease of $5.03 per barrel, or 18 percent, from the same period a year ago. The Company's worldwide natural gas production was 2,013 million cubic feet per day (mmcf/d) in the third quarter of 2001, which was an increase of 8 percent from the same period a year ago. The increase was primarily due to higher natural gas production from U.S. Lower 48 operations. In the third quarter of 2001, earnings from continuing operations included $25 million in special item charges, primarily relating to environmental and litigation provisions, while the third quarter of 2000 included $52 million in special item charges. The special items recorded in the third quarter of 2000 consisted of losses of $40 million related to commodity derivative positions not accounted for as hedges and $38 million in environmental and litigation charges, which were partially offset by $26 million in net benefits related to foreign and U.S. deferred tax adjustments. Sales and operating revenues were $1,573 million for the third quarter of 2001, which was a decrease of $760 million from the same period a year ago. This decrease was primarily due to lower marketing and trading activities in crude oil and condensate by the Company's Trade segment, as well as lower overall hydrocarbon commodity prices. -25- Earnings from continuing operations totaled $629 million for the nine months period of 2001, which was an increase of $79 million from the same period a year ago. This increase was primarily due to higher worldwide average natural gas prices and increased worldwide natural gas and liquids production. The Company's worldwide average natural gas price, including realized hedging activities, was $3.51 per mcf for the nine months period of 2001, which was an increase of 83 cents per mcf, or 31 percent, from the same period a year ago. The Company's worldwide natural gas production increased by 11 percent from the same period a year ago, primarily due to higher natural gas production from U.S. Lower 48 and Far East operations. The Company's worldwide liquids production increased by 3 percent from the same period a year ago primarily from U.S. Lower 48 operations. These positive results were partially offset by lower worldwide average liquids prices, higher depreciation, depletion and amortization expense, higher receivable provisions related to geothermal operations in Indonesia, higher dry hole costs and a higher effective tax rate due to a change in the Thai baht/U.S. dollar exchange rate. The Company's worldwide average liquids price, including realized hedging activities, was $23.89 per barrel for the nine months period of 2001, which was a decrease of $1.48 per barrel, or 6 percent, from the same period a year ago. In the nine months period of 2001, earnings from continuing operations included $66 million in special item charges, primarily relating to environmental and litigation provisions, while the nine months period of 2000 included $13 million in special item benefits, detailed in the table on page 27. Earnings from discontinued operations were $16 million in the nine months period of 2001 compared with $37 million in the same period a year ago. The Company recorded pre-tax gains of $25 million ($16 million after-tax) in the nine months period of 2001 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 results for the third quarter and nine months periods of 2000 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 a change in accounting principle related to the initial adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative instruments and Hedging Activities". -26- 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 nine months periods ended September 30:
For the Three Months For the Nine Months Ended September 30, Ended September 30, ----------------------- ------------------------ Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------ Adjusted after-tax earnings (a) $ 127 $ 228 $ 695 $ 537 Special items: Continuing operations Gain on asset sales - - - 42 Deferred tax adjustment - 46 - 46 Environmental and litigation provisions/settlements (26) (38) (71) (71) Executive stock purchase program - - - (9) Insurance benefits related to environmental issues - - - 21 Trading derivatives -- non-hedging (Northrock) 1 (40) 5 (40) Provision for prior years income tax issues (Other) - (20) - (20) Reformulated gasoline patent case - - - 55 Restructuring costs - - - (11) - ------------------------------------------------------------------------------------------------------------ Total special items from continuing operations (25) (52) (66) 13 Discontinued operations Gain on disposal - Agricultural products - 14 - 37 Gain on disposal - Refining and marketing - - 16 - - ------------------------------------------------------------------------------------------------------------ Total special items from discontinued operations - 14 16 37 Cumulative effect of accounting change - - (1) - - ------------------------------------------------------------------------------------------------------------ Net earnings (a) $ 102 $ 190 $ 644 $ 587 ============================================================================================================ (a) Includes minority interests of: $ (8) $ (13) $ (38) $ (3)
-27- 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 continental shelf area of 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 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 Nine Months Ended September 30, Ended September 30, ----------------------- ------------------------ Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------ Adjusted after-tax earnings (loss) (before special items) Lower 48 (a) $ 51 $ 104 $ 434 $ 259 Alaska 17 22 49 69 Canada (b) 5 10 12 2 - ------------------------------------------------------------------------------------------------------------ Adjusted after-tax earnings (before special items) (a) (b) 73 136 495 330 Special items: Gain on asset sales (Lower 48) - - - 42 Deferred tax adjustment (Canada) - 46 - 46 Trading derivatives- non-hedging (Northrock) 1 (40) 5 (40) - ------------------------------------------------------------------------------------------------------------ Total special items 1 6 5 48 - ------------------------------------------------------------------------------------------------------------ After-tax earnings (a) (b) $ 74 $ 142 $ 500 $ 378 ============================================================================================================ (a) Includes minority interests of: $ (10) $ (14) $ (42) $ (25) (b) Includes minority interests of: $ - $ (1) $ - $ 19
After-tax earnings totaled $74 million in the third quarter of 2001, which was a decrease of $68 million from the same period a year ago. This decrease was primarily due to the Company's lower North America average prices for natural gas and liquids, the effect of which was partially offset by higher natural gas production. The Company's average North America natural gas price, including realized hedging activities, was $2.85 per mcf in the third quarter of 2001, which was a decrease of 84 cents per mcf, or 23 percent, from the same period a year ago. The Company's average North America liquids price, including realized hedging activities, was $22.37 per barrel in the third quarter of 2001, which was a decrease of $5.08 per barrel, or 19 percent, from the same period a year ago. North America average net daily natural gas production was 1,114 mmcf/d in the third quarter of 2001, compared to 1,001 mmcf/d in the same period a year ago, which was an increase of 11 percent, primarily from the Lower 48 operations. The increase in the Lower 48 was primarily from higher Pure production and from the Company's production on Ship Shoal 295 Block (Muni field) in the Gulf of Mexico, which began production in the fourth quarter of 2000, as well as newly acquired properties in Mobile Bay and other Gulf of Mexico shelf areas. The third quarter 2001 results were also impacted by higher depreciation, depletion and amortization expense. The third quarter of 2000 results benefited from a $46 million deferred tax adjustment in Canada, which was partially offset by losses of $40 million related to Northrock's commodity derivative positions not accounted for as hedges. -28- After-tax earnings totaled $500 million for the nine months period of 2001, which was an increase of $122 million from the same period a year ago. This increase was primarily due to the Company's higher North America average natural gas prices and higher natural gas production. The Company's average North America natural gas price, including realized hedging activities, was $4.29 per mcf in the nine months period of 2001, which was an increase of $1.35 per mcf, or 46 percent, from the same period a year ago. North America average net daily natural gas production was 1,131 mmcf/d for the nine months period of 2001 compared to 976 mmcf/d in the same period a year ago, which was an increase of 16 percent, primarily from the Lower 48 operations. The nine months period of 2001 also benefited from small 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 in the Lower 48 operations, lower North America average liquids prices, and higher dry hole costs primarily from the Gulf of Mexico shelf also in the Lower 48 operations. The Company's average North America liquids price, including realized hedging activities, was $23.39 per barrel in the nine months period of 2001, which was a decrease of $1.58 per barrel, or 6 percent, from the same period a year ago. The results of the nine months period of 2000 included the $46 million deferred tax adjustment in Canada and a $42 million after-tax gain related to the formation of Pure. International - Unocal's International operations encompass 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 Nine Months Ended September 30, Ended September 30, ----------------------- ------------------------ Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------ Far East $ 109 $ 120 $ 328 $ 290 Other 2 15 29 32 - ------------------------------------------------------------------------------------------------------------ After-tax earnings $ 111 $ 135 $ 357 $ 322 ============================================================================================================
After-tax earnings totaled $111 million in the third quarter of 2001, which was a decrease of $24 million from the same period a year ago. The decrease was primarily due to lower average liquids prices, higher dry hole costs and a higher effective tax rate due to changes in the Thai baht/U.S. dollar exchange rate, the effects of which were partially offset by higher natural gas prices. The average liquids price for International operations was $23.65 per barrel in the third quarter of 2001, which was a decrease of $4.92 per barrel, or 17 percent, from the same period a year ago. The average natural gas price for International operations was $2.63 per mcf in the third quarter of 2001, which was an increase of 16 cents per mcf, or 6 percent, from the same period a year ago. After-tax earnings totaled $357 million for the nine months period of 2001, which was an increase of $35 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 $2.57 per mcf for the nine months period of 2001, which was an increase of 17 cents per mcf, or 7 percent, from the same period a year ago. Natural gas production increased 6 percent for the nine months period of 2001 compared to the same period a year ago, primarily in the Far East. The average net daily natural gas production was 909 mmcf/d in the nine months period of 2001 compared to 855 mmcf/d for the same period a year ago. These positive results were partially offset by lower liquids prices and higher effective tax rates, primarily due to changes in the Thai baht/U.S. dollar exchange rate. The average liquids price for International operations was $24.60 per barrel for the nine months period of 2001, which was a decrease of $1.36 per barrel, or 5 percent, from the same period a year ago. -29- TRADE The 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. The Trade segment 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, the segment takes pricing positions in hydrocarbon derivative instruments. After-tax results totaled $3 million in the third quarter of 2001 compared to a loss of $1 million in the same period a year ago. The increase in the third quarter of 2001 was primarily due to higher results from non-hedging commodity derivative positions related to domestic crude oil. For the nine months ended September 30, 2001, after-tax results totaled $10 million compared to $3 million in the same period a year ago. The increase was primarily due to higher results from non-hedging commodity derivative positions related to crude oil and 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. After-tax earnings totaled $13 million for the third quarter of 2001 compared to $16 million in the same period a year ago. The decrease was primarily due to lower results from the Company's North America gas storage business. For the nine months ended September 30, 2001, after-tax earnings totaled $40 million compared to $47 million in 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. 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. After-tax earnings totaled $2 million and $5 million in the third quarter and nine months periods of 2001, respectively, which compared to $4 million and $18 million, respectively, for the same periods a year ago. The lower results in both the third quarter and nine months periods of 2001 were primarily due to higher receivable provisions related to geothermal operations in Indonesia. The receivable provisions were partially offset in both the third quarter and nine months periods by higher electricity generation and steam sales in Indonesia. -30- 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 Nine Months Ended September 30, Ended September 30, ----------------------- ------------------------ Millions of dollars 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------ Adjusted after-tax earnings effect (before special items) Administrative and general expense $ (19) $ (19) $ (63) $ (62) Net interest expense (a) (31) (36) (96) (109) Environmental and litigation expense (4) (5) (9) (11) Other (a) (21) (2) (44) (1) - ------------------------------------------------------------------------------------------------------------ Adjusted after-tax earnings effect (before special items) (a) (75) (62) (212) (183) Special items: Asset sales (Other) - - - - Environmental and litigation provisions (26) (38) (71) (71) Other Executive stock purchase program - - - (9) Insurance benefits related to environmental issues - - - 21 Provision for prior year income tax issues - (20) - (20) Reformulated gasoline patent case - - - 55 Restructuring costs - - - (11) - ------------------------------------------------------------------------------------------------------------ Total special items (26) (58) (71) (35) - ------------------------------------------------------------------------------------------------------------ After-tax earnings effect (a) $ (101) $ (120) $ (283) $ (218) ============================================================================================================ (a) Includes minority interests of: $ 2 $ 2 $ 4 $ 3
The after-tax earnings effect in the third quarter of 2001 was a loss of $101 million compared to a loss of $120 million in the same period a year ago. Environmental and litigation provisions in the third quarter of 2001 were lower than in the third quarter of 2000. Net interest expense was also lower in the third quarter of 2001 versus the same period a year ago primarily due to higher capitalized interest on development projects. The third quarter 2001 results also included a decrease in earnings from the Company's minerals businesses and higher employee benefit-related accruals, both reflected in the Other category. The third quarter 2000 results included a $20 million provision for U.S. deferred taxes related to prior year income tax matters. The after-tax earnings effect for the nine months period of 2001 was a loss of $283 million compared to a loss of $218 million in the same period a year ago. The results of the nine months period in 2000 benefited from a $55 million after-tax gain related to payments received in the Company's reformulated gasoline patent infringement case and a $21 million after-tax insurance recovery. In addition, the nine months 2001 period results were also lower due to higher employee benefit-related accruals and lower earnings from the minerals businesses. The Company also made a $10 million pre-tax cash contribution in 2001, included in the Other category, to a charitable foundation. Net interest expense was lower for the nine months period of 2001, compared to the same period a year ago, primarily due to higher capitalized interest on development projects. -31- FINANCIAL CONDITION AND CAPITAL EXPENDITURES
At At At September 30, December 31, September 30, ------------------------------------------------- Millions of dollars 2001 2000 2000 - ------------------------------------------------------------------------------------------------- Current ratio 1.0:1 1.0:1 1.1:1 Total debt and capital leases $ 2,859 $ 2,506 $ 2,738 Trust convertible preferred securities 522 522 522 Stockholders' equity 3,201 2,719 2,593 ------------------------------------------------- Total capitalization $ 6,582 $ 5,747 $ 5,853 ================================================= Total debt/total capitalization 43% 44% 47% Floating-rate debt/total debt 6% 3% 7% - -------------------------------------------------------------------------------------------------
For the nine months period of 2001, net cash flow provided by operating activities was $1,780 million compared with $1,257 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. Positive cash flow generated from reduced working capital was a reflection of a continuous decrease in crude oil prices during the first nine months of the year, lower crude oil trading activity by the Company's 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 $51 million for the nine months period of 2001. The proceeds included a $25 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, $14 million from the sale of certain oil and gas properties and $12 million from the sale of miscellaneous assets. Capital expenditures for the nine months period of 2001 were $1,257 million, compared with $872 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 and higher development expenditures in Indonesia. The capital expenditures amount for the nine months period of 2001 excluded Pure's acquisition of properties from International Paper Company for $271 million, Pure's cash outlay of $172 million for the acquisition of all the shares of Hallwood Energy Corporation and Northrock's cash outlay of $93 million for the acquisition of all the shares of Tethys Energy Inc. (see note 3 to the consolidated financial statements in Item 1 of this report). Capital expenditures for the nine months period of 2000 excluded $161 million related to the acquisition of the remaining shares of Northrock. For the full year 2001, total capital expenditures, excluding major acquisitions, are currently expected to be approximately $1.7 billion. Of this total, about 58 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 35 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. -32- 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), anticipated dividend payments and repayment of maturing debt during the remainder of 2001. The Company's long-term debt, including the current portion, was $2.86 billion at September 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 to meet unanticipated cash requirements. At the end of October 2001, the Company replaced its $1 billion bank credit agreement with two new revolving credit facilities totaling $1 billion. One of these credit facilities is a $400 million 364-day credit agreement and the other credit facility is a $600 million 5-year credit agreement. The credit facilities provide for the termination of their loan commitments and require the prepayment of all outstanding borrowings in the event that (1) any person or group becomes the beneficial owner of more than 30 percent of the then outstanding voting stock of Unocal other than in a transaction having the approval of the Company's board of directors, at least a majority of which are continuing directors, or (2) if continuing directors shall cease to constitute at least a majority of the board. ENVIRONMENTAL MATTERS At September 30, 2001, the Company's reserves for environmental remediation obligations totaled $236 million, of which $117 million was included in current liabilities. During the nine months period of 2001, cash payments of $69 million were applied against the reserve and $92 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, facilities sold with retained liabilities and closed Company facilities. The Company also estimated that it possibly could incur additional remediation costs aggregating approximately $250 million (as discussed in note 12 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 September 30, Millions of dollars 2001 - ----------------------------------------------------------------------------- Superfund and similar sites $ 16 Active company facilities 47 Company facilities sold with retained liabilities and former company-operated sites 73 Inactive or closed company facilities 100 - ----------------------------------------------------------------------------- Total reserves $ 236 ============================================================================= -33- 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, drilling activities 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, current and future worldwide political instability and security and other factors. The Company expects adjusted (excluding special items) after-tax earnings to be between 25 and 35 cents per share for the fourth quarter of 2001, assuming average NYMEX benchmark commodity prices of $22.25 per barrel of crude oil and $2.55 per MMBtu for Lower 48 natural gas. The fourth quarter forecast is also dependent on the Company's drilling results and other factors. The Company expects net daily worldwide production for the fourth quarter of 2001 to average between 500,000 and 510,000 Barrels of Oil Equivalent (BOE). The Discoverer Spirit drillship completed drilling of a delineation well on the discovery at the Mad Dog prospect on Green Canyon Block 826. The well was successful in proving the commerciality of the prospect, and the Company anticipates the development plan for Mad Dog to be approved by the end of this year or early next year. The Discoverer Spirit drillship is currently drilling the first appraisal well on the Trident prospect as a follow-up to the discovery made earlier this year. The Trident #2 well is located 1.25-miles northeast of the Trident discovery in 9,727 feet of water. The Company expects to complete the first appraisal well in about 60 to 75 days. The Company anticipates drilling a second Trident appraisal well in late 2002. In August 2001, the Company signed a sublease agreement with a third party for the Discoverer Spirit drillship for a minimum period of 200 days. The third party will be responsible for making the lease payments directly to the lessor during the sublease period. The subleasing will give the Company the additional time necessary to incorporate its recent drilling activities into the overall evaluation of its deepwater portfolio. The Company anticipates the subleasing to commence in early 2002 after it has completed its drilling of the Trident #2 appraisal well. In November 2001, the Company signed a memorandum of understanding with Forest Oil Corporation (Forest) to jointly explore and develop certain properties in the central Gulf of Mexico Shelf. Under the proposed transaction, the Company would acquire a portion of Forest's proved reserves and current production for $120 million in cash. The Company would become the operator of the jointly owned properties. The two companies are currently negotiating the details of the transaction, which is expected to close by the end of 2001. -34- In the Cook Inlet of Alaska, the Company drilled four 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 expects to drill a follow-up to the K-13 well in late 2001. The Company holds a 56 percent working interest in this production zone in the McArthur River field. The Company expects its Thailand operations to continue to perform strongly. In October 2001, the Company reached agreement with the Petroleum Authority of Thailand (PTT) to provide an incentive for it to take incremental natural gas quantities above contract production minimums from certain fields in the Gulf of Thailand over a 15-month period. The Company and its partners paid PTT $15 million as an incentive for PTT to purchase 18 billion cubic feet of gas above the contract minimums between July 2001 and September 2002. At the end of the incentive period, if PTT fails to take any of the incremental volume, it shall refund to the Company and its partners the advance incentive amount paid on a pro-rata basis for any purchase volume short of the agreed incremental volume. The current contract pricing mechanism will continue for all quantities of gas taken under the contracts. The Company also continues to develop its first oil fields in the Gulf of Thailand. The Company began crude oil production in July from its Plamuk field and is working on the development of the neighboring Yala field. The two fields are expected to produce a combined 15,000 b/d by early next year. 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 does not expect PTT to incur a "take-or-pay" obligation in 2001. In September 2001, the Company announced that its Unocal Rapak, Ltd., subsidiary had drilled two successful exploration appraisal wells on the Ranggas prospect in the southern portion of the Rapak Production-Sharing Contract (PSC) area, offshore East Kalimantan, Indonesia. These two wells were a follow-up to the initial discovery well. Unocal Rapak, Ltd. is operator of the Rapak PSC area and holds an 80-percent working interest. The Ranggas-2 well was drilled to a total depth of 13,661 feet in 5,192 feet of water. The well encountered 155 feet of net oil pay and 118 feet of net gas pay. The well is located in the southern portion of the Ranggas structure, nearly a mile southwest of the discovery well. The Ranggas-3 well was drilled to a total depth of 13,248 feet in 5,368 feet of water. The well encountered 306 feet of net oil pay and 123 feet of net gas pay. The well is located 3.4 miles north of the discovery well in the central portion of the Ranggas structure. In the next phase of drilling, Unocal Rapak, Ltd. expects to drill four to eight wells beginning late in 2001 or early 2002 to further delineate the Ranggas discovery and test at least two adjacent prospects. The Company expects to determine commerciality and the size of production facilities by the end of this second drilling phase. In the third quarter of 2001 the Azerbaijan International Operating Company (AIOC) consortium approved development of the "Phase 1" portion of offshore oil reserves in the Caspian Sea. This phase of the project will develop 1.5 billion barrels of crude oil reserves. Phase 1 production is scheduled to commence in early 2005 and is expected to peak at approximately 360,000 b/d. The company holds an approximate 10 percent working interest in AIOC. 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 the drilling of two more wells starting in late 2001. -35- As of September 30, 2001, the Company had a gross receivable balance of approximately $375 million related to its geothermal operations in Indonesia. Approximately $156 million was related to Gunung Salak electric generating Units 1, 2, and 3, of which $154 million represented past due amounts and accrued interest resulting from partial payments for March 1998 through September 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 $219 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. 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. In August 2001, the Company received notice that the FTC is conducting an investigation in conjunction with this matter. The Company has been cooperating with the FTC in its inquiry. In October 2001, the Company was informed that the U.S. District Court in Los Angeles granted the Company's motion for summary judgement requesting an accounting of infringement of the `393 patent from August 1996 through December 2000 by the five defendants. The Company had requested 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 court did not make findings of the specific amount owed to the Company in its order. The court also denied the defendants' motions that these damage proceedings be stayed pending the outcome of the `393 patent reexamination or, alternatively, that the defendants be granted a new trial as to damages. The Company is awaiting a definitive order. -36- 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. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently in the process of evaluating the impact that SFAS No. 144 will have on its financial position and results of operations. -37- 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 September 30, 2001. Assuming a ten percent decrease in the Company's weighted average borrowing costs at September 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 $111 million at September 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 September 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 September 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 $7 million at September 30, 2001. -38- 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 $8 million at September 30, 2001. The value at risk related to hydrocarbon derivatives held for trading purposes was approximately $5 million at September 30, 2001. -39- 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 (2000 Form 10-K), and in Item 1 of Part II of Unocal's Quarterly Reports on Form 10-Q for the quarters ended March 31(First Quarter 2001 Form 10-Q), and June 30, 2001; the information regarding environmental remediation reserves in note 11 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 12 to the consolidated financial statements. Information with respect to recent developments in certain of such proceedings is set forth below: 1. In September 2001, the California Superior Court denied the Company's demurrers which sought to have the court dismiss the complaints in the matters pending in that court captioned John Roe III, et al. v. Unocal Corp., et al. and John Doe I, et al. v. Unocal Corp., et al., which were described in Paragraph 4 of Item 3 of the 2000 Form 10-K. Subsequently, the Company filed its answers denying the allegations in the complaints. The plaintiffs' appeals from the dismissals of their prior lawsuits in the U.S. District Court for the Central District of California are scheduled to be heard by the U.S. Court of Appeals for the Ninth Circuit in December 2001. Certain Environmental Matters Involving Civil Penalties 2. In October 2001, the Company reached an agreement with the U.S. Department of Justice and the U.S. Environmental Protection Agency to settle the action in the U.S. District Court for the Central District of California that alleged violations of the federal Clean Air Act at the Company's former Los Angeles refinery marine terminal, which action was described in Paragraph 10 of Item 3 of the 2000 Form 10-K and in Paragraph 1 of Item I of Part II of the First Quarter 2001 Form 10-Q. The settlement provides for the payment by the Company of civil penalties aggregating $1,750,000, for which the Company had previously established a reserve. ITEM 5. OTHER INFORMATION. On October 31, 2001, the Company's board of directors elected Charles R. Williamson as chairman of the board effective on that date. Mr. Williamson will also continue as the Company's chief executive officer. Mr. Williamson succeeded John W. Creighton, Jr., who resigned as a non-executive chairman but will continue as a director of the Company. -40- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: The Exhibit Index on page 43 of this report lists the exhibits that are filed as part of this report. (b) Reports on Form 8-K: Filed during the third quarter of 2001: (1) Current Report on Form 8-K, dated August 22, 2001, and filed September 6, 2001, for the purpose of reporting, under Item 5, the Company's drilling results in Gulf of Mexico and Indonesia and the Company's forecasts for production and reserves. Filed during the fourth quarter of 2001 to the date hereof: (1) Current Report on Form 8-K, dated October 24, 2001, and filed October 30, 2001, for the purpose of reporting, under Item 5, the Company's third quarter and nine months 2001 results and the Company's earnings forecast for the fourth quarter of 2001. -41- 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: November 14, 2001 By: /s/JOE D. CECIL --------------------------------- Joe D. Cecil Vice President and Comptroller (Duly Authorized Officer Principal Accounting Officer) -42- EXHIBIT INDEX 3 Bylaws of Unocal, as amended through October 31, 2001 and currently in effect. 10.1 Amendment to the Revised Incentive Compensation Plan, effective December 5, 2000. 10.2 Form of Nonqualified Stock Option Grant under the Long-Term Incentive Plan of 1998, effective August 20, 2001 (subject to stockholders approval), between Unocal and Terry G. Dallas as to 240,000 shares of Unocal Common Stock with an exercise price of $36.22. 12.1 Statement regarding computation of ratio of earnings to fixed charges of Unocal Corporation for the nine months ended September 30, 2001 and 2000. 12.2 Statement regarding computation of ratio of earnings to fixed charges of Union Oil Company of California for the nine months ended September 30, 2001 and 2000. 99 Summary of change-of-control provisions in certain stock-based compensation plans. Copies of exhibits will be furnished upon request. Requests should be addressed to the Corporate Secretary. -43- EX-3 3 q32001_ex3.txt UNOCAL BYLAWS EXHIBIT 3 BYLAWS OF UNOCAL CORPORATION a Delaware corporation (Effective October 31, 2001) ARTICLE I FISCAL YEAR Section 1. The fiscal year of Unocal Corporation (hereinafter called the "Corporation") shall end on the thirty-first (31st) day of December of each year. ARTICLE II OFFICES Section 1. Principal Office. The principal office for the transaction of business of the Corporation is hereby fixed and located at 2141 Rosecrans Avenue, Suite 4000, in the City of El Segundo, County of Los Angeles, State of California. The Board of Directors (hereinafter sometimes called the "Board") is hereby granted full power and authority to change said principal office from one location to another. ARTICLE III STOCKHOLDERS Section 1. Annual Meetings. The annual meetings of the stockholders shall be held at 10:00 o'clock A.M. on the fourth (4th) Monday in May of each year, if not a legal holiday, for the purpose of electing directors and for the transaction of any other business which is within the powers of the stockholders and properly brought before the meeting. If the fourth (4th) Monday in May is a legal holiday, the annual meeting of the stockholders shall be held at 10:00 o'clock A.M. on the preceding Monday. Section 2. Notice of Meetings. Written notice of each annual or special meeting of stockholders shall be given to each stockholder entitled to vote thereat not less than ten (10) nor more than sixty (60) days before the meeting. Section 3. Place of Meetings. All meetings of stockholders, whether annual or special, shall be held at the principal office of the Corporation or at such other place, within or without the State of Delaware, as the Board may from time to time designate pursuant to authority hereinafter granted it. In the absence of any such designation stockholders' meetings shall be held at the principal office of the Corporation. Section 4. Voting Rights. Stockholders entitled to vote at stockholder meetings shall be entitled to one (1) vote for each full share. A fraction of a share or a fractional interest in a share shall not be entitled to any voting rights whatsoever. Section 5. Conduct of Meetings. The decisions of the Chairman of the Board or officer presiding at all stockholders' meetings shall govern in all matters relating to the conduct of the meeting. Section 6. Voting. Directors shall be divided into three (3) classes. At each annual meeting, all directors of one (1) class shall be elected in accordance with, and subject to, the provisions of ARTICLE SIXTH of the Corporation's Restated Certificate of Incorporation by the holders of shares entitled to vote in the election. Section 7. Nominations and Other Stockholder Business. At any meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting in accordance with the procedures set forth herein. Only such business shall be conducted at an annual meeting of the stockholders as shall have been properly brought before the meeting (a) pursuant to the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) by or at the direction of the Board of Directors, or (c) by a stockholder or a beneficial owner of the Corporation's stock ("Proponent") in compliance with all of the following provisions: (1) such business must be a proper matter for stockholder action under the Delaware General Corporation Law: (2) the Corporate Secretary must have timely received (as described below) written notice by the Proponent containing (a) a brief description of each matter desired to be brought before the meeting, (b) the Proponent's name and address (if the Proponent is a stockholder of record, as they appear on the Corporation's books), (c) the class and the number of shares of stock of the Corporation which are beneficially owned by the Proponent and, if the Proponent is not a stockholder of record, proof of beneficial ownership, (d) a description of any material interest of the Proponent in such business, (e) a statement as to whether the Proponent intends to deliver a proxy statement and form of proxy to holders of a sufficient number of shares, in the case of a nomination, to elect such nominee, and in the case of a proposal of other business, to carry such proposal (an affirmative statement of such intent, a "Solicitation Notice"), and (f) as to each person whom the Proponent proposes to nominate for election or re-election as a director, (i) all information relating to such person as would be required to be disclosed in solicitations of proxies for the election of such person as a director pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (ii) such person's written consent to serve as a director if elected; (3) if the Proponent has provided the Corporation with a Solicitation Notice, the Proponent must have delivered a proxy statement and form of proxy to holders of a sufficient number of shares, in the case of a nomination, to elect such nominee, and in the case of a proposal of other business, to carry such proposal; and -2- (4) if the Proponent has not provided the Corporation with a Solicitation Notice, the Proponent must not have delivered a proxy statement and a form of proxy to holders of a sufficient number of shares, in the case of a nomination, to elect such nominee, and in the case of a proposal of other business, to carry such proposal. The Corporate Secretary shall be deemed to have timely received a Proponent's notice under clause (c)(2) of the preceding paragraph if it is delivered at the Corporation's principal office to the attention of the Corporate Secretary at least ninety (90) days prior to the annual meeting of stockholders; provided, however, that if there has been an amendment to the Bylaws since the last annual meeting changing the date of the annual meeting, a Proponent's notice shall be deemed to have been timely received if it is delivered not later than the close of business on the later of the ninetieth (90th) day prior to the annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made; provided further, however, that if the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased board of directors at least one hundred (100) days prior to the annual meeting, a Proponent's notice shall be deemed to have been timely received, but only with respect to nominees for any new positions created by such increase, if it is delivered not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made. Only such business shall be conducted at a special meeting of the stockholders as shall have been brought before the meeting pursuant to the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors. Nominations of persons for election to the Board of Directors may be made at a special meeting of the stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) by a Proponent who delivers the notice described in clause (c)(2) of the second paragraph of this Section at the Corporation's principal office to the attention of the Corporate Secretary not later than the close of business on the later of the ninetieth (90th) day prior to such special meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the number of directors proposed by the Board of Directors to be elected at such meeting. Only persons nominated in accordance with the procedures set forth in this section shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this section. The chairman of the meeting shall have the power to determine whether a nomination or any other business is in compliance with this section, and to declare that any defective nomination or other business not be presented for stockholder action at the meeting and be disregarded. -3- For purposes of this section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. Notwithstanding the foregoing provisions of this section, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to matters set forth in this section. Nothing in this section shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth herein. Section 8. Quorum. The holders of one-third (1/3) of all of the outstanding shares of the stock of the Corporation entitled to vote at a meeting of stockholders, present in person or by proxy, shall constitute a quorum for the transaction of any business at such meeting. ARTICLE IV BOARD OF DIRECTORS Section 1. Powers. Subject to the limitations of the Restated Certificate of Incorporation of the Corporation and of the Delaware General Corporation Law as to action which shall be authorized or approved by the stockholders, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed by, the Board of Directors. Section 2. Number. The exact number of directors of the Corporation shall be ten(10) until changed in the manner provided by law. Section 3. Chairman and Vice Chairman of the Board. The Board shall elect a Chairman, who shall preside at all meetings of the Board of Directors and shall have such other powers and duties as may from time to time be assigned by the Board of Directors or prescribed by the Bylaws. The Board may also appoint a Vice Chairman, who shall preside at all meetings of the Board of Directors in the absence of the Chairman and shall have such other powers and duties as may from time to time be assigned by the Board of Directors or prescribed by the Bylaws. Section 4. Annual Meetings. Immediately following each annual meeting of stockholders, the Board shall hold its annual meeting for the purpose of organization, election of officers and the transaction of any other business. Section 5. Regular Meetings. Regular meetings of the Board shall be held at the times and on the dates fixed by resolution of the Board. -4- Section 6. Special Meetings. Special meetings of the Board for any purpose or purposes whatsoever may be called by the Chairman of the Board and Chief Executive Officer or, in his absence or inability, by the President and Chief Operating Officer, or by at least two (2) of the directors at the time in office. Section 7. Notice of Meetings. Notice of annual meetings and of regular meetings of the Board is hereby dispensed with. Notice of special meetings must be given at least two (2) days in advance if given by mail, or at least twenty-four (24) hours in advance if delivered personally or given by telephone or other electronic means. Section 8. Place of Meetings. All meetings of the Board, whether annual, regular or special meetings, shall be held at any place within or without the State of Delaware which has been designated from time to time by resolution of the Board or in the notice of the meeting. In the absence of such designation all directors' meetings shall be held at the principal office of the Corporation. Section 9. Quorum. A majority of the exact number of directors specified in Section 2 of this Article IV of the Bylaws shall constitute a quorum of the Board of Directors for the transaction of business; provided, however, that vacancies on the Board may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, each such director to hold office until a successor is elected at an annual or special meeting of the stockholders. Section 10. Compensation of Directors. Directors and members of committees appointed by the Board shall receive such compensation, if any, for their services, and such reimbursement for their expenses, as may be fixed or determined by resolution of the Board. The Board may, however, in any such resolution provide that directors who are also employees of the Corporation or any of its subsidiaries shall not receive additional compensation for services as a director or member of a committee appointed by the Board. Section 11. Indemnification of Directors, Officers, Employees and Other Agents. (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or involved in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative ("Proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, trustee, or fiduciary, or in a similar capacity (collectively, "Agent") of another foreign or domestic corporation, limited liability company, partnership, joint venture, trust, or any other enterprise or entity whatsoever, including without limitation employee benefit plans (collectively, "Affiliate"), whether the basis of such Proceeding is alleged action in an official capacity, or in any other capacity while serving as a director or officer of the Corporation or as an Agent of an Affiliate, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General -5- Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability, and loss, including without limitation, attorneys' fees, judgments, fines, ERISA excise taxes, penalties, amounts paid or to be paid in settlement, and any other amounts actually incurred or suffered by such person in connection with any Proceeding; and such indemnification shall continue as to a person who has ceased to be a director or officer of the Corporation or Agent of an Affiliate and shall inure to the benefit of his or her heirs, executors, and administrators; provided, however, that, except as provided in paragraph (b) hereof with respect to Proceedings seeking to enforce rights to indemnification, the Corporation shall indemnify any such person seeking indemnification in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including without limitation, service to an employee benefit plan) in advance of the final disposition of a Proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may, to the extent authorized from time to time by the Board of Directors, either on a general basis or as to specific employees or agents, provide indemnification to employees and agents of the Corporation with similar scope and effect as the foregoing indemnification of directors and officers. (b) Right to Bring Suit. If a claim under paragraph (a) of this Section is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for expenses incurred in a Proceeding in advance of its final disposition, in which case the applicable period shall be twenty (20) days, the person seeking indemnification (the "Party to be Indemnified") may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Party to be Indemnified shall be entitled to be paid also the expense of prosecuting or defending such claim. The Corporation's sole defense to an action seeking indemnification (other than an action brought to enforce a claim for expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) shall be that the Party to be Indemnified has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the Party to be Indemnified for the amount claimed, and the burden of -6- providing such defense shall be on the Corporation. Neither the failure of the Corporation (including the Board of Directors, its independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the Party to be Indemnified is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including the Board of Directors, its independent legal counsel, or its stockholders) that the Party to be Indemnified has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Party to be Indemnified has not met the applicable standard of conduct. (c) Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Restated Certificate of Incorporation, Bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. (d) Insurance. The Corporation shall maintain in full force and effect, at its own expense, director and officer liability insurance ("Insurance") coverage for each director and officer in amounts and scope at least as favorable as that maintained by the Corporation on September 30, 1996, or, to the extent more favorable, any Insurance policy entered into or renewed by the Corporation following such date. Notwithstanding the foregoing, if the Corporation, after using its best efforts, cannot obtain and purchase such coverage for an amount no more than what it paid for the most recent expiring Insurance policy plus a reasonable additional amount, the Corporation shall only be required to purchase such Insurance coverage for any act or omission occurring at or prior to the time of such date. (e) Enforceability; Amendment. The rights provided to any person by this Bylaw shall be enforceable against the Corporation by such person, who shall be presumed to have relied upon it in serving or continuing to serve as an Agent, as provided above. No amendment of this Bylaw shall impair the rights of any person arising at any time with respect to events occurring prior to such amendment, including, without limitation, any right of a director or officer to Insurance for any act or omission occurring at or prior to the time of such amendment. Section 12. Authority to Designate Place of Stockholders' Meetings. The Board is hereby granted full power and authority to designate from time to time any place within or without the State of Delaware for the holding of any stockholders' meeting. Section 13. Committees of the Board. The Board may, by resolution, appoint one or more committees of the Board, in addition to an Executive Committee, and prescribe their duties and powers. A quorum for the transaction of business shall be one-third (1/3) of the members of the Committee unless the Bylaws or resolution of the Board shall otherwise provide. A majority of the members of any such committee may determine -7- its own rules of procedure unless the Board shall otherwise provide. The Board shall have the power at any time to fill vacancies in, to change the membership of, or to dissolve any such committee. Section 14. Action by Written Consent. Any action required or permitted to be taken by the Board or any committee thereof may be taken without a meeting, if all members of the Board or such committee, as the case may be, shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Section 15. Conference Calls. Members of the Board or any committee thereof may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. ARTICLE V EXECUTIVE COMMITTEE Section 1. Number and Composition. The Board of Directors shall appoint from its membership, annually, an Executive Committee of the Board composed of three (3) or more directors. Included on the Executive Committee shall be the Chairman of the Board and Chief Executive Officer of the Corporation. Each member of the Executive Committee shall hold membership at the pleasure of the Board, which shall have the exclusive power to fill vacancies thereon as they may occur. The Chairman of the Executive Committee shall be the Chairman of the Board. Section 2. Powers. The Executive Committee, during the intervals between meetings of the Board, shall have and there is hereby granted to it all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, except that the Executive Committee shall not be permitted to fill vacancies on the Board or on any committee, approve any action for which stockholder approval is also required by the Delaware General Corporation Law, amend or repeal any resolution of the Board which by its express terms is not so amendable or repealable, or appoint other committees of the Board or the members thereof and shall not have any powers restricted by Section 141(c) of the Delaware General Corporation Law unless the Board shall have specifically delegated authority to the Executive Committee to take action with respect to a matter listed in such Section as permitted to be so delegated. Section 3. Procedure. Two (2) members of the Executive Committee shall constitute a quorum of the Executive Committee for the transaction of business. The Executive Committee, by vote of a majority of its members, shall fix its own times and places of meetings and shall prescribe its own rules of procedure; no change in which shall be made save by a majority vote of its members. -8- Section 4. Records and Reports. The Executive Committee shall keep regular minutes of all business transacted at its meetings, and all action of the Executive Committee shall be reported to the Board at its next ensuing meeting. Section 5. Compensation. Members of the Executive Committee may receive such compensation, if any, for their services, and such reimbursement for their expenses, as may be fixed or determined by the Board. ARTICLE VI MANAGEMENT COMMITTEE Section 1. Number and Composition. The Board of Directors shall appoint annually a Management Committee of the Corporation composed of the Chief Executive Officer, the President and Chief Operating Officer and the Chief Financial Officer of the Corporation. The Chairman of the Management Committee shall be the Chief Executive Officer of the Corporation. Section 2. Powers. The Management Committee, during the intervals between meetings of the Board, shall have and there is hereby granted to it all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation which may be delegated to officers under the Delaware General Corporation Law, including the appointment and removal of subordinate officers, subject to approval limits established by resolution of the Board of Directors as deemed appropriate from time to time. Section 3. Procedure. Two (2) members of the Management Committee shall constitute a quorum of the Management Committee for the transaction of business. The Management Committee, by vote of a majority of its members may prescribe its own rules of procedure; no change in which shall be made save by a majority vote of its members. Section 4. Records. The Management Committee shall keep records of business transacted at its meetings. ARTICLE VII OFFICERS Section 1. Officers. The officers of the Corporation shall be a Chief Executive Officer, a President and Chief Operating Officer, a Chief Financial Officer, a Vice President, a Secretary, a Comptroller, a Treasurer, a Chief Legal Officer and a Chief Information Officer. The Corporation may also have, at the discretion of the Board, one (1) or more Vice Presidents, who may be designated as Executive Vice Presidents, Group Vice Presidents, Senior Vice Presidents or Vice Presidents, one (1) or more Assistant Chief Financial Officers, one (1) or more Assistant Secretaries, one (1) or more Assistant Treasurers, and one (1) or more Assistant Comptrollers, and the Board may appoint such other officers as it may deem necessary or advisable, who shall have such authority and perform such duties as from time to time may be prescribed by the Board, the Chairman of -9- the Board or the Chief Executive Officer. Any two (2) or more offices may be held by the same person. Section 2. Election and Removal. The officers of the Corporation shall be chosen annually by the Board at its annual meeting and each shall hold office until the corresponding annual meeting of the Board in the next year and until a successor shall be elected and qualified unless such officer shall theretofore resign or shall be removed or otherwise disqualified to serve. The Board may remove any officer either with or without cause or under such other terms or conditions as it may prescribe. Vacancies may be filled by the Board as they may occur. Section 3. Powers and Duties. (a) Chief Executive Officer. The Chief Executive Officer shall be the officer, reporting directly to the Board, responsible for overall management of the Corporation and shall have general supervision, direction and control over the business and affairs of the Corporation and its officers. The Chief Executive Officer shall be a member of the Executive Committee and of the Management Committee and in general shall perform all duties incident to the office of Chief Executive Officer and shall have such powers and duties as may from time to time be assigned by the Board of Directors or prescribed by the Bylaws. (b) President and Chief Operating Officer. The President and Chief Operating Officer in general shall perform all duties incident to the office of President and Chief Operating Officer, and shall have such powers and duties as may from time to time be assigned by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or prescribed by the Bylaws. (c) Vice Presidents. Vice Presidents, who may be designated as Executive Vice Presidents, Group Vice Presidents, Senior Vice Presidents or Vice Presidents, shall have such authority and shall perform such duties as shall from time to time be assigned by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President and Chief Operating Officer, or prescribed by the Bylaws. (d) Chief Financial Officer. The Chief Financial Officer shall have such authority and shall perform such duties as shall from time to time be assigned by the Board, the Chairman of the Board, the Chief Executive Officer or prescribed by the Bylaws. (e) Assistant Chief Financial Officer. Each Assistant Chief Financial Officer shall assist the Chief Financial Officer and shall perform such duties as shall from time to time be assigned by the Board, the Chairman of the Board, the Chief Executive Officer or the Chief Financial Officer. (f) Secretary. The Secretary shall keep, or cause to be kept, at the principal office and/or such other place or places as the Board may order, a book or books of -10- minutes of all meetings of directors and stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The Secretary shall keep or cause to be kept at the principal office, or at the office of the Corporation's transfer agent, a stock register, which may be an electronic database, showing the names of the stockholders of record and their addresses, the number and classes of shares held by each, the numbers and dates of the certificates issued for those shares, and the numbers and dates of cancellation of every certificate surrendered for cancellation. The Secretary shall give or cause to be given notice of all meetings of the stockholders and the Board required to be given by the Bylaws or by law. The Secretary shall have charge of and be custodian of the seal of the Corporation and the minute books and documents relating to the existence and governance of the Corporation. The Secretary shall have such other powers and perform such other duties as may from time to time be prescribed by the Board, the Chairman of the Board or the Bylaws, and shall in general, subject to control of the Board and the Chairman of the Board, perform all the duties usually incident to the office of secretary of a corporation. (g) Assistant Secretaries. Each Assistant Secretary shall assist the Secretary and, in the absence or disability of the Secretary, may perform the duties of the Secretary unless and until the contrary is expressed by the Board, and may perform such other duties as may be prescribed by the Board or the Secretary. (h) Treasurer. The Treasurer shall have custody of and be responsible for all the monies and funds of the Corporation. The Treasurer shall deposit or cause to be deposited all Corporation monies, funds and other valuables in the name and to the credit of the Corporation in such bank or banks as shall be judged proper or as shall be directed by the Board, the Chairman of the Board, the Chief Executive Officer, or the Chief Financial Officer, and shall disburse the funds of the Corporation which have been duly approved for disbursement. The Treasurer shall enter or cause to be entered regularly in the books of the Corporation full and accurate accounts of all monies received and paid out on account of the Corporation. The Treasurer shall have such other powers and perform such other duties as may from time to time be prescribed by the Board, the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer or the Bylaws, and shall in general, subject to control of the Board, the Chairman of the Board, the Chief Executive Officer, and the Chief Financial Officer, perform all the duties usually incident to the office of treasurer of a corporation. (i) Assistant Treasurers. Each Assistant Treasurer shall assist the Treasurer and, in the absence or disability of the Treasurer, may perform the duties of the Treasurer -11- unless and until the contrary is expressed by the Board, and shall perform such other duties as may be prescribed by the Board or the Treasurer. (j) Comptroller. The Comptroller shall be the principal officer in charge of the general accounting books, accounting records and forms of the Corporation and shall see that all monies and obligations due the Corporation and all properties and assets are properly accounted for. The Comptroller shall prepare the Corporation's balance sheets, income accounts and other financial statements and reports, and render to the Board, the Chairman of the Board, the Chief Executive Officer, and the Chief Financial Officer, such periodic reports covering the results of operations of the Corporation as may be required by them or any of them. The Comptroller shall have such other powers and perform such other duties as may from time to time be prescribed by the Board, the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer or the Bylaws and shall in general, subject to control of the Board, the Chairman of the Board, the Chief Executive Officer, and the Chief Financial Officer, perform all the duties usually incident to the office of comptroller of a corporation. (k) Assistant Comptrollers. Each Assistant Comptroller shall assist the Comptroller and, in the absence or disability of the Comptroller, may perform the duties of the Comptroller unless and until the contrary is expressed by the Board, and shall perform such other duties as may be prescribed by the Board or the Comptroller. (l) Chief Legal Officer. The Chief Legal Officer shall be in charge of the Corporation's legal affairs. The Chief Legal Officer shall advise the Board, the Chairman of the Board, the Chief Executive Officer and the other officers of the Corporation on such legal matters and prepare such reports as may be required by them or any of them. (m) Chief Information Officer. The Chief Information Officer shall be in charge of the Corporation's information technology. The Chief Information Officer shall advise the Board, the Chairman of the Board, the Chief Executive Officer and the other officers of the Corporation on such information technology matters and prepare such reports as may be required by them or any of them. ARTICLE VIII MISCELLANEOUS Section 1. Execution of Documents. Unless otherwise authorized by or pursuant to a resolution of the Board of Directors, all contracts, leases, deeds, deeds of trust, mortgages, bonds, indentures, endorsements, assignments, powers of attorney, and other documents and instruments of whatsoever kind shall be executed for and on behalf of the Corporation by the Chief Executive Officer, the President and Chief Operating Officer, the Chief Financial Officer, a Vice President, the Treasurer, the Comptroller, or by any such officer and shall be attested by the Secretary or an Assistant Secretary, who shall have authority to affix the corporate seal to the same. -12- Section 2. Undertakings and Commitments. No undertaking, commitment, contract, instrument or document shall be binding upon the Corporation unless previously authorized or subsequently ratified by the Board or executed by an officer or officers, an employee or employees or an agent or agents of the Corporation acting under powers conferred by or pursuant to resolution of the Board or by these Bylaws. Section 3. Checks, Drafts, etc. All checks, notes and other obligations for collection, deposit or transfer, and all checks and drafts for disbursement from Corporation funds, and all bills of exchange and promissory notes, and all acceptances, obligations and other instruments for the payment of money, shall be endorsed or signed by such officer or officers, employee or employees or agent or agents as shall be authorized from time to time to do so by or pursuant to a resolution of the Board of Directors. Section 4. Representation of Shares of Other Corporations. Shares standing in the name of the Corporation may be voted or represented and all rights incident thereto may be exercised on behalf of the Corporation by the Chief Executive Officer, the President and Chief Operating Officer, the Chief Financial Officer, a Vice President, the Secretary, the Treasurer or the Comptroller, or by such other officers upon whom the Board of Directors may from time to time confer like powers. ARTICLE IX AMENDMENTS TO BYLAWS Section 1. Power of Stockholders. New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote of seventy-five (75) percent of the outstanding stock of the Corporation entitled to vote thereon. Section 2. Power of Directors. Subject to the right of stockholders as provided in Section 1 of this Article IX to adopt, amend or repeal Bylaws, Bylaws may be adopted, amended or repealed by the Board of Directors as provided or permitted by law; however, any Bylaw amendment adopted by the Board of Directors increasing or reducing the authorized number of directors or amending this Section shall require a resolution adopted by the affirmative vote of not less than seventy-five (75) percent of the directors. ARTICLE X EMERGENCY Section 1. "Emergency" as used in this Article means disorder, disturbance or damage caused by war, enemy attack, other warlike acts or by catastrophe, disaster or other similar emergency condition, which prevents the conduct and management of the affairs and business of the Corporation by the Board of Directors and officers in the manner provided for in other Articles of these Bylaws. The powers and duties conferred and imposed by this Article, and any resolutions adopted pursuant hereto, shall be effective only during an emergency. This Article may be implemented from time to time by resolutions adopted by the Board of Directors before or during an emergency, or during an -13- emergency by the emergency Board of Directors constituted and then acting pursuant hereto. An emergency, once commenced, shall be deemed to continue until terminated by resolutions adopted for that purpose by the Board of Directors. Section 2. If, during an emergency, a majority of the Board of Directors cannot be found or is unable to act, one-third (1/3) of the exact number of the Board of Directors shall constitute a quorum thereof. Section 3. During any emergency, the officers and employees of the Corporation shall continue, so far as possible, to conduct the Corporation's affairs and business under the guidance of the Board of Directors acting pursuant to this Article and in accordance with known orders of governmental authorities. Section 4. If, during any emergency, a quorum of the Board of Directors, as provided in Section 3 of this Article, cannot be found or is unable to act, any three (3) available members of the Executive Committee, including the Chief Executive Officer, shall be and constitute the Board of Directors, with two (2) thereof constituting a quorum, and as such shall have and exercise the fullest power of the Board of Directors for the conduct and management of the affairs and business of the Corporation, permitted by law, without the limitations set forth in Section 2 of ARTICLE V of these Bylaws, provided that such emergency Board of Directors as so constituted shall comply to the extent practicable under the circumstances with the provisions of ARTICLE III of these Bylaws relating to annual and special meetings of stockholders. If three (3) members of the Executive Committee, including the Chief Executive Officer, are not able to serve, any three (3) available directors shall be and constitute such emergency Board of Directors, with two (2) thereof constituting a quorum, for the exercise of the powers conferred and performance of the duties imposed by this Section 4. Section 5. If, during any emergency, neither a quorum of the Board of Directors, as provided in Section 3 of this Article, nor a quorum of the emergency Board of Directors, as provided for in Section 4 of this Article is available to serve, then the powers conferred and duties imposed by Section 4 shall vest in and devolve upon any three (3) of (in the following order of priority) available directors, Executive Vice Presidents, the Chief Financial Officer, and as many other Vice Presidents (or, in case of their inability, any other officers), in order of seniority, as may be necessary from time to time to constitute a total of three (3) emergency directors. The Chief Executive Officer and any other one (1) emergency director shall constitute a quorum of such emergency Board of Directors for exercise of the powers conferred and performance of the duties imposed hereunder, but if the Chief Executive Officer is not available, any two (2) of such emergency directors shall constitute a quorum. -14- EX-10 4 q32001_ex10-1.txt EXHIBIT 10.1 REVISED COMPENSATION PLAN EXHIBIT 10.1 UNOCAL CORPORATION AMENDMENT TO REVISED INCENTIVE COMPENSATION PLAN DECEMBER 5, 2000 The Revised Incentive Compensation Plan is amended by adding the following paragraph at the end of Section 5 thereof: "In the event of a "Change of Control" (as such term defined in the Long-Term Incentive Plan of 1998) the Award Period shall be reduced to the period ending on the date of such Change of Control. Each participant in the Plan shall be paid in cash not less than his or her target award, prorated by the ratio that the reduced Award Period bears to the calendar year and subject to the limitation of the first paragraph of this section 5." EX-10 5 q32001_ex10-2.txt EXHIBIT 10.2 NONQUALIFIED STOCK OPTION GRANT EXHIBIT 10.2 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 Terry G. Dallas (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 $36.22 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 August 20, 2001. 4. The total number of shares which may be purchased pursuant to this Option shall be 240,000 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 August 20, 2002 75% of the shares may be purchased on or after August 20, 2003 100% of the shares may be purchased on or after August 20, 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. 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 -2- employment. 6. The Committee may at its sole discretion elect to reinstitute any lapsed Options upon the rehire of a terminated Option Holder. 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. -3- 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. 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 -4- 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 (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 -5- 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. 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 August 20, 2001, which date is the date of grant of this Option. UNOCAL CORPORATION By: /s/CHARLES R. WILLIAMSON ------------------------ Charles R. Williamson Chief Executive Officer ACCEPTED: /s/TERRY G. DALLAS -------------------- PRINT NAME: Terry G. Dallas ------------------------------------ DATE: 29 August 01 ------------------------------------------ -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 6 q32001_ex12-1.txt EXHIBIT 12.1 - UNOCAL COMPUTATION Exhibit 12.1
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES For the Nine Months Ended September 30, ----------------------------- Millions of dollars 2001 2000 - ------------------------------------------------------------------------------------------------------ Earnings from continuing operations $ 629 $ 550 Provision for income taxes 447 309 Minority Interests 38 3 Distributions (less than) greater than earnings from equity investments 44 (48) - ------------------------------------------------------------------------------------------------------ Earnings subtotal 1,158 814 Fixed charges included in earnings: Interest expense 145 159 Distribution on convertible preferred securities 24 24 Interest portion of rentals 15 17 - ------------------------------------------------------------------------------------------------------ Fixed charges subtotal 184 200 Earnings from continuing operations available before fixed charges $1,342 $1,014 ====================================================================================================== Fixed charges: Fixed charges included in earnings $ 184 $ 200 Capitalized interest 19 9 - ------------------------------------------------------------------------------------------------------ Total fixed charges $ 203 $ 209 - ------------------------------------------------------------------------------------------------------ Ratio of earnings from operations to fixed charges 6.6 4.9 - ------------------------------------------------------------------------------------------------------
EX-12 7 q32001_ex12-2.txt EXHIBIT 12.2 - UNION OIL COMPUTATION EXHIBIT 12.2
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES For the Nine Months Ended September 30, ----------------------------- Millions of dollars 2001 2000 - ------------------------------------------------------------------------------------------------------ Earnings from continuing operations $ 648 $ 566 Provision for income taxes 451 311 Minority Interests 38 3 Distributions (less than) greater than earnings from equity investments 44 (48) - ------------------------------------------------------------------------------------------------------ Earnings subtotal 1,181 832 Fixed charges included in earnings: Interest expense 145 159 Interest portion of rentals 15 17 - ------------------------------------------------------------------------------------------------------ Fixed charges subtotal 160 176 Earnings from continuing operations available before fixed charges $1,341 $1,008 ====================================================================================================== Fixed charges: Fixed charges included in earnings $ 160 $ 176 Capitalized interest 19 9 - ------------------------------------------------------------------------------------------------------ Total fixed charges $ 179 $ 185 - ------------------------------------------------------------------------------------------------------ Ratio of earnings from operations to fixed charges 7.5 5.4 - ------------------------------------------------------------------------------------------------------
EX-99 8 q32001_ex99.txt SUMM. OF CHANGE-OF-CONTROL IN STOCK-BASED COMP. EXHIBIT 99 SUMMARY OF CHANGE OF CONTROL PROVISIONS IN CERTAIN STOCK-BASED COMPENSATION PLANS The Unocal Stock Option Plan, initially adopted in 1997 and subsequently amended, the Union Oil Restricted Stock Plan, adopted in July 2001, and the Unocal Phantom Stock Plan, also adopted in July 2001, each provide stock-based compensation to certain key employees of Unocal Corporation ("Unocal") and certain of its subsidiaries who are not executive officers or directors of Unocal. Each of such plans contains provisions for the acceleration and/or enhancement of the benefits provided in the event of a change of control of Unocal. The Unocal Stock Option Plan, as amended (the "Option Plan"), provides for the grant to selected key employees of non-qualified stock options with respect to up to an aggregate of 8,000,000 shares of Unocal Common Stock. No key employee may receive options covering more than 10,000 shares under a single award or more than an aggregate of 40,000 shares under all grants under the Option Plan. At October 31, 2001, options with respect to 4,708,111 Unocal Common Shares were outstanding under the Option Plan with a weighted average exercise price of $32.97 and options could thereafter be granted with respect to up to 3,092,071 additional shares. The Option Plan and the stock option awards under the Option Plan provide that upon the occurrence of a "Change of Control Event", as defined in such awards, the awards shall thereupon become fully vested and the options shall become fully exercisable. The Union Oil Restricted Stock Plan (the "Restricted Stock Plan") provides for the grant to selected key employees of not to exceed an aggregate of 400,000 shares of Unocal Common Stock, of which 360,790 shares had been granted at October 31, 2001. The shares granted are credited to an "Incentive Account" for the employee, together with dividend equivalents, but are subject to restrictions for a period of four years from the date of grant except upon a participant's termination of employment due to death, disability, for the convenience of the Company, retirement at age 65, or upon a "Change of Control", as defined in such Restricted Stock Plan, in which event the Incentive Account of a participant becomes fully vested and free of the restrictions. The Unocal Phantom Stock Plan (the "Phantom Stock Plan") provides for the grant to selected key employees of not to exceed 150,000 "Incentive Units," each equivalent for bookkeeping purposes to the market value of one outstanding share of Unocal Common Stock, of which 1,819 units had been granted at October 31, 2001. The Incentive Units are credited to an "Incentive Account" for the participant, together with dividend equivalents. The Incentive Account of a participant matures and becomes payable in cash according to a schedule established by the terms of the grant document, with a required period of employment subsequent to the date of grant for an Incentive Account to become 100% matured of not less than two years, except that the Incentive Account shall become 100% matured upon the participant's termination of employment due to death, disability, for the convenience of the Company, retirement at age 65, or upon a "Change of Control", as defined in such Phantom Stock Plan. In each of the three plans described above, the definition of "Change of Control" is substantially similar to the definition of such term contained in Section 2(e) of the Company's Long-Term Incentive Plan of 1998, as amended, which definition was filed as Exhibit 99 to the Company's Current Report on Form 8-K, dated December 5, 2000, SEC File No. 1-8483, and is hereby incorporated herein by reference. -2- -----END PRIVACY-ENHANCED MESSAGE-----