-----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, T5rYs7bh8EfY8D03pDGxrjkx4rr1ueXqAbxP5EIvLkpWwaCpjMdH2YBeOVbOS8PU obV11qidBCN6UH7IarGVyg== 0000716039-04-000153.txt : 20040806 0000716039-04-000153.hdr.sgml : 20040806 20040805182700 ACCESSION NUMBER: 0000716039-04-000153 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040806 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: 04955859 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 q22004_10q.txt 2ND QUARTER 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 -------------------- 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 ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ------- ------- Number of shares of Common Stock, $1.00 par value, outstanding as of July 30, 2004: 264,748,504 TABLE OF CONTENTS PAGE GLOSSARY.................................................................... i FORWARD-LOOKING STATEMENTS.................................................. iii PART I FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Earnings............................................. 1 Consolidated Balance Sheets....................................... 2 Consolidated Cash Flows........................................... 3 Notes to Consolidated Financial Statements........................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 32 Item 3. Quantative and Qualitative Disclosures About Market Risk............ 46 Item 4. Controls and Procedures............................................. 50 PART II OTHER INFORMATION Item 1. Legal Proceedings................................................... 51 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities................................................ 51 Item 4. Submission of Matters to a Vote of Security Holders................. 52 Item 5. Other Information................................................... 52 Item 6. Exhibits and Reports on Form 8-K.................................... 53 SIGNATURE................................................................... 53 EXHIBIT INDEX............................................................... 54 GLOSSARY Below are definitions of certain key terms that may be used in this Form 10-Q: M Thousand Bbl Barrels MM Million Cf/d Cubic feet per day B Billion Cfe/d Cubic feet of gas T Trillion equivalent per day Btu British thermal units CF Cubic feet DD&A Depreciation, depletion and amortization BOE Barrels of oil equivalent NGLs Natural gas liquids Liquids Crude oil, condensate and NGLs Bbl/d Barrels per day o API Gravity is a measurement of the gravity (density) of crude oil and other liquid hydrocarbons by a system recommended by the American Petroleum Institute ("API"). The measuring scale is calibrated in terms of "API degrees." The higher the API gravity, the lighter the oil. o Bilateral institution refers to a country specific institution that lends funds primarily to promote the export of goods from that country. Examples of bilateral institutions are Ex-Im (U.S.), Hermes (Germany), SACE (Italy), COFACE (France), and JBIC (Japan). o BOE is a term used to quantify oil and natural gas amounts using a standard measurement. Gas volumes are converted to barrels of oil equivalent on the basis of energy content, where the volume of natural gas that when burned produces the same amount of heat as a barrel of oil (6,000 cubic feet of gas equals one barrel of oil equivalent). o British Thermal Units ("Btu") is a standardized unit of measure for energy, equivalent to the amount of heat required to raise the temperature of one pound of water one degree Fahrenheit. Ten thousand MMBtu (million Btu) is the standard volume for exchange traded natural gas derivative contracts, the approximate heat content of ten thousand Mcf (thousand cubic feet) of natural gas. o Delineation or appraisal well is a well drilled in an unproven area adjacent to a discovery well to define the boundaries of the reservoir. o Development well is a well drilled within the proved area of an oil or natural gas reservoir to a depth of a stratigraphic horizon known to be productive. o Dry hole is a well incapable of producing hydrocarbons in sufficient commercial quantities to justify future capital expenditures for completion and additional infrastructure. o Economic interest method pursuant to production sharing contracts is a method by which our share of the cost recovery revenue and the profit revenue is divided by market oil and gas prices and represents the volume to which we are entitled. The lower the commodity price, the higher the volume entitlement, and vice versa. o Exploratory well is a well drilled to find and produce oil or natural gas reserves that is not a development well. o Farm-in or farm-out is an agreement whereby the owner of a working interest in an oil and gas lease assigns the working interest or a portion thereof to another party who agrees to pay a portion of past or future costs. The interest received by an assignee is a "farm-in," while the interest transferred by the assignor is a "farm-out." o Field is an area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature or stratigraphic condition. o Floating Production Storage and Offloading ("FPSO") technology refers to the use of a vessel that is stationed above or near an offshore oil field. Produced fluids from platform based and subsea completion wells are brought by flowlines to the vessel where they are separated, treated, stored and then offloaded to another vessel for transportation. -i- o Gross acres or gross wells are the total acres or wells in which we have a working interest. o Hydrocarbons are organic compounds of hydrogen and carbon atoms that form the basis of all petroleum products. o Lifting is the amount of liquids each working-interest partner takes physically. The liftings may be more or less than actual entitlements based on royalties, working interest percentages, and a number of other factors. o Liquefied Natural Gas ("LNG") is a gas, mainly methane, which has been liquefied in a refrigeration and pressurization process to facilitate storage and transportation. o Liquefied Petroleum Gas ("LPG") is a mixture of butane, propane and other light hydrocarbons. At normal temperature it is a gas, but when cooled or subjected to pressure it can be stored and transported as a liquid. o Multilateral institution refers to an institution with shareholders from multiple countries that lends money for specific development reasons. Examples of multilateral institutions are International Finance Corporation ("IFC"), European Bank for Reconstruction and Development ("EBRD"), and Asian Development Bank ("ADB"). o Natural Gas Liquids ("NGLs") are primarily ethane, propane, butane and natural gasolines which can be extracted from wet natural gas and become liquid under various combinations of increasing pressure and lower temperature. o Net acreage and net oil and gas wells are obtained by multiplying gross acreage and gross oil and gas wells by our working interest percentage in the properties. o Net pay is the amount of oil or gas saturated rock capable of producing oil or gas. o Net working interest is a working interest after deducting royalties. o OPEC is the abbreviation for Organization of Petroleum Exporting Countries. o Producible well is a well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of production exceed production expenses and taxes. o Production Sharing Contract ("PSC") is a contractual agreement between us and a host government whereby we, act as contractor, bear all exploration, development and production costs in return for an agreed upon share of the proceeds from the sale of production. o Prospective acreage is lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas. o Proved acreage is acreage that is allocated to producing wells or wells capable of production or to acreage that is being developed. o Reservoir is a porous and permeable underground formation containing oil and/or natural gas enclosed or surrounded by layers of less permeable rock and is individual and separate from other reservoirs. o Subsea tieback is a well with the wellhead equipment located on the bottom of the ocean. o Take-or-Pay is a type of contract clause where specific quantities of a product must be paid for, even if delivery is not taken. Normally, the purchaser has the right in following years to take product that had been paid for but not taken. o Trend or Play is an area or region of concentrated activity with a group of related fields and/or prospects. o Working interest is the percentage of ownership we have in a joint venture, partnership, consortium, project or acreage. o West Texas Intermediate ("WTI") crude oil is a light, sweet crude oil (high API gravity, low sulfur) used as the benchmark for U.S. crude oil refining and trading. WTI is deliverable at Cushing, Oklahoma to fill New York Mercantile Exchange ("NYMEX") futures contracts for light, sweet crude oil. -ii- FORWARD-LOOKING STATEMENTS This report contains forward-looking statements. All statements other than historical facts are forward-looking. These statements may be identified by words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," "forecasts," "could," "will" and words of similar meaning, and include statements regarding: o exploratory drilling, project development and other plans and objectives for future operations, o oil and gas production rates and timing, o operating and capital expenditures, o negotiations, sales and transactions with third parties, o the availability of cash on hand, borrowings and cash from asset sales and financings to fund our activities, o the use of cash on hand to repurchase common stock, preferred securities of Unocal Capital Trust and to make a contribution to our U.S. Qualified Retirement Plan, o possible contingent payments pursuant to completed transactions, o future tax refunds, o commodity prices, o the amount and timing of contingent liabilities for environmental, litigation and tax matters and under guarantees and indemnities, o economic conditions, and o the impact of new or existing accounting pronouncements. Although these statements are based upon Unocal's current expectations and beliefs, they are subject to known and unknown risks and uncertainties that could cause actual results and outcomes to differ materially from those described in, or implied by, the forward-looking statements. In that event, our business, financial condition, results of operations or liquidity could be materially adversely affected and investors in our securities could lose part or all of their investments. These risks and uncertainties include: o changes in commodity prices and the effectiveness of our hedging activities to manage that volatility, o our ability to find or acquire additional oil and gas reserves and to develop deepwater fields and other large projects in a timely and cost-effective manner, o the accuracy of our estimates and judgments regarding hydrocarbon resources and formations, o decline rates of producing properties in which we have an interest, o adverse geological and other operational factors, such as formation irregularities, equipment failures or shortages, fires, blow-outs and weather conditions, o our success in competing against other energy companies and retaining and attracting qualified personnel, o future costs for environmental, litigation and other contingent liabilities and those under our postemployment benefit plans and medical plans, o the extent of our cash flow and other capital resources available to fund capital expenditures, o market conditions for our common stock and the preferred securities of Unocal Capital Trust, o regulatory factors, such as changes in environmental laws and receipt of required permits and licenses, o international and domestic political and economic factors, o our ability to enter into agreements and transactions on acceptable terms with, and performance by, foreign governmental entities, joint venture partners, independent contractors, operators of properties in which we have an interest and other third parties, and o other factors discussed in our 2003 Annual Report on Form 10-K, as amended, and subsequent reports filed by us with the U.S. Securities and Exchange Commission ("SEC"). Copies of our SEC filings are available by calling us at (800) 252-2233 or from the SEC by calling (800) SEC-0330. The reports are also available on our web site, www.unocal.com. We undertake no obligation to update the forward-looking statements in this report to reflect future events or circumstances. All such statements are expressly qualified in their entirety by this cautionary statement. ------------------------------------- For the purpose of this report, the terms "Unocal," "Union Oil," "we," "our," "its" and the "Company" refer to Unocal Corporation ("Unocal") and its consolidated subsidiaries, including Union Oil Company of California ("Union Oil"), unless the context otherwise provides. -iii- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED EARNINGS (UNAUDITED) UNOCAL CORPORATION For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------------------------------ Millions of dollars except per share amounts 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------------------------ Revenues Sales and operating revenues $ 1,921 $ 1,557 $ 3,751 $ 3,325 Interest, dividends and miscellaneous income 19 9 30 20 Gain on sales of assets 40 47 84 50 - ------------------------------------------------------------------------------------------------------------------ Total revenues 1,980 1,613 3,865 3,395 Costs and other deductions Crude oil, natural gas and product purchases 766 536 1,516 1,182 Operating expense 376 325 662 618 Administrative and general expense 46 87 109 138 Depreciation, depletion and amortization 240 254 472 513 Impairments 9 3 14 3 Dry hole costs 40 10 65 81 Exploration expense 48 88 98 143 Interest expense 46 36 87 74 Property and other operating taxes 22 21 42 43 Distributions on convertible preferred securities of subsidiary trust - 8 - 16 - ------------------------------------------------------------------------------------------------------------------ Total costs and other deductions 1,593 1,368 3,065 2,811 Earnings from equity investments 38 53 75 96 - ------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations before income taxes and minority interests 425 298 875 680 - ------------------------------------------------------------------------------------------------------------------ Income taxes 144 131 323 297 Minority interests (1) 2 4 4 - ------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations 282 165 548 379 Earnings from discontinued operations (a) 59 12 62 15 Cumulative effect of accounting changes (b) - - - (83) - ------------------------------------------------------------------------------------------------------------------ Net earnings $ 341 $ 177 $ 610 $ 311 ================================================================================================================== Basic earnings per share of common stock (c) Continuing operations $ 1.07 $ 0.65 $ 2.08 $ 1.47 Discontinued operations 0.22 0.04 0.24 0.06 Cumulative effect of accounting changes - - - (0.32) - ------------------------------------------------------------------------------------------------------------------ Net earnings $ 1.29 $ 0.69 $ 2.32 $ 1.21 ================================================================================================================== Diluted earnings per share of common stock (d) Continuing operations $ 1.04 $ 0.64 $ 2.03 $ 1.45 Discontinued operations 0.21 0.04 0.22 0.05 Cumulative effect of accounting changes - - - (0.30) - ------------------------------------------------------------------------------------------------------------------ Net earnings $ 1.25 $ 0.68 $ 2.25 $ 1.20 ================================================================================================================== Cash dividends declared per share of common stock $ 0.20 $ 0.20 $ 0.40 $ 0.40 - ------------------------------------------------------------------------------------------------------------------ (a) Net of tax (benefit) $ 30 $ 7 $ 32 $ 9 (b) Net of tax (benefit) $ - $ - $ - $ (48) (c) Basic weighted average shares outstanding (in thousands) 263,916 258,202 262,945 258,103 (d) Diluted weighted average shares outstanding (in thousands) 277,754 272,108 277,232 271,907 See Notes to the Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS UNOCAL CORPORATION At June 30, At December 31, ------------------------------------- Millions of dollars 2004 (a) 2003 - --------------------------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 939 $ 404 Accounts and notes receivable - net 1,316 1,292 Inventories 142 141 Deferred income taxes 108 119 Other current assets 37 35 - --------------------------------------------------------------------------------------------------------------- Total current assets 2,542 1,991 Investments and long-term receivables - net 886 892 Properties - net (b) 8,440 8,324 Goodwill 130 131 Deferred income taxes 314 300 Other assets 165 160 - --------------------------------------------------------------------------------------------------------------- Total assets $ 12,477 $ 11,798 =============================================================================================================== Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 1,148 $ 1,072 Taxes payable 300 326 Dividends payable 53 52 Interest payable 42 43 Current portion of environmental liabilities 117 118 Current portion of long-term debt and capital leases 236 248 Other current liabilities 206 226 - --------------------------------------------------------------------------------------------------------------- Total current liabilities 2,102 2,085 Long-term debt and capital leases 3,104 2,635 Deferred income taxes 724 704 Accrued abandonment, restoration and environmental liabilities 871 844 Other deferred credits and liabilities 1,042 960 Minority interests 46 39 Commitments and contingencies - Note 16 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely parent debentures - 522 Common stock ($1 par value, shares authorized: 750,000,000 (c)) 276 271 Capital in excess of par value 1,154 1,031 Unearned portion of restricted stock issued (28) (13) Retained earnings 3,961 3,456 Accumulated other comprehensive income (340) (298) Notes receivable - key employees (4) (27) Treasury stock - at cost (d) (431) (411) - --------------------------------------------------------------------------------------------------------------- Total stockholders' equity 4,588 4,009 - --------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 12,477 $ 11,798 =============================================================================================================== (a) Unaudited (b) Net of accumulated depreciation, depletion and amortization of: $ 12,109 $ 11,711 (c) Number of shares outstanding (in thousands) 264,600 260,594 (d) Number of shares (in thousands) 11,162 10,623 See Notes to the Consolidated Financial Statements.
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CONSOLIDATED CASH FLOWS (UNAUDITED) UNOCAL CORPORATION For the Six Months Ended June 30, ------------------------------ Millions of dollars 2004 2003 - --------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net earnings $ 610 $ 311 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation, depletion and amortization 472 515 Impairments 14 3 Dry hole costs 65 81 Amortization of exploratory leasehold costs 32 71 Deferred income taxes ( 6) 40 Gain on sales of assets (84) (50) Gain on disposal of discontinued operations (84) (13) Pension expense net of contributions 44 42 Restructuring provisions net of payments (14) 27 Cumulative effect of accounting changes - 83 Other (37) 4 Working capital and other changes related to operations Accounts and notes receivable 45 6 Inventories (1) (4) Accounts payable 76 26 Taxes payable (26) (3) Other 20 (54) - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,126 1,085 - --------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures (includes dry hole costs) (801) (917) Proceeds from sales of assets 158 191 Proceeds from sales of discontinued operations 120 - Return of capital from affiliate company 48 - - --------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (475) (726) - --------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Long-term borrowings 135 79 Reduction of long-term debt and capital lease obligations (241) (143) Minority interests (1) (3) Repurchases of common stock (20) - Proceeds from issuance of common stock 94 10 Dividends paid on common stock (105) (103) Loans to key employees 24 3 Other (2) (7) - --------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (116) (164) - --------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 535 195 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 404 168 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 939 $ 363 =============================================================================================================== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest (net of amount capitalized) $ 87 $ 83 Income taxes (net of refunds) $ 317 $ 275 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 our management, include all adjustments necessary for a fair presentation of financial position and results of operations. All adjustments are of a normal recurring nature. Certain notes and other information have been condensed or omitted from these interim financial statements in accordance with the Securities and Exchange Commission ("SEC") disclosure requirements for Form 10-Q. Therefore, these interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes filed with the SEC in our 2003 Annual Report on Form 10-K, as amended. Our consolidated financial statements include the accounts of subsidiaries in which a controlling interest is held and variable interest entities where Unocal is the primary beneficiary. Investments in entities without a controlling interest are generally accounted for by the equity method. Under the equity method, our investments are stated at cost plus the equity in undistributed earnings and losses after acquisition. Income taxes estimated to be payable when earnings are distributed are included in deferred income taxes. Other securities and investments excluding marketable securities are generally carried at cost. Undivided interests in oil and gas joint ventures are consolidated on a proportionate basis. We follow the successful efforts method of accounting for our oil and gas activities. Results for the six months ended June 30, 2004, are not necessarily indicative of future financial results. We made changes in the reporting of our segments from the reporting utilized in the 2003 Annual Report on Form 10-K, as amended (see note 20 - Segment Data). The financial statements of the prior periods have been reclassified to conform to the 2004 presentation. 2. Accounting Changes SFAS No. 132 (revised 2003): In 2003, we adopted Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits (revised 2003)." In accordance with this pronouncement, beginning in 2004, quarterly reports include disclosure of the components of net pension and postretirement benefit cost as well as the changes in the estimated current year contributions to the plans. In addition, benefit payment information will be included in our 2004 Annual Report on Form 10-K. FASB Interpretation No. 46 (revised December 2003): Effective January 1, 2004, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" which clarifies the definition of a variable interest entity ("VIE") and provides a scope exception for certain entities that meet the Statement's definition of a "business." This pronouncement resulted in the deconsolidation of Unocal Capital Trust (the "Trust") (see note 14 for further details). As a result, the $522 million obligation for the Trust's convertible preferred securities was removed from the consolidated balance sheet and replaced by an increase in long-term debt for the $538 million in 6-1/4% convertible junior subordinated debentures of Unocal payable to the Trust. We also recorded a $16 million investment in the Trust on the consolidated balance sheet. The deconsolidation did not affect our consolidated net earnings. Other Matters: In July 2004, the FASB issued for comment by August 17, 2004, proposed FASB Staff Position No. 142-b, "Application of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Oil- and Gas-Producing Entities," that clarifies that oil and gas drilling rights are tangible assets. This position is consistent with our classification of the cost of acquiring oil and gas drilling rights in property, plant and equipment on our consolidated balance sheet. Unocal's net properties include approximately $1.43 billion and $1.53 billion at June 30, 2004 and December 31, 2003, respectively, for investment in these rights. Earlier, the FASB's Emerging Issues Task Force ("EITF") had given consideration to whether these rights are intangible assets and subject to the classification and disclosure provisions of FASB Statement No. 142. -4- In December 2003, "The Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act") was enacted, which introduces a prescription drug benefit under Medicare Part D. The availability of the new drug benefit could cause Medicare eligible plan participants to leave their current employer-sponsored plans (or cause employees to join such plans), depending on the drug benefits provided under those plans relative to the benefits provided by Medicare. The Act also provides that a non-taxable federal subsidy will be paid to sponsors of postretirement benefit plans that provide retirees with a drug benefit that is at least "actuarially equivalent" to the Medicare Part D benefit. The federal subsidy is not payable to a plan sponsor for retirees who leave their current employer-sponsored plan to participate in the Medicare drug program. Final detailed regulations specifying the manner in which actuarial equivalency must be determined and the evidence required to demonstrate it are not yet available. It is not known whether we will amend the plan in response to the new legislation. In accordance with FASB Staff Position 106-2, we are deferring the accounting for this Act and thus any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the consolidated financial statements or accompanying notes do not reflect the effects of the Act on the plan. If current employer-sponsored plans are at least actuarially equivalent to the Medicare Part D benefit, this Staff Position states the effect of the subsidy on benefits attributable to past service would result in an actuarial experience gain that would be amortized to earnings. The effect of the subsidy on current service would reduce service cost. This accounting is effective for the third quarter of 2004. Although we continue to study the Act, we do not expect the impact on earnings to be material. EITF Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," is effective with the 2004 Form 10-K and requires additional disclosures for cost method investments. Effective with the third quarter of 2004, this consensus also provides recognition and measurement guidance regarding impairment of cost method investments. We have not determined the impact of these new directives. EITF issue 03-16, "Accounting for Investments in Limited Liability Companies ("LLCs")," is effective beginning with the third quarter 2004. This pronouncement may cause some entities to be accounted for by the equity method rather than on a cost basis. We are studying this rule. 3. Other Financial Information o Revenues - During the second quarters of 2004 and 2003, approximately 27 percent and 25 percent, respectively, of total sales and operating revenues were attributable to the resale of liquids and natural gas purchased from others in connection with marketing activities. For the six months ended June 30, 2004 and 2003, these percentages were approximately 27 percent and 25 percent, respectively. Related purchase costs are classified as expense in the crude oil, natural gas and product purchases category on the consolidated earnings statement. o Capitalized Interest - During the second quarters of 2004 and 2003, capitalized interest totaled $10 million and $19 million, respectively. For the six months ended June 30, 2004 and 2003, capitalized interest totaled $26 million and $35 million, respectively. The decrease from the prior year was related to development projects in Indonesia and Azerbaijan. o Exploration Expense - Our exploration expense on the consolidated earnings statement consisted of the following:
For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------- ------------------ Millions of dollars 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Exploration operations $ 18 $ 16 $ 35 $ 31 Geological and geophysical 10 20 25 34 Amortization of exploratory leasehold costs 16 47 32 71 Leasehold rentals 4 5 6 7 - -------------------------------------------------------------------------------- Exploration expense $ 48 $ 88 $ 98 $ 143 ================================================================================
-5- Amortization of exploratory leasehold costs for the second quarter and six month periods of 2004 was lower than the comparable periods of 2003, which included a $26 million pre-tax provision resulting from our decision to relinquish 44 deepwater Gulf of Mexico blocks before the end of their lease term. The remaining decrease in the amortization of exploratory leasehold costs for the second quarter and six month periods of 2004 is principally due to lower amortization levels for the Gulf of Mexico compared to the same periods a year ago. o Executive Stock Purchase Program - In the first quarter of 2004, we repurchased 539,208 shares of our common stock from four of the original participants of the Executive Stock Purchase Program of 2000 at market prices in the first quarter of 2004. The purchases, which aggregated to approximately $20 million, were accounted for as treasury stock on the consolidated balance sheet. The recipients used the proceeds to repay the loans made by Unocal for the original acquisition of the shares. 4. Dispositions Of Assets Our subsidiary, Pure Resources Inc. ("Pure"), sold certain of its mineral fee lands it held in several states to Black Stone Minerals Company, LP. The sale involved Pure's royalty interests, overriding royalty interests, minor working interests, and subsurface mineral rights on approximately 3.3 million net acres, located primarily in Texas, Louisiana, Mississippi, Arkansas and Alabama. The $190 million sale price included approximately $75 million for the prospective portion of these mineral fee lands resulting in a $22 million after-tax gain. The net proceeds received were $176 million after sale price adjustments to reflect the effective date of the transaction as October 1, 2003. The sale of the producing portion of these lands was recorded in discontinued operations (see note 7 for further detail). Our subsidiary, Unocal North Sumatra Geothermal, Ltd. ("UNSG"), received about $60 million from PT PLN (Persero) ("PLN"), the state electricity utility, for the sale of our rights and interests in the Sarulla geothermal project on the island of Sumatra, Indonesia. PLN acquired UNSG's interest in the Joint Operation Contract with Pertamina, the Indonesian national petroleum company and the Energy Sales Contract with PLN. We recorded a $21 million after-tax gain from the sale in the first quarter of 2004. 5. Restructuring In 2003, we accrued $38 million pre-tax in restructuring charges and adopted a plan for streamlining the organizational structures in order to align them with our portfolio requirements and business needs. These charges represented the costs associated with eliminating 360 positions and were included in administrative and general expense on the consolidated earnings statement in the second, third and fourth quarters of 2003. During the second quarter of 2004, the plan was modified to reflect a reduction in the number of employees involved in the restructuring and the subsequent reversal of $2 million pre-tax in previously recognized costs. At June 30, 2004, 288 of 324 employees in the plan had been terminated. The remaining 36 individuals have been advised of planned termination dates as a result of the plan. The following table reflects the 2004 plan activity. The majority of the remaining liability of $12 million is expected to be paid by the end of 2004.
Millions of dollars Number of Termination Training/ (except employees) Employees Costs Out-placement Costs - -------------------------------------------------------------------------------- Liability at December 31, 2003 360 $ 24 $ 2 1st Quarter Payments 7 - - -------------------------------------------------------------------------------- Liability at March 31, 2004 $ 17 $ 2 2nd Quarter adjustments (36) (2) - 2nd Quarter payments 4 1 - -------------------------------------------------------------------------------- Liability at June 30, 2004 324 $ 11 $ 1 ================================================================================
-6- 6. Income Taxes Income taxes on earnings from continuing operations for the second quarter and six month periods of 2004 were $144 million and $323 million, respectively, compared with $131 million and $297 million for the comparable periods of 2003. The effective income tax rate for the second quarter and six month periods of 2004 was 34 percent and 37 percent, respectively, compared with 44 percent for each of the same periods a year ago. The overall lower effective tax rates for both the second quarter and six month periods of 2004, as compared to the same periods a year ago, are due primarily to a net deferred tax benefit of $27 million recorded in the second quarter of 2004 for settlements and assessments with various taxing authorities (see note 16 - "Tax Matters" for additional detail) and the tax benefit effect in the second quarter of 2004 of currency related adjustments in Thailand. 7. Discontinued Operations In June 2004, we sold certain of our prospective and producing mineral fee lands in the U.S., which included approximately 2 MBOE/d of production in Mississippi, Arkansas and Alabama (see note 4 for further details). The $190 million sale price included approximately $115 million for the producing portion of these mineral fee lands resulting in an after-tax gain of approximately $43 million. The net proceeds received were $176 million after sale price adjustments to reflect the effective date of the transaction as October 1, 2003. The gain on the asset disposal plus normal results of operations prior to the sale have been reported as discontinued operations in the consolidated earnings statement. These properties generated revenues of $12 million and net earnings of approximately $6 million in the six month period of 2004 and revenues of $13 million and net earnings of approximately $6 million in the six month period of 2003. We also sold our Cal Ven Pipeline system located in Alberta, Canada, for approximately $19 million in May 2004 and recorded an after-tax gain of approximately $13 million. The gain plus normal results of operations prior to the sale have been reported as discontinued operations in the consolidated earnings statement. The Cal Ven pipeline generated revenues of $1 million and net earnings of approximately $0.4 million in 2004 and revenues of $1 million and net earnings of approximately $0.4 million in the six month period of 2003. In 2003, we recorded an after-tax gain of $8 million related to the 1997 sale of our former West Coast refining, marketing and transportation assets. The sales agreement contained a provision calling for payments to us for price differences between California Air Resources Board Phase 2 gasoline and conventional gasoline. This provision of the agreement terminated at the end of 2003. The following table summarizes the results from these discontinued operations:
For the Three Months For the Six Months Ended June 30, Ended June 30, --------------------------------------------------- Millions of dollars 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Revenues $ 6 $ 7 $ 13 $ 14 Total costs and other deductions 1 1 3 3 - -------------------------------------------------------------------------------- Earnings from discontinued operations before income taxes 5 6 10 11 Income taxes on discontinued operations 2 2 4 4 - -------------------------------------------------------------------------------- Earnings from discontinued operations 3 4 6 7 Gain on disposal of discontinued operations before income taxes 84 13 84 13 Income taxes on disposal of discontinued operations 28 5 28 5 - -------------------------------------------------------------------------------- Gain on disposal of discontinued operations 56 8 56 8 - -------------------------------------------------------------------------------- Total earnings from discontinued operations $ 59 $ 12 $ 62 $ 15 ================================================================================
-7- 8. Earnings Per Share The following are reconciliations of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for earnings from continuing operations for the second quarter and six month periods ended June 30, 2004 and 2003:
- -------------------------------------------------------------------------------- Earnings Shares Per Share Millions except per share amounts (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------- Three months ended June 30, 2004 Earnings from continuing operations $ 282 263.9 Basic EPS $ 1.07 ============ Effect of dilutive securities Options and common stock equivalents 1.6 ----------------------- 282 265.5 $ 1.06 Interest on convertible debentures payable to trust (after-tax) 7 12.3 ----------------------- Diluted EPS $ 289 277.8 $ 1.04 ============ Three months ended June 30, 2003 Earnings from continuing operations $ 165 258.2 Basic EPS $ 0.65 ============ Effect of dilutive securities Options and common stock equivalents 1.6 ----------------------- 165 259.8 $ 0.64 Distributions on subsidiary trust preferred securities (after-tax) 7 12.3 ----------------------- Diluted EPS $ 172 272.1 $ 0.64 ============ - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Earnings Shares Per Share Millions except per share amounts (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------- Six months ended June 30, 2004 Earnings from continuing operations $ 548 262.9 Basic EPS $ 2.08 ============ Effect of dilutive securities Options and common stock equivalents 2.0 ----------------------- 548 264.9 $ 2.07 Interest on convertible debentures payable to trust (after-tax) 14 12.3 ----------------------- Diluted EPS $ 562 277.2 $ 2.03 ============ Six months ended June 30, 2003 Earnings from continuing operations $ 379 258.1 Basic EPS $ 1.47 ============ Effect of dilutive securities Options and common stock equivalents 1.5 ----------------------- 379 259.6 $ 1.46 Distributions on subsidiary trust preferred securities (after-tax) 14 12.3 ----------------------- Diluted EPS $ 393 271.9 $ 1.45 ============ - --------------------------------------------------------------------------------
Certain options were not included in the computation of diluted EPS as the exercise prices were greater than average market prices of the common shares during the respective periods. For the three month and six month periods ended June 30, 2004, there were options outstanding to purchase approximately 3.6 million and 2.5 million shares, respectively, of common stock that were excluded from the computation of diluted EPS. In the three month and six month periods ended June 30, 2003, there were options outstanding to purchase approximately 8.9 million and 10.5 million shares, respectively, of common stock that were excluded from the computation of diluted EPS. -8- 9. Stock-Based Compensation Prior to 2003, we applied Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock-based compensation. Accordingly, stock-based compensation expense recognized in our consolidated earnings included expenses related to various cash incentive plans that were paid to certain employees based upon defined measures of Unocal's common stock price performance and total shareholder return. In addition, the amounts also included expenses related to our subsidiary, Pure Resources, Inc. ("Pure"), which had its own stock-based compensation plans. Under APB Opinion No. 25, stock-based employee compensation cost was not recognized in earnings when stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," prospectively to all employee awards granted, modified, or settled after December 31, 2002. Therefore, the cost related to stock-based employee compensation included in the determination of net earnings for 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. The following table illustrates the effect on net earnings and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period:
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------------------------------------- Millions of dollars except per share amounts 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Net earnings As reported $ 341 $ 177 $ 610 $ 311 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects and minority interests 2 4 7 6 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects and minority interests (2) (6) (9) (10) ----------------------------------------------------- Pro forma net earnings $ 341 $ 175 $ 608 $ 307 ===================================================== Net earnings per share: Basic - as reported $ 1.29 $ 0.69 $ 2.32 $ 1.21 Basic - pro forma $ 1.29 $ 0.68 $ 2.31 $ 1.19 Diluted - as reported $ 1.25 $ 0.68 $ 2.25 $ 1.20 Diluted - pro forma $ 1.25 $ 0.67 $ 2.24 $ 1.18
10. Comprehensive Income Unocal's comprehensive income is detailed in the following table:
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------------------------------- Millions of dollars 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Net earnings $ 341 $ 177 $ 610 $ 311 Change in unrealized gain (loss) on hedging instruments (a) (5) 7 (21) (3) Reclassification adjustment for settled hedging contracts (b) 17 4 9 11 Unrealized foreign currency translation adjustments (21) 68 (30) 114 - -------------------------------------------------------------------------------- Total comprehensive income $ 332 $ 256 $ 568 $ 433 ================================================================================ (a) Net of tax effect of: (3) 4 (13) (2) (b) Net of tax effect of: 10 2 5 6
-9- 11. Assets Held for Sale As of June 30, 2004, we held for sale our interest in the Trans-Andean oil pipeline, which transports crude oil from Argentina to Chile. This property is part of our Midstream and Marketing segment and the investment represents approximately $32 million in assets on our consolidated balance sheet. In the second quarter of 2004, we sold certain of our prospective mineral fee lands in North America (see note 7 - Discontinued Operations). These lands were held for sale as of December 31, 2003. In the first quarter of 2004, our UNSG subsidiary sold its rights and interests in the Sarulla geothermal project on the island of Sumatra, Indonesia (see note 4 - Disposition Of Assets). This property was held for sale as of December 31, 2003. 12. Postemployment Benefit Plans We have numerous plans worldwide that provide employees with retirement benefits. We also have medical plans that provide health care benefits for eligible employees and many of our retired employees. Most of our plans covering employees outside of North America are unfunded and resulting liabilities are extinguished on a "pay as you go" basis. The components of net periodic benefit cost for our pension and postretirement medical plans for the three month and six month periods ending June 30, 2004 and June 30, 2003 were:
For the Three Months Ended June 30, Pension Benefits Other Benefits ----------------- ---------------- Millions of dollars 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Service cost (net of employee contributions) $ 8 $ 6 $ 1 $ 1 Interest cost 20 16 6 5 Expected return on plan assets (19) (16) - - Amortization of: Prior service cost 2 2 - - Net actuarial (gains) losses 14 15 4 2 Curtailment and settlement (gains) losses - 3 - 1 - -------------------------------------------------------------------------------- Net periodic pension and other benefit cost (credit) $ 25 $ 26 $ 11 $ 9 ================================================================================
For the Six Months Ended June 30, Pension Benefits Other Benefits ----------------- ---------------- Millions of dollars 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Service cost (net of employee contributions) $ 16 $ 13 $ 2 $ 2 Interest cost 40 36 13 11 Expected return on plan assets (38) (37) - - Amortization of: Prior service cost 3 3 - - Net actuarial (gains) losses 30 30 7 5 Curtailment and settlement (gains) losses - 3 - 1 - -------------------------------------------------------------------------------- Net periodic pension and other benefit cost (credit) $ 51 $ 48 $ 22 $ 19 ================================================================================
The assumed weighted-average rates used to determine the preceding net periodic benefit costs were:
Pension Benefits Other Benefits -------------------------------------------- Weighted-average assumptions 2004 2003 2004 2003 - ------------------------------------------------------------------------------- Discount rates 6.00% 6.74% 6.00% 6.75% Rates of salary increases 4.91% 4.93% 4.99% 4.99% Expected returns on plan assets 8.00% 8.40% N/A N/A
We are still in the process of evaluating the impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 on our U.S. Postretirement Welfare plan. In keeping with the guidance provided by FASB Staff Position 106-2, we have deferred accounting for this Act and thus the measurement of the net periodic postretirement benefit cost at June 30, 2004 does not reflect the effects of the Act on the plan. We are not required under existing funding or tax regulations to make any cash contributions to our U.S. Qualified Retirement Plan in 2004; however, we did make a voluntary $100 million pre-tax contribution to our U.S. Qualified Retirement Plan on July 29, 2004. -10- We disclosed in our financial statements for the year ended December 31, 2003 that we expected to contribute approximately $48 million in support of our various postemployment benefit plans. This amount consists of $4 million to our Supplemental Executive Retirement plans, approximately $17 million to our foreign pension plans and approximately $27 million to our worldwide postretirement medical plans in 2004. As of June 30, 2004, we anticipate that actual contributions in support of our worldwide post employment benefit plans (exclusive of the aforementioned $100 million contribution to our U.S. Qualified Retirement Plan) in 2004 will not vary materially from the levels forecasted at year-end 2003. 13. Long Term Debt Unocal's total consolidated debt, including current maturities, was $3.34 billion at June 30, 2004, compared with $2.88 billion at the end of 2003. The increase primarily reflects the recognition of $538 million in 6-1/4% convertible junior subordinated debentures, payable to the Trust, as long term debt, replacing the $522 million convertible preferred securities of the Trust (see note 2 and note 14 for further detail). During the six months period of 2004, we retired $173 million in 6.375% notes and paid down $20 million of medium-term notes, which matured during the quarter. In addition, we retired the remaining $24 million limited recourse loan balance under the Azerbaijan International Operating Company's Early Oil Project in the second quarter of 2004. We also made a $15 million principal payment on the variable rate portion of the Overseas Private Investment Corporation ("OPIC") Financing Agreement for the West Seno project in Indonesia, which is scheduled to mature in June 2009. These decreases were partially offset by $40 million in new borrowings related to Phase 1 development of the Azeri-Chirag-Gunashli structure in the Azerbaijan sector of the Caspian Sea, scheduled for repayment semiannually from June 2006 through December 2015 and $95 million drawn under two new loans from the OPIC Financing Agreement, both limited recourse loans, for the first phase of the West Seno project in Indonesia. One loan was drawn for $50 million and the other was drawn for $45 million, and they each carried fixed rates that were 3.61% and 4.78%, respectively. Principal payments on the $50 million loan are scheduled semiannually from June 2005 to December 2007, and on the $45 million loan payments are scheduled from June 2005 to June 2008. A capital lease of $30 million was also added during the second quarter of 2004 for a 10-year lease agreement on a floating storage unit for our Thailand production operations. The lease agreement has an extension option for an additional 5 years. 14. Variable Interest Entities In 1996, Unocal exchanged 10,437,873 newly issued 6-1/4% trust convertible preferred securities of Unocal Capital Trust, a Delaware statutory trust, for shares of a then-outstanding issue of convertible preferred stock. Unocal acquired the convertible preferred securities, which had an aggregate liquidation value of $522 million, from the Trust, together with 322,821 common securities of the Trust, which had an aggregate liquidation value of $16 million, in exchange for $538 million principal amount of 6-1/4% convertible junior subordinated debentures of Unocal. The Trust was accounted for as a 100-percent-owned consolidated finance subsidiary of Unocal, with the debentures and payments thereon by Unocal to the Trust eliminated in the consolidated financial statements. Pursuant to FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" as revised in December 2003 (see note 2), we deconsolidated the Trust in the first quarter of 2004. As a result, the $522 million obligation for the convertible preferred securities was removed from the consolidated balance sheet and replaced by $538 million in 6-1/4% convertible junior subordinated debentures of Unocal payable to the Trust. In addition, we recorded our $16 million investment in the Trust in investments and long-term receivables-net on the consolidated balance sheet. Effective in the first quarter of 2004, interest payments on the debentures are now recorded as interest expense on the consolidated earnings statement. In prior periods, payments to the holders of the preferred securities were reported as a separate line item on the consolidated earnings statement. Payments are subject to deferral under certain circumstances. If payments are deferred, Unocal would be prohibited from paying dividends on its common stock during the deferral period. -11- 15. Accrued Abandonment, Restoration and Environmental Liabilities At June 30, 2004, we had accrued $739 million in estimated abandonment and restoration costs as liabilities. At December 31, 2003, we had accrued $710 million in estimated abandonment and restoration costs. The increase in the liability account from December 31, 2003 was due to $22 million in accrued pre-tax accretion expense, $10 million in revisions to existing estimates and $6 million in new abandonment liabilities recorded during the period. Abandonment liability settlements totaled $9 million during the first six months of 2004. Our reserve for environmental remediation obligations at June 30, 2004 totaled $249 million, of which $117 million was included in current liabilities. This compared with $252 million at December 31, 2003, of which $118 million was included in current liabilities. 16. Commitments and Contingencies Unocal has contingent liabilities for existing or potential claims, lawsuits and other proceedings, including those involving environmental, tax, guarantees and other matters, some of which are discussed more specifically below. We accrue liabilities when it is probable that future costs will be incurred and these costs can be reasonably estimated. Accruals are based on developments to date, our estimates of the outcomes of these matters and our 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 our future results of operations and financial condition or liquidity. Environmental matters We continue to move forward to address environmental issues for which we are responsible. In cooperation with regulatory agencies and others, we follow procedures that we have established to identify and cleanup contamination associated with past operations. We are subject to loss contingencies pursuant to federal, state, local and foreign 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 us or owned by others and are associated with past and present operations, including sites at which we have 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 we are able to determine whether we are 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 our 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 we are usually just one of a number of companies identified as a PRP, or other reasons. Assessment and Remediation As disclosed in note 15, at June 30, 2004, we had accrued $249 million for estimated future environmental assessment and remediation costs at various sites where liabilities for such costs are probable and reasonably estimable. The amount accrued represents our reserve for assessment and remediation obligations based on currently available facts, existing technology and presently enacted laws and regulations. The remediation cost estimates, in many cases, are based on plans recommended to the regulatory agencies for approval and are subject to future revisions. The ultimate costs to be incurred could exceed the total amounts reserved. We may also incur additional liabilities in the future at sites where remediation liabilities are probable but future environmental costs are not presently reasonably estimable because the sites have not been assessed or the assessments have not advanced to the stage where costs are reasonably estimable. At those sites where investigations or feasibility studies have advanced to the stage of analyzing feasible -12- alternative remedies and/or ranges of costs, we estimate that we could incur possible additional remediation costs aggregating approximately $210 million. The amount of such possible additional costs reflects the aggregate of the high ends of the ranges of costs of feasible alternatives that we identified for those sites with respect to which investigation or feasibility studies have advanced to the stage of analyzing such alternatives. However, such estimated possible additional costs are not an estimate of the total remediation costs beyond the amounts reserved, because there are sites where we are not yet in a position to estimate all, or in some cases any, possible additional costs. Both the amounts reserved and estimates of possible additional costs will be adjusted as additional information becomes available regarding the nature and extent of site contamination, required or agreed-upon remediation methods and other actions by government agencies and private parties. Therefore, the amounts reserved and the possible additional estimated costs may change in the near term, and in some cases could change substantially. During the six month period ended June 30, 2004, cash payments of $39 million were applied against the reserves and $36 million in provisions were added to the reserves. Possible additional remediation costs increased by $5 million during the six month period of 2004. The accrued costs and the estimated possible additional costs are shown below for four categories of sites:
At June 30, 2004 ------------------------------------ Estimated Possible Millions of dollars Reserve Additional Costs - -------------------------------------------------------------------------------- Superfund and similar sites $ 16 $ 15 Active Company facilities 32 30 Company facilities sold with retained liabilities and former Company-operated sites 93 80 Inactive or closed Company facilities 108 85 - -------------------------------------------------------------------------------- Total $ 249 $ 210 ================================================================================
The time frames over which the amounts included in the reserve may be paid extend from the near term to several years into the future. The sites included in the above categories are in various stages of investigation and remediation; therefore, the related payments against the existing reserve will be made in future periods. Also, some of the work is dependent upon reaching agreements with regulatory agencies and/or other third parties on the scope of remediation work to be performed, who will perform the work, the timing of the work, who will pay for the work and other factors that may have an impact on the timing of the payments for amounts included in the reserve. For some sites, the remediation work will be performed by other parties, such as the current owners of the sites, and we have a contractual agreement to pay a share of the remediation costs. For these sites, we generally have less control over the timing of the work and consequently the timing of the associated payments. Based on available information, we estimate that the majority of the amounts included in the reserve will be paid within the next three to five years. At the sites where we have contractual agreements to share remediation costs with third parties, the reserve reflects our estimated shares of those costs. In many of the oil and gas sites, remediation cost sharing is included in joint venture agreements that were made with third parties during the original operation of the sites. In many cases where we sold facilities or a business to a third party, sharing of remediation costs for those sites may be included in the sales agreement. Superfund and similar sites Contamination at the sites of the "Superfund and similar sites" category was the result of the disposal of substances at these sites by one or more PRPs. Contamination of these sites could be from many sources, of which we may be one. We have been notified that we are a PRP at the sites included in this category. At the sites where we have not denied liability, our contribution to the contamination at these sites was primarily from operations in the categories. Included in this category of sites are: o the McColl site in Fullerton, California o the Operating Industries site in Monterey Park, California o the Casmalia Waste site in Casmalia, California -13- At June 30, 2004, we have received notifications from the U.S. Environmental Protection Agency ("EPA") that we may be a PRP at 24 sites and may share certain liabilities at these sites. Of the total, four sites are under investigation and/or litigation, and our potential liability is not presently determinable; and for two sites, our potential liability appears to be de minimis. Of the remaining 18 sites, where we have concluded that liability is probable and to the extent costs can be reasonably estimated, a reserve of $13 million has been established for future remediation and settlement costs. Various state agencies and private parties had identified 21 other similar PRP sites. Six sites are under investigation and/or litigation, and our potential liability is not presently determinable; and at three sites, our potential liability appears to be de minimis. Where we have concluded that liability is probable and to the extent costs can be reasonably estimated at the remaining 12 sites, a reserve of $3 million has been established for future remediation and settlement costs. The sites discussed above exclude 127 sites where our liability has been settled, or where we have no evidence of liability and there has been no further indication of liability by government agencies or third parties for at least a 12-month period. We do not consider the number of sites for which we have been named a PRP as a relevant measure of liability. Although the liability of a PRP is generally joint and several, we are usually just one of numerous companies designated as a PRP. Our ultimate share of the remediation costs at those sites often is not determinable due to many unknown factors. The solvency of other responsible parties and disputes regarding responsibilities may also impact our ultimate costs. Active Company facilities The "Active Company facilities" category includes oil and gas fields and mining operations. The oil and gas sites are primarily contaminated with crude oil, oil field waste and other petroleum hydrocarbons. Contamination at the active mining sites was principally the result of the impact of mined material on the groundwater and/or surface water at these sites. Included in this category are: o the Molycorp molybdenum mine in Questa, New Mexico o the Molycorp lanthanide facility in Mountain Pass, California o Alaska oil and gas properties We have a reserve of $32 million for estimated future costs of remedial orders, corrective actions and other investigation, remediation and monitoring obligations at certain operating facilities and producing oil and gas fields. We recorded provisions of $8 million during the first six months of 2004. The provisions were primarily for the estimated additional costs of the remedial investigation and feasibility study (RI/FS) that is continuing at a molybdenum mine located in Questa, New Mexico, which is owned by the Company's Molycorp, Inc. ("Molycorp") subsidiary. The estimated additional costs are based on an evaluation that Molycorp performed in the second quarter of 2004 of the remaining work that will be required to complete the RI/FS. Molycorp has been conducting the RI/FS cooperatively with the U.S. Environmental Protection Agency to determine what, if any, adverse impacts past mining operations may have had on the environment. During the first six months of 2004, we made payments of $4 million for this category of sites. Company facilities sold with retained liabilities and former Company operated sites The "Company facilities sold with retained liabilities and former Company-operated sites" category includes our former refineries, transportation and distribution facilities and service stations. The required remediation of these sites is mainly for petroleum hydrocarbon contamination as the result of leaking tanks, pipelines or other equipment or impoundments that were used in these operations. Also included in this category are former oil and gas fields that we no longer operate. In most cases, these sites are contaminated with crude oil, oil field waste and other petroleum hydrocarbons. Contamination at other sites in these categories of sites was the result of former industrial chemical and polymers manufacturing and distribution facilities and agricultural chemical retail businesses. Included in this category are: -14- o West Coast refining, marketing and transportation sites o auto/truckstop facilities in various locations in the U.S. o industrial chemical and polymer sites in the South, Midwest and California o agricultural chemical sites in the West and Midwest. In each sale, we retained a contractual remediation or indemnification obligation and are responsible only for certain environmental problems that resulted from operations prior to the sale. The reserve represents estimated future costs for remediation work: identified prior to the sale of these sites; included in negotiated agreements with the buyers of these sites where we retained certain levels of remediation liabilities; and/or identified in subsequent claims made by buyers of the properties. Our former operated sites include service stations, distribution facilities and oil and gas fields that we previously operated but did not own. We have an aggregate reserve of $93 million for this group of sites. During the first six months of 2004, provisions of $23 million for this category were recorded. These provisions were primarily for approximately 200 sites where we had operated service stations, bulk plants or terminals. The provisions were based on new and revised cost estimates that were developed for these sites in the first six months of 2004. Payments of $28 million were made during the first six months of 2004 for sites in this category. Inactive or closed Company facilities The "Inactive or closed Company facilities" category includes former oil and gas fields and other locations that are no longer operating. In most cases, these sites are contaminated with crude oil, oil field waste and other petroleum hydrocarbons. Other sites in this category were contaminated from former ferromolybdenum production operations. Included in this category are: o the Guadalupe oil field on the central California coast o the Molycorp Washington and York facilities in Pennsylvania o the Beaumont Refinery in Texas. A reserve of $108 million has been established for these types of facilities. During the first six months of 2004, we accrued $4 million related to sites in this category primarily for the Beaumont Refinery site. A provision was recorded for the updated cost estimates to close impoundments used in our former operations at this site. Final design work and related detailed cost estimates to close these impoundments were completed. We also received final approval of a permit for these projects from the Texas Commission on Environmental Quality. Payments of $6 million were made during the first six months of 2004 for sites in this category. Legal Compliance We are subject to federal, state and local environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended, the Resource Conservation and Recovery Act ("RCRA") and laws governing low level radioactive materials. Under these laws, we are subject to existing and/or possible obligations to remove or mitigate the environmental effects of the disposal or release of certain chemical, petroleum and radioactive substances at various sites. Corrective investigations and actions pursuant to RCRA and other federal, state and local environmental laws are being performed at our facility in Beaumont, Texas, a former agricultural chemical facility in Corcoran, California, Molycorp's facility in Washington, Pennsylvania and other facilities. In addition, Molycorp is required to decommission its Washington and York facilities in Pennsylvania pursuant to the terms of their respective radioactive source materials licenses and decommissioning plans. We also must provide financial assurance for future closure and post-closure costs of our RCRA-permitted facilities and for decommissioning costs at facilities that are under radioactive source materials licenses. Pursuant to a 1998 settlement agreement between us and the State of California (and the subsequent stipulated judgment entered by the Superior Court), we must provide financial assurance for anticipated costs of remediation activities at our inactive Guadalupe oil field. As previously discussed, remediation reserves for these sites are included in the "Inactive or closed Company facilities" category and totaled $97 million at June 30, 2004. At those sites where investigations or feasibility studies have advanced to the stage of analyzing alternative remedies and/or ranges of costs, we estimate that we could -15- incur possible additional remediation costs aggregating approximately $55 million. Although any possible additional costs for these sites are likely to be incurred at different times and over a period of many years, we believe that these obligations could have a material adverse effect on our results of operations but are not expected to be material to our consolidated financial condition or liquidity. Insurance We maintain insurance coverage intended to reimburse the cost of damages and remediation related to environmental contamination resulting from sudden and accidental incidents under current operations. The purchased coverages contain specified and varying levels of deductibles and payment limits. Although certain of our contingent legal exposures enumerated above are uninsurable either due to insurance policy limitations, public policy or market conditions, our management believes that our current insurance program significantly reduces the possibility of an incident causing us a material adverse financial impact. Certain Litigation and Claims Agrium Litigation: In June 2002, a lawsuit was filed against us by Agrium Inc., a Canadian corporation, and Agrium U.S. Inc., its U.S. subsidiary, in the Superior Court of the State of California for the County of Los Angeles (Agrium U.S. Inc. and Agrium Inc. v. Union Oil Company of California, Case No. BC275407) (the "Agrium Claim"). Simultaneously, we filed suit against the Agrium entities ("Agrium") in the U.S. District Court for the Central District of California (Union Oil Company of California v. Agrium, Inc., Case No. 02-04518 NM) (the "Company Claim"). We subsequently removed the Agrium Claim to the U.S. District Court for the Central District of California (Case No. 02-04769 NM). The federal court remanded the Agrium Claim to the California Superior Court. In addition, we initiated arbitration concerning the Gas Purchase and Sale Agreement ("GPSA") between us and Agrium U.S. Inc. (AAA Case No. 70 198 00539 02) (the "Arbitration"). The Agrium Claim alleges numerous causes of action relating to Agrium's purchase from us of a nitrogen-based fertilizer plant on the Kenai Peninsula, Alaska, in September 2000. The primary allegations involve our obligation to supply natural gas to the plant pursuant to the GPSA. Agrium alleges that we misrepresented the amount of natural gas reserves available for sale to the plant as of the closing of the transaction and that we have failed to develop additional natural gas reserves for sale to the plant. Agrium also alleges that we misrepresented the condition of the general effluent sewer at the plant and made misrepresentations regarding other environmental matters. Agrium seeks damages in an unspecified amount for breach of such representations and warranties, as well as for alleged misconduct by us in operating and managing certain oil and gas leases and other facilities. Agrium also seeks declaratory relief for the calculation of payments under a "Retained Earnout" covenant in the Purchase and Sale Agreement for the plant (the "PSA") that entitles us to certain contingent payments based on the price of ammonia subsequent to the September 2000 closing. The complaint includes demands for punitive damages and attorneys' fees. In September 2002, Agrium amended its complaint to add allegations that we breached certain conditions of the September 2000 closing, breached certain indemnification obligations, and violated the pertinent health and safety code. Agrium also asked for recission of the sale of the fertilizer plant, in addition, or as an alternative, to money damages. In addition, Agrium sought a declaration by the arbitration panel that has been convened (see below) that natural gas from Unocal's Ninilchik, Happy Valley fields in South Kenai "or elsewhere" should be delivered to the plant to meet Unocal's alleged obligations under the GPSA. In the Company Claim, we seek declaratory relief in our favor against the allegations of Agrium set forth above and for judgment on the Retained Earnout in the amount of $17 million plus interest accrued subsequent to May 2002. Unocal also sought reimbursement of over $5 million in royalties paid to the State of Alaska. The GPSA contains a contractual limit on liquidated damages of $25 million per year, not to exceed a total of $50 million over the life of the agreement. In addition, the PSA contains a limit on damages of $50 million. On July 16, 2003, the court approved an agreed stipulation between the parties to submit all issues under the GPSA to arbitration. The arbitration proceedings commenced May 24, 2004. One of Agrium's expert witnesses testified in the -16- arbitration proceeding that Agrium's damages were in a range between $292 million and $708 million, depending upon different models. The arbitration panel issued its ruling on July 22, 2004. The arbitration panel agreed with us that the GPSA is a reserves-based contract. The panel's decision laid out the methodology for determining past and future gas delivery quantities and for calculating liquidated damages arising from underdeliveries of gas by us to the fertilizer plant. Using the methodology, the arbitration panel found we owed Agrium $36 million plus $2 million in interest for underdelivery of natural gas to the fertilizer plant through April 2004. Based on current delivery projections from certain dedicated fields, we expect to reach the GPSA $50 million cap for liquidated damages over time for underdeliveries subsequent to April 2004. The arbitration panel did not rule on the enforceability of this $50 million cap because its award did not exceed the amount of the cap. The parties continue to disagree over the cap's enforceability. The arbitration panel also ordered Agrium to reimburse us $5 million for excess royalties that have been paid by us to the state of Alaska. The litigation related to the PSA remains pending in California Superior Court in Los Angeles County. We believe we have a meritorious defense to each of the Agrium remaining claims, but that in any event our exposure to damages for all disputes under the agreements is limited by those agreements. Agrium alleges that it is entitled to recover damages in excess of those amounts. Petrobangla Claim: In July 2002, our subsidiary Unocal Bangladesh Blocks Thirteen and Fourteen, Ltd. ("Unocal Blocks 13 and 14 Ltd.") received a letter from the Bangladesh Oil, Gas & Mineral Corporation ("Petrobangla") claiming, on behalf of the Bangladesh government and Petrobangla, compensation allegedly due in the amount of $685 million for 246 BCF of recoverable natural gas allegedly "lost and damaged" in a 1997 blowout and ensuing fire during the drilling by Occidental Petroleum Corporation (known at that time in Bangladesh as Occidental of Bangladesh Ltd.) ("OBL"), as operator, of the Moulavi Bazar #1 ("MB #1") exploration well on the Blocks 13 and 14 PSC area in Northeast Bangladesh. Unocal and OBL believe that the claim vastly overstates the amount of recoverable gas involved in the blowout. Consistent with worldwide industry contracting practice, there was no provision in the PSC for compensating the Bangladesh government or Petrobangla for resources lost during the contractor's operations. Even if some form of compensation were due, Unocal and OBL believe that settlement compensation for the blowout was fully addressed in a 1998 Supplemental Agreement to the PSC (the "Supplemental Agreement"), which, among other matters, waived OBL's then 50-percent contractor's share (as well as the then 50-percent contractor's share held by our Unocal Bangladesh, Ltd., subsidiary ("Unocal Bangladesh")) of entitlement to the recovery of costs incurred in the drilling of the MB #1 and the blowout, waived their right to invoke force majeure in connection with the blowout, and reduced by five percentage points their contractors' profit share (with a concomitant increase in Petrobangla's profit share) of future production from the sands encountered by the MB #1 well to a drill depth of 840 meters or, if the blowout sand reservoir were not present or development is not feasible deemed commercial, from other commercial fields in the Moulavi Bazar "ring-fenced" area of Block 14. Consequently, Unocal and OBL consider the matter closed and Unocal Blocks 13 and 14 Ltd. has advised Petrobangla that no additional compensation is warranted. By Writ Petition Affidavit dated March 24, 2003, a concerned citizen filed suit in the Bangladesh lower court (Alam v. Bangladesh, Petrobangla, Department of Environment, and Unocal Bangladesh, Ltd., Supreme Court of Bangladesh, High Court Division, Writ Petition No. 2461 of 2003) on the basis of the MB #1 blowout. We were notified of the suit on May 26, 2003 when we received the court's order to show cause why the Supplemental Agreement should not be declared illegal and cancelled on account of its having been executed without lawful authority, and why Unocal Bangladesh should not be directed to stop exploration until it compensates for the MB#1 blowout. No hearing is currently scheduled on the matter, and we believe the action is not well founded. -17- Tax Matters We believe we have adequately provided in our accounts for tax items and issues not yet resolved. Several prior material tax issues are unresolved. Resolution of these tax issues affects not only the year in which the items arose, but also our tax situation in other tax years. With respect to the 1979-1994 taxable years, the Joint Committee on Taxation of the U.S. Congress has reviewed and approved the settlement of all issues for these years, including the carryback of a 1993 net operating loss to taxable year 1984 and resultant credit adjustments, as previously agreed with the Appeals division of the Internal Revenue Service ("IRS"). This settlement and corresponding recalculation of taxable income and credits for this period resulted in an overpayment of taxes. We anticipate receiving a cash refund of at least $68 million, representing overpaid taxes plus interest thereon, in the third quarter of 2004. Taxable years 1979-1984 are now closed and barred from additional assessment of federal income taxes. Although the IRS has completed its audit of Unocal for taxable years 1985-1994 and a settlement has been reached for all such years, these years cannot be formally closed until a separate audit by the IRS of the Alaska Kuparuk River Unit tax partnership is completed. Accordingly, the IRS refers to the 1985-1994 taxable years as "partially closed." All such developments have been considered in our accounts. With respect to the 1995-1997 taxable years, a settlement of all issues has been reached with the Appeals division of the IRS. Although the IRS has completed its audit of Unocal for taxable years 1995-1997 and a settlement has been reached for all such years, these years cannot be formally closed until a separate audit by the IRS of the Alaska Kuparuk River Unit tax partnership is completed. Accordingly, the IRS refers to the 1995-1997 taxable years as "partially closed." All such developments have been considered in our accounts. The 1998-2001 taxable years are before the Exam division of the IRS. With respect to state tax matters, a tentative settlement has been reached with the Franchise Tax Board of the state of California with respect to taxable years 1989-1991. Unocal anticipates receiving a cash refund of approximately $11 million representing overpaid taxes plus interest thereon, later this year. Guarantees Related to Assets or Obligations of Third Parties Future Remediation Costs We have agreed to indemnify certain third parties for particular future remediation costs that may be incurred for properties held by these parties. The guarantees were established when we either leased property from or sold property to these third parties. The properties may or may not have been contaminated by our former operations. Where it has been or will be determined that we are responsible for contamination, the guarantees require us to pay the costs to remediate the sites to specified cleanup levels or to levels that will be determined in the future. The maximum potential amount of future payments that we could be required to make under these guarantees is indeterminate primarily due to the following: the indefinite term of the majority of these guarantees; the unknown extent of possible contamination; uncertainties related to the timing of the remediation work; possible changes in laws governing the remediation process; the unknown number of claims that may be made; changes in remediation technology; and the fact that most of these guarantees lack limitations on the maximum potential amount of future payments. We have accrued probable and reasonably estimable assessment and remediation costs for the locations covered under these guarantees. These amounts are included in the "Company facilities sold with retained liabilities and former Company-operated sites" category of our reserve for environmental remediation obligations. At June 30, 2004, the reserve for this category totaled $93 million. For those sites where investigations or feasibility studies have advanced to the stage of analyzing feasible alternative remedies and/or ranges of costs, we estimate that we could incur possible additional remediation costs aggregating approximately $80 million. -18- BTC Construction Completion Guarantee We have a construction completion guarantee related to debt financing arrangements for the Baku-Tbilisi-Ceyhan ("BTC") pipeline project. We have an equity interest in the development of this pipeline from Baku, Azerbaijan through Georgia to the Mediterranean port of Ceyhan, Turkey. Our maximum potential future payments under the guarantee are estimated to be $310 million. The debt is secured by transportation proceeds from production of the Azeri field in the Caspian Sea. The debt is non-recourse upon financial completion certification, which is expected by 2009. As of June 30, 2004, we have recorded a liability of $19 million as the estimated value of this guarantee. Other Guarantees and Indemnities We have also guaranteed the debt of certain other entities accounted for by the equity method. The majority of this debt matures ratably through the year 2014. The maximum potential amount of future payments we could be required to make is approximately $16 million. In the ordinary course of business, we have agreed to indemnify cash deficiencies for certain domestic pipeline joint ventures, which we account for on the equity method. These guarantees are considered in our analysis of overall risk. Since most of these agreements do not contain spending caps, it is not possible to quantify the amount of maximum payments that may be required. Nevertheless, we believe the payments would not have a material adverse impact on our financial condition or liquidity. Financial Assurance for Unocal Obligations Surety Bonds and Letters of Credit In the normal course of business, we have performance obligations that are secured, in whole or in part, by surety bonds or letters of credit. These obligations primarily cover self-insurance, site restoration, dismantlement and other programs where governmental organizations require such support. These surety bonds and letters of credit are issued by financial institutions and are required to be reimbursed by us if drawn upon. At June 30, 2004, we had obtained various surety bonds for $184 million. These surety bonds included a bond for $72 million securing our performance under a fixed price natural gas sales contract for the delivery of 72 billion cubic feet of gas over a ten-year period that began in January of 1999 and will end in December of 2008 and $112 million in various other routine performance bonds held by local, city, state and federal agencies. We also had obtained $62 million in standby letters of credit at June 30, 2004, of which $14 million represented additional collateral related to the aforementioned fixed price natural gas sales contract. We have entered into indemnification obligations in favor of the providers of these surety bonds and letters of credit. Other Guarantees and Credit Rating Triggers We have various other guarantees for approximately $525 million. Approximately $134 million of the $525 million in guarantees represent financial assurance we gave on behalf of our Molycorp subsidiary relating to permits covering operations and discharges from Molycorp's Questa, New Mexico, molybdenum mine. Our financial assurance is for the completion of temporary closure plans (required only upon cessation of operations) and other obligations required under the terms of the permits. The costs associated with the financial assurance are based on estimations provided by agencies of the state of New Mexico. Guarantees for approximately $300 million of the $525 million would require us to obtain a surety bond or a letter of credit or establish a trust fund if our credit rating were to drop below investment grade -- that is BBB- or Baa3 from Standard & Poor's Ratings Services and Moody's Investors Service, Inc., respectively. Classification on Balance Sheet Approximately $150 million of the surety bonds, letters of credit and other guarantees that we are required to obtain or issue reflect obligations that are already included on the consolidated balance sheet in other current liabilities and other deferred credits. The surety bonds, letters of credit and other guarantees may also reflect some of the possible additional remediation liabilities discussed earlier in this note. -19- Other Matters Our lease agreement for the Discoverer Spirit deepwater drillship has a current minimum daily rate of approximately $226,000. The future remaining minimum lease payment obligation was approximately $100 million at June 30, 2004. The contract will expire on September 18, 2005. We also have other contingent liabilities for litigation, claims and contractual agreements arising in the ordinary course of business. Based on management's assessment of the ultimate amount and timing of possible adverse outcomes and associated costs, none of these other matters is presently expected to have a material adverse effect on our consolidated financial condition, liquidity or results of operations. 17. Loans to Certain Officers and Key Employees In February 2004, we repurchased 539,208 shares from four of the original participants in our 2000 Executive Stock Purchase Program (the "Program") at market price for approximately $20 million. The purchase of this number of shares was approved by our board of directors in February 2004. The Program was approved by our board of directors and by our stockholders at the annual stockholders meeting in May 2000. The balance of the loans under this Program, including accrued interest, totaled $4 million at June 30, 2004 and $27 million at December 31, 2003, and was reflected as a reduction to stockholders' equity on the consolidated balance sheet. 18. Financial Instruments and Commodity Hedging Interest rate contracts - We enter into interest rate swap contracts to manage our debt with the objective of minimizing the volatility and magnitude of our borrowing costs. We may also enter into interest rate option contracts to protect our interest rate positions, depending on market conditions. At June 30, 2004, we had approximately $21 million of after-tax deferred losses in accumulated other comprehensive income on the consolidated balance sheet related to cash flow hedges of interest rate exposures through September 2012. Of this amount, $3 million in after-tax losses are expected to be reclassified to the consolidated earnings statement during the next twelve months. Foreign currency contracts - Various foreign exchange currency forward, option and swap contracts are entered into from time to time to manage our exposures to adverse impacts of foreign currency fluctuations on recognized obligations and anticipated transactions. At June 30, 2004, we had no material deferred amounts in accumulated other comprehensive income on the consolidated balance sheet related to foreign currency contracts. Commodity hedging activities - We use hydrocarbon derivatives to mitigate our overall exposure to fluctuations in hydrocarbon commodity prices. We reported a gain of $1 million in the first six months of 2004 due to ineffectiveness for cash flow and fair value hedges. At June 30, 2004, we had approximately $23 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 July 2004 through December 2004. Nearly all of the after-tax losses are expected to be reclassified to the consolidated earnings statement during 2004. Fair values for debt and other long-term instruments - The estimated fair values of our long-term debt were $3.56 billion at June 30, 2004. Fair values were based on the discounted amounts of future cash outflows using the rates offered to us for debt with similar remaining maturities. -20- 19. Supplemental Condensed Consolidating Financial Information Unocal guarantees all the publicly held securities issued by its 100 percent-owned subsidiary Union Oil. Such guarantees are full and unconditional and no subsidiaries of Unocal or Union Oil guarantee these securities. As a result of adopting FASB Interpretation No. 46 (revised December 2003) (see note 2 and 14 for further detail), we deconsolidated Unocal Capital Trust effective January 1, 2004. The following tables present condensed consolidating financial information for (a) Unocal (Parent), (b) Union Oil (Parent) and (c) on a combined basis, the subsidiaries of Union Oil (non-guarantor subsidiaries). Virtually all of our operations are conducted by Union Oil and its subsidiaries. The 2003 tables also present the Trust, as part of the condensed consolidating financial information.
CONDENSED CONSOLIDATED EARNINGS STATEMENT For the Three Months Ended June 30, 2004 Non- Unocal Union Oil Guarantor Millions of dollars (Parent) (Parent) Subsidiaries Eliminations Consolidated - --------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ 318 $ 1,833 $ (230) $ 1,921 Interest, dividends and miscellaneous income 1 1 19 (2) 19 Gain on sales of assets - (40) 80 - 40 - --------------------------------------------------------------------------------------------------------------------- Total revenues 1 279 1,932 (232) 1,980 Costs and other deductions Purchases, operating and other expenses 3 292 1,194 (231) 1,258 Depreciation, depletion and amortization - 65 175 - 240 Impairments - 3 6 - 9 Dry hole costs - 10 30 - 40 Interest expense 9 31 8 (2) 46 - --------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 12 401 1,413 (233) 1,593 Equity in earnings of subsidiaries 350 443 - (793) - Earnings from equity investments - 2 37 (1) 38 - --------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 339 323 556 (793) 425 - --------------------------------------------------------------------------------------------------------------------- Income taxes (2) (29) 175 - 144 Minority interests - - (1) - (1) - --------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 341 352 382 (793) 282 Earnings from discontinued operations - (2) 61 - 59 - --------------------------------------------------------------------------------------------------------------------- Net earnings $ 341 $ 350 $ 443 $ (793) $ 341 =====================================================================================================================
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CONDENSED CONSOLIDATED EARNINGS STATEMENT For the Three Months Ended June 30, 2003 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ - $ 361 $ 1,518 $ (322) $ 1,557 Interest, dividends and miscellaneous income - 9 7 4 (11) 9 Gain on sales of assets - - 43 4 - 47 - ----------------------------------------------------------------------------------------------------------------------- Total revenues - 9 411 1,526 (333) 1,613 Costs and other deductions Purchases, operating and other expenses 3 - 341 1,036 (323) 1,057 Depreciation, depletion and amortization - - 78 176 - 254 Impairments - - 3 - - 3 Dry hole costs - - 6 4 - 10 Interest expense 9 1 29 7 (10) 36 Distributions on convertible preferred securities - 8 - - - 8 - ----------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 12 9 457 1,223 (333) 1,368 Equity in earnings of subsidiaries 187 - 224 - (411) - Earnings from equity investments - - 4 49 - 53 - ----------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 175 - 182 352 (411) 298 - ----------------------------------------------------------------------------------------------------------------------- Income taxes (2) - 3 130 - 131 Minority interests - - - 2 - 2 - ----------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 177 - 179 220 (411) 165 Earnings from discontinued operations - - 8 4 - 12 - ----------------------------------------------------------------------------------------------------------------------- Net earnings $ 177 $ - $ 187 $ 224 $ (411) $ 177 =======================================================================================================================
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CONDENSED CONSOLIDATED EARNINGS STATEMENT For the Six Months Ended June 30, 2004 Non- Unocal Union Oil Guarantor Millions of dollars (Parent) (Parent) Subsidiaries Eliminations Consolidated - --------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ 644 $ 3,543 $ (436) $ 3,751 Interest, dividends and miscellaneous income 1 5 27 (3) 30 Gain on sales of assets - (16) 100 - 84 - --------------------------------------------------------------------------------------------------------------------- Total revenues 1 633 3,670 (439) 3,865 Costs and other deductions Purchases, operating and other expenses 5 521 2,338 (437) 2,427 Depreciation, depletion and amortization - 128 344 - 472 Impairments - 6 8 - 14 Dry hole costs - 27 38 - 65 Interest expense 17 57 16 (3) 87 Distributions on convertible preferred securities - - - - - - --------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 22 739 2,744 (440) 3,065 Equity in earnings of subsidiaries 628 681 - (1,309) - Earnings from equity investments - 3 73 (1) 75 - --------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 607 578 999 (1,309) 875 - --------------------------------------------------------------------------------------------------------------------- Income taxes (3) (52) 378 - 323 Minority interests - - 4 - 4 - --------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 610 630 617 (1,309) 548 Earnings from discontinued operations - (2) 64 - 62 - --------------------------------------------------------------------------------------------------------------------- Net earnings $ 610 $ 628 $ 681 $ (1,309) $ 610 =====================================================================================================================
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CONDENSED CONSOLIDATED EARNINGS STATEMENT For the Six Months Ended June 30, 2003 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------- Revenues Sales and operating revenues $ - $ - $ 873 $ 3,201 $ (749) $ 3,325 Interest, dividends and miscellaneous income - 17 18 6 (21) 20 Gain on sales of assets - - 34 16 - 50 - ----------------------------------------------------------------------------------------------------------------------- Total revenues - 17 925 3,223 (770) 3,395 Costs and other deductions Purchases, operating and other expenses 5 - 623 2,246 (750) 2,124 Depreciation, depletion and amortization - - 184 329 - 513 Impairments - - 3 - - 3 Dry hole costs - - 58 23 - 81 Interest expense 17 1 59 17 (20) 74 Distributions on convertible preferred securities - 16 - - - 16 - ----------------------------------------------------------------------------------------------------------------------- Total costs and other deductions 22 17 927 2,615 (770) 2,811 Equity in earnings of subsidiaries 329 - 405 - (734) - Earnings from equity investments - - 7 89 - 96 - ----------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and minority interests 307 - 410 697 (734) 680 - ----------------------------------------------------------------------------------------------------------------------- Income taxes (4) - 34 267 - 297 Minority interests - - - 4 - 4 - ----------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 311 - 376 426 (734) 379 Earnings from discontinued operations - - 8 7 - 15 Cumulative effect of accounting changes - - (55) (28) - (83) - ----------------------------------------------------------------------------------------------------------------------- Net earnings $ 311 $ - $ 329 $ 405 $ (734) $ 311 =======================================================================================================================
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CONDENSED CONSOLIDATED BALANCE SHEET At June 30, 2004 Non- Unocal Union Oil Guarantor Millions of dollars (Parent) (Parent) Subsidiaries Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 1 $ 360 $ 578 $ - $ 939 Accounts and notes receivable - net 120 273 1,043 (120) 1,316 Inventories - 8 213 (79) 142 Other current assets (1) 118 28 - 145 - ---------------------------------------------------------------------------------------------------------------------- Total current assets 120 759 1,862 (199) 2,542 Properties - net - 1,962 6,481 (3) 8,440 Other assets including goodwill 5,768 5,631 1,924 (11,828) 1,495 - ---------------------------------------------------------------------------------------------------------------------- Total assets $5,888 $ 8,352 $ 10,267 $ (12,030) $ 12,477 ====================================================================================================================== Liabilities and Stockholders' Equity Current liabilities Accounts payable $ - $ 369 $ 899 $ (120) $ 1,148 Current portion of long-term debt - 162 74 - 236 Other current liabilities 56 225 439 (2) 718 - ---------------------------------------------------------------------------------------------------------------------- Total current liabilities 56 756 1,412 (122) 2,102 Long-term debt and capital leases 538 1,649 917 - 3,104 Deferred income taxes - (219) 943 - 724 Accrued abandonment, restoration and environmental liabilities - 370 501 - 871 Other deferred credits and liabilities - 726 319 (3) 1,042 Minority interests - - 39 7 46 Stockholders' equity 5,294 5,070 6,136 (11,912) 4,588 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $5,888 $ 8,352 $ 10,267 $ (12,030) $ 12,477 ======================================================================================================================
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CONDENSED CONSOLIDATED BALANCE SHEET At December 31, 2003 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - ------------------------------------------------------------------------------------------------------------------------------ Assets Current assets Cash and cash equivalents $ 1 $ - $ 45 $ 358 $ - $ 404 Accounts and notes receivable - net 94 - 360 946 (108) 1,292 Inventories - - 15 205 (79) 141 Other current assets (1) - 127 28 - 154 - ------------------------------------------------------------------------------------------------------------------------------ Total current assets 94 - 547 1,537 (187) 1,991 Properties - net - - 2,012 6,315 (3) 8,324 Other assets including goodwill 4,645 541 5,433 1,564 (10,700) 1,483 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $4,739 $ 541 $ 7,992 $ 9,416 $ (10,890) $ 11,798 ============================================================================================================================== Liabilities and Stockholders' Equity Current liabilities Accounts payable $ - $ - $ 335 $ 831 $ (94) $ 1,072 Current portion of long-term debt - - 193 55 - 248 Other current liabilities 52 3 299 427 (16) 765 - ------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 52 3 827 1,313 (110) 2,085 Long-term debt - - 1,811 824 - 2,635 Deferred income taxes - - (184) 888 - 704 Accrued abandonment, restoration and environmental liabilities - - 390 454 - 844 Other deferred credits and liabilities - - 654 309 (3) 960 Minority interests - - - 32 7 39 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely parent debentures - 522 - - - 522 Stockholders' equity 4,687 16 4,494 5,596 (10,784) 4,009 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $4,739 $ 541 $ 7,992 $ 9,416 $ (10,890) $ 11,798 ==============================================================================================================================
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CONDENSED CONSOLIDATED CASH FLOWS For the Six Months Ended June 30, 2004 Non- Unocal Union Oil Guarantor Millions of dollars (Parent) (Parent) Subsidiaries Eliminations Consolidated - --------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities $ 7 $ 613 $ 506 $ - $ 1,126 Cash Flows from Investing Activities Capital expenditures and acquisitions (includes dry hole costs) - (131) (670) - (801) Proceeds from sales of assets and discontinued operations - 28 250 - 278 Return of capital from affiliate company - - 48 - 48 - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities - (103) (372) - (475) - --------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Change in long-term debt - (193) 87 - (106) Dividends paid on common stock (105) - - - (105) Proceeds from issuance of common stock 94 - - - 94 Repurchases of common stock (20) - - - (20) Other 24 (2) (1) - 21 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (7) (195) 86 - (116) - --------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents - 315 220 - 535 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 1 45 358 - 404 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1 $ 360 $ 578 $ - $ 939 =====================================================================================================================
CONDENSED CONSOLIDATED CASH FLOWS For the Six Months Ended June 30, 2003 Unocal Non- Unocal Capital Union Oil Guarantor Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities $ 90 $ - $ 389 $ 606 $ - $ 1,085 Cash Flows from Investing Activities Capital expenditures and acquisitions (includes dry hole costs) - - (223) (694) - (917) Proceeds from sales of assets and discontinued operations - - 123 68 - 191 Return of capital from affiliate company - - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities - - (100) (626) - (726) - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Change in long-term debt and capital leases - - (114) 50 - (64) Dividends paid on common stock (103) - - - - (103) Proceeds from issuance of common stock 10 - - - - 10 Repurchases of common stock - - - - - - Other 3 - (7) (3) - (7) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (90) - (121) 47 - (164) - -------------------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents - - 168 27 - 195 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period - - (18) 186 - 168 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ - $ - $ 150 $ 213 $ - $ 363 ================================================================================================================================
-27- 20. Segment Data We made changes in the reporting of our segments from the reporting utilized in the 2003 Annual Report on Form 10-K, as amended, as detailed in the following tables. Our reportable segments are: (1) Exploration and Production, (2) Midstream and Marketing, and (3) Geothermal. General corporate overhead, unallocated costs and other miscellaneous operations, including real estate, carbon and minerals and those businesses that were sold or being phased-out, are included under the Corporate and Other heading. Our Exploration and Production segment has simplified its North America presentation by combining the Alaska business unit with the U.S. Lower 48 business to form the U.S. geographic designation. In the International geographic designation, we now present Asia and Other, instead of the previous categories of Far East and Other. In addition, the former Trade segment has been combined with the Midstream segment to form the Midstream and Marketing segment.
- ---------------------------------------------------------------------------------------------------------------------- Segment Information Exploration and Production For the Three Months North America International Ended June 30, 2004 - ---------------------------------------------------------------------------------------------------------------------- Millions of dollars U.S. Canada Total N.A. Asia Other Total Int'l Total E&P - ---------------------------------------------------------------------------------------------------------------------- Sales & operating revenues $ 197 $ 68 $ 265 $ 356 $ 79 $ 435 $ 700 Other income (loss) (a) 35 - 35 1 1 2 37 Inter-segment revenues 229 34 263 100 - 100 363 - ---------------------------------------------------------------------------------------------------------------------- Total 461 102 563 457 80 537 1,100 Earnings (loss) from equity investments - - - 12 2 14 14 Earnings (loss) from continuing operations 108 16 124 137 29 166 290 Earnings from discontinued operations (net) 46 - 46 - - - 46 - ---------------------------------------------------------------------------------------------------------------------- Net earnings (loss) 154 16 170 137 29 166 336 Assets (at June 30, 2004) 3,210 1,267 4,477 3,529 927 4,456 8,933 - ----------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------- Midstream Geothermal Corporate and Other Total and Net Environ- Marketing Admin & Interest mental & General Expense Litigation Other(b) - ---------------------------------------------------------------------------------------------------------------------- Sales & operating revenues $ 1,003 $ 124 $ - $ - $ - $ 94 $ 1,921 Other income (loss) (a) 3 13 - 4 - 2 59 Inter-segment revenues 4 - - - - (367) - - ---------------------------------------------------------------------------------------------------------------------- Total 1,010 137 - 4 - (271) 1,980 Earnings (loss) from equity investments 12 (2) - - - 14 38 Earnings (loss) from continuing operations 18 57 (21) (33) (11) (18) 282 Earnings from discontinued operations (net) 13 - - - - - 59 - ---------------------------------------------------------------------------------------------------------------------- Net earnings (loss) 31 57 (21) (33) (11) (18) 341 Assets (at June 30, 2004) 1,082 625 - - - 1,837 12,477 - ---------------------------------------------------------------------------------------------------------------------- (a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets. (b) Includes eliminations and consolidation adjustments.
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- ---------------------------------------------------------------------------------------------------------------------- Segment Information Exploration and Production For the Three Months North America International Ended June 30, 2003 - ---------------------------------------------------------------------------------------------------------------------- Millions of dollars U.S. Canada Total N.A. Asia Other Total Int'l Total E&P - ---------------------------------------------------------------------------------------------------------------------- Sales & operating revenues $ 197 $ 37 $ 234 $ 321 $ 66 $ 387 $ 621 Other income (loss) (a) 46 - 46 - - - 46 Inter-segment revenues 284 41 325 72 - 72 397 - ---------------------------------------------------------------------------------------------------------------------- Total 527 78 605 393 66 459 1,064 Earnings (loss) from equity investments 6 - 6 11 - 11 17 Earnings (loss) from continuing operations 100 8 108 126 19 145 253 Earnings from discontinued operations (net) 4 - 4 - - - 4 - ---------------------------------------------------------------------------------------------------------------------- Net earnings (loss) 104 8 112 126 19 145 257 Assets (at December 31, 2003) 3,315 1,324 4,639 3,377 765 4,142 8,781 - ----------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------- Midstream Geothermal Corporate and Other Total and Net Environ- Marketing Admin & Interest mental & General Expense Litigation Other(b) - ---------------------------------------------------------------------------------------------------------------------- Sales & operating revenues $ 865 $ 28 $ - $ - $ - $ 43 $ 1,557 Other income (loss) (a) 1 2 - 6 - 1 56 Inter-segment revenues 3 - - - - (400) - - ---------------------------------------------------------------------------------------------------------------------- Total 869 30 - 6 - (356) 1,613 Earnings (loss) from equity investments 17 4 - - - 15 53 Earnings (loss) from continuing operations 21 7 (22) (28) (28) (38) 165 Earnings from discontinued operations (net) - - - - - 8 12 - ---------------------------------------------------------------------------------------------------------------------- Net earnings (loss) 21 7 (22) (28) (28) (30) 177 Assets (at December 31, 2003) 1,097 611 - - - 1,309 11,798 - ---------------------------------------------------------------------------------------------------------------------- (a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets. (b) Includes eliminations and consolidation adjustments.
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- ---------------------------------------------------------------------------------------------------------------------- Segment Information Exploration and Production For the Six Months North America International Ended June 30, 2004 - ---------------------------------------------------------------------------------------------------------------------- Millions of dollars U.S. Canada Total N.A. Asia Other Total Int'l Total E&P - ---------------------------------------------------------------------------------------------------------------------- Sales & operating revenues $ 495 $ 139 $ 634 $ 708 $ 136 $ 844 $ 1,478 Other income (loss) (a) 45 - 45 2 2 4 49 Inter-segment revenues 435 66 501 202 - 202 703 - ---------------------------------------------------------------------------------------------------------------------- Total 975 205 1,180 912 138 1,050 2,230 Earnings (loss) from equity investments - - - 22 2 24 24 Earnings (loss) from continuing operations 221 28 249 295 46 341 590 Earnings from discontinued operations (net) 49 - 49 - - - 49 - ---------------------------------------------------------------------------------------------------------------------- Net earnings (loss) 270 28 298 295 46 341 639 Assets (at June 30, 2004) 3,210 1,267 4,477 3,529 927 4,456 8,933 - ----------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------- Midstream Geothermal Corporate and Other Total and Net Environ- Marketing Admin & Interest mental & General Expense Litigation Other(b) - ---------------------------------------------------------------------------------------------------------------------- Sales & operating revenues $ 1,984 $ 164 $ - $ - $ - $ 125 $ 3,751 Other income (loss) (a) 8 45 - 10 - 2 114 Inter-segment revenues 6 - - - - (709) - - ---------------------------------------------------------------------------------------------------------------------- Total 1,998 209 - 10 - (582) 3,865 Earnings (loss) from equity investments 28 (1) - - - 24 75 Earnings (loss) from continuing operations 41 94 (48) (65) (27) (37) 548 Earnings from discontinued operations (net) 13 - - - - - 62 - ---------------------------------------------------------------------------------------------------------------------- Net earnings (loss) 54 94 (48) (65) (27) (37) 610 Assets (at June 30, 2004) 1,082 625 - - - 1,837 12,477 - ---------------------------------------------------------------------------------------------------------------------- (a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets. (b) Includes eliminations and consolidation adjustments.
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- ---------------------------------------------------------------------------------------------------------------------- Segment Information Exploration and Production For the Six Months North America International Ended June 30, 2003 - ---------------------------------------------------------------------------------------------------------------------- Millions of dollars U.S. Canada Total N.A. Asia Other Total Int'l Total E&P - ---------------------------------------------------------------------------------------------------------------------- Sales & operating revenues $ 417 $ 95 $ 512 $ 653 $ 96 $ 749 $ 1,261 Other income (loss) (a) 49 - 49 - - - 49 Inter-segment revenues 672 79 751 163 - 163 914 - ---------------------------------------------------------------------------------------------------------------------- Total 1,138 174 1,312 816 96 912 2,224 Earnings (loss) from equity investments 9 - 9 20 4 24 33 Earnings (loss) from continuing operations 223 32 255 258 29 287 542 Earnings from discontinued operations (net) 7 - 7 - - - 7 Cumulative effect of accounting changes (b) (32) 4 (28) 13 - 13 (15) - ---------------------------------------------------------------------------------------------------------------------- Net earnings (loss) 198 36 234 271 29 300 534 Assets (at December 31, 2003) 3,315 1,324 4,639 3,377 765 4,142 8,781 - ----------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------- Midstream Geothermal Corporate and Other Total and Net Environ- Marketing Admin & Interest mental & General Expense Litigation Other(c) - ---------------------------------------------------------------------------------------------------------------------- Sales & operating revenues $ 1,926 $ 63 $ - $ - $ - $ 75 $ 3,325 Other income (loss) (a) 1 2 - 10 - 8 70 Inter-segment revenues 5 - - - - (919) - - ---------------------------------------------------------------------------------------------------------------------- Total 1,932 65 - 10 - (836) 3,395 Earnings (loss) from equity investments 33 5 - - - 25 96 Earnings (loss) from continuing operations 30 19 (45) (59) (45) (63) 379 Earnings from discontinued operations (net) - - - - - 8 15 Cumulative effect of accounting changes (b) (2) - - - - (66) (83) - ---------------------------------------------------------------------------------------------------------------------- Net earnings (loss) 28 19 (45) (59) (45) (121) 311 Assets (at December 31, 2003) 1,097 611 - - - 1,309 11,798 - ---------------------------------------------------------------------------------------------------------------------- (a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets. (b) Net of tax (benefit) $48 (c) Includes eliminations and consolidation adjustments.
21. Subsequent Events On July 29, 2004, we sold our 50 percent equity interest in a jointly held project company that owns UnoPaso Exploracao e Producao de Petroleo e Gas Ltda., a Brazilian exploration and production venture for $67 million plus possible future payments. The underlying assets sold represent net production of approximately 4.5 MBOE/d and represent our remaining oil and natural gas assets in Brazil. We expect to record an after-tax gain of $1 million in the third quarter of 2004. On July 1, 2004, we sold property in Parachute, Colorado for $24 million in cash. We expect to record an after-tax gain of $15 million in the third quarter of 2004. -31- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with Management's Discussion and Analysis in Item 7 of Unocal's 2003 Annual Report on Form 10-K, as amended, and the consolidated financial statements and related notes therein. Our 2003 Annual Report on Form 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and contractual obligations. You should read the following discussion and analysis together with the cautionary statement under "Forward-Looking Statements" on page iii of this report. We simplified our reporting segments effective January 1, 2004. In our Exploration and Production segment: (1) we combined the Alaska business unit with the U.S. Lower 48 to form the U.S. geographic designation under North America and (2) we now present Asia and Other instead of the previous categories of Far East and Other under International. In addition, the former Trade segment has been combined with the Midstream segment to form the Midstream and Marketing segment. See note 20 to the consolidated financial statements in Item 1 of this report for revisions to our reportable segments. OVERVIEW Unocal's primary line of business is the exploration, development and production of natural gas, crude oil, condensate and natural gas liquids. Our principal operations are in Asia and North America. We are also a leading producer of geothermal energy and a provider of electrical power in Asia. Other activities include ownership in proprietary and common carrier pipelines, natural gas storage facilities and the marketing of hydrocarbon commodities. Our strategy is focused on creating value for our stockholders by continuing to advance oil and gas development projects and delivering successful exploration results through the drill bit. Fluctuations in hydrocarbon commodity prices and the resulting impact on our realized prices for liquids and North America natural gas are a significant driver of our financial performance. Some of our more significant operational highlights and asset sales from the second quarter of 2004 and through the date of this report are listed below: - - Deepwater oil discovery drilled on the Tobago prospect in the Gulf of Mexico. - - Deepwater appraisal wells encountered hydrocarbons on the St. Malo prospect in the Gulf of Mexico and on the deepwater Ranggas, Gehem and Gula prospects in Indonesia. - - Ramp-up of production continued on the deepwater West Seno project in Indonesia, although slower than initially forecast. - - Installed a floating storage unit for oil production from fields in the Gulf of Thailand that resulted in decreased production during the installation process. - - Construction of the Phase 1 and 2 developments of the Azerbaijan International Operating Company ("AIOC") project in the Caspian Sea progressed; first oil at the wellhead is expected in early 2005 for Phase 1. - - AIOC participant companies are reviewing for approval Phase 3 development and official sanction is expected by year-end 2004. - Approximately 70 percent of the construction completed on the Baku-Tbilisi-Ceyhan ("BTC") export pipeline from the Caspian Sea. - - Agreement reached in June 2004 to settle an eight-year dispute over operation of the Tiwi and Mak-Ban geothermal steam fields in the Philippines. - - Certain mineral fee lands in the U.S. sold for $190 million. - - Arbitration panel decision received in dispute over our gas deliveries to Agrium's Kenai, Alaska nitrogen-based fertilizer plant and Agrium's obligation to reimburse us for royalties on the supplied natural gas. Unocal is required to pay $36 million for past deliveries through April 2004 plus $2 million in interest. See note 16 under Part I, Item 1 of this report. - - $67 million received in cash from the sale of our 50 percent equity interest in a jointly held project company that owned UnoPaso Exploracao e Producao de Petroleo e Gas Ltda., a Brazilian exploration and production venture that owned our remaining oil and natural gas assets in Brazil; possible future payments contingent on achieving certain natural gas prices and/or volume thresholds. -32- CONSOLIDATED RESULTS The following table summarizes our consolidated net earnings for the second quarter and six month periods ended June 30, 2004 and 2003:
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------------------------------- Millions of dollars 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Earnings from continuing operations $ 282 $ 165 $ 548 $ 379 Earnings from discontinued operations 59 12 62 15 Cumulative effect of accounting changes - - - (83) - -------------------------------------------------------------------------------- Net earnings $ 341 $ 177 $ 610 $ 311 ================================================================================
Earnings From Continuing Operations Second Quarter Results: Earnings from continuing operations were $282 million in the second quarter of 2004, which was an increase of $117 million compared to the same quarter a year ago. The increase was primarily due to higher realized worldwide liquids and natural gas prices, which increased net earnings by approximately $50 million and $35 million, respectively. In the current quarter, our worldwide average realized liquids price was $32.61 per Bbl, which was an increase of $7.25 per Bbl from the same period a year ago. Our hedging program lowered the average realized liquids price by $1.94 per Bbl in the current quarter while the prior year quarter included a loss of 4 cents per Bbl from hedging activities. Our worldwide average realized natural gas price, which included a loss of 11 cents per Mcf from hedging activities in the current quarter, was $3.65 per Mcf. This was an increase of 12 cents per Mcf from the $3.53 per Mcf realized during the same period a year ago, which included a loss of 7 cents per Mcf from hedging activities. In addition, our Geothermal segment settled an outstanding eight-year dispute over operation of the Tiwi and Mak-Ban geothermal steam fields in the Philippines and recorded an after-tax settlement gain of $46 million. We also recorded a net tax benefit of $27 million for settlements and assessments with various taxing authorities. During the quarter, our subsidiary, Pure Resources Inc., recorded a $23 million after-tax gain from the sale of exploratory mineral fee lands. The second quarter of 2004 also benefited from approximately $25 million after-tax in lower exploration expense compared to the same period a year ago, primarily due to the higher amortization of exploratory leasehold costs in 2003 resulting from the relinquishment of 44 deepwater blocks in the Gulf of Mexico. The second quarter of 2004 included a $1 million after-tax benefit from an adjustment to the 2003 company-wide restructuring plan, which was recorded originally as a $17 million restructuring charge in the second quarter of 2003. These positive variance factors were partially offset by lower North America production, which reduced net earnings by approximately $50 million in the second quarter of 2004 compared with the same period a year ago. North America liquids production averaged 70,000 Bbl/d in the second quarter of 2004, down from 84,000 Bbl/d a year ago, while natural gas production averaged 594 MMcf/d down from 805 MMcf/d for 2003. Most of the production decline was due to the divestiture of various properties in the Gulf of Mexico, onshore U.S. and Canada in 2003. In addition, dry hole costs were approximately $15 million higher in the current quarter compared to the same period a year ago, primarily from Indonesia and Thailand. We also recorded a provision of $46 million pre-tax ($29 million after-tax) associated with the recent arbitration ruling regarding Agrium's Kenai, Alaska nitrogen-based fertilizer plant, and our obligations to supply natural gas to the plant. The second quarter of 2003 included a $20 million after-tax gain on the sale of our equity interest in Matador Petroleum Corporation ("Matador"). Our after-tax environmental and litigation expenses were $15 million in the second quarter of 2004, compared with $29 million in 2003. Six Months Results: Earnings from continuing operations were $548 million in the first six months of 2004 compared to $379 million for the same period a year ago. The increase was primarily due to higher worldwide natural gas and liquids prices, which increased net earnings by approximately $70 million and $55 million, respectively. Our worldwide average realized natural gas price, including a gain of 3 cents per Mcf from hedging activities, was $3.92 per Mcf in the first six months of 2004. This was an increase of 21 cents per Mcf, or 6 percent, from the $3.71 per Mcf, including a loss of 17 cents per Mcf from hedging activities, realized during the first six months of 2003. In the first six months of 2004, our worldwide average realized liquids price was $31.41 per Bbl, which was an increase of $3.87 per Bbl, or 14 percent, from the same period a year ago. Our hedging program lowered the average realized liquids price by $1.45 per Bbl in the first six months of 2004 while the first six months of 2003 included a loss of 26 cents per Bbl from -33- hedging activities. Exploration expenses and dry hole costs were lower in the first six months of 2004 compared with the same period a year ago, primarily due to lower amortization of exploratory leasehold costs and lower drilling activity, increasing net earnings by approximately $40 million. In addition, the first six months of 2004 included the aforementioned settlement gain of $46 million by our Geothermal segment. We also recorded the net tax benefit of $27 million recorded for settlements and assessments with various taxing authorities. These positive variance factors were partially offset by lower North America production, which reduced net earnings by approximately $115 million in the first six months of 2004. North America liquids production averaged 71,000 Bbl/d in the first six months of 2004, down from 85,000 Bbl/d a year ago, while natural gas production averaged 595 MMcf/d down from 833 MMcf/d for the six months period a year ago. Most of the production decline was due to the divestiture of various properties in the Gulf of Mexico, onshore U.S. and Canada in 2003 and a field shut-in at the Mobile Bay area in the Gulf of Mexico due to pipeline damage in the first quarter of 2004. We also recorded the aforementioned provision of $29 million after-tax associated with the arbitration ruling regarding Agrium's Kenai, Alaska nitrogen-based fertilizer plant. The first six months of 2004 included approximately $25 million in after-tax gains from asset sales, primarily from the sale of certain of our exploratory mineral fee lands in the U.S. The first six months of 2003 included approximately $30 million in after-tax gains, primarily from the $20 million after-tax gain on the sale of our equity interest in Matador. The first six months of 2004 also included a $1 million after-tax benefit from an adjustment to the 2003 company-wide restructuring plan, which was recorded originally as a $17 million restructuring charge in the second quarter of 2003. After-tax environmental and litigation expenses were $38 million in the first six months of 2004, compared with $46 million in the same period a year ago. Earnings From Discontinued Operations Earnings from discontinued operations were $59 million and $12 million in the second quarters of 2004 and 2003, respectively, and $62 million and $15 million for the six month periods of 2004 and 2003, respectively. The second quarter and six month periods of 2004 included approximately $43 million after-tax from our sale of certain mineral fee producing properties in the United States and $13 million after-tax from our sale of the Cal Ven pipeline located in Alberta, Canada. The remaining amounts in the second quarter and six month periods of 2004 reflect after-tax earnings of $3 million and $6 million, respectively, from our operations in these mineral fee producing properties and the Cal Ven pipeline prior to the sale. After-tax earnings from the mineral fee producing properties and the Cal Ven pipeline were $4 million and $7 million during the second quarter and six month periods of 2003, respectively. In the second quarter of 2003, we recorded an after-tax gain of $8 million related to the 1997 sale of our former West Coast refining, marketing and transportation assets. The sales agreement contained a provision calling for payments to us for price differences between California Air Resources Board Phase 2 gasoline and conventional gasoline. This provision of the agreement terminated at the end of 2003. Cumulative Effect of Accounting Changes In the first quarter of 2003, we recorded a non-cash $83 million after-tax charge for the cumulative effect of a change in accounting principle related to the initial adoption of Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." Revenues Revenues from continuing operations for the second quarter of 2004 were $1.98 billion compared with $1.61 billion for the same period a year ago. In the first six months of 2004, total revenues from continuing operations were $3.87 billion compared with $3.40 billion for the same period a year ago. The increase in both the second quarter and six month periods primarily reflected higher crude oil and natural gas prices. This was partially offset by lower North America production. -34- Income Taxes Income taxes on earnings from continuing operations for the second quarter and six month periods of 2004 were $144 million and $323 million, respectively, compared with $131 million and $297 million for the comparable periods of 2003. The effective income tax rate for the second quarter and six month periods of 2004 was 34 percent and 37 percent, respectively, compared with 44 percent for both of the comparable periods of 2003. The overall lower effective tax rates for both the second quarter and six months periods of 2004, as compared to 2003, are due primarily to a net deferred tax benefit of $27 million recorded in the second quarter of 2004 for settlements and assessments with various taxing authorities and the tax benefit effect in the second quarter of 2004 of currency related adjustments in Thailand. The following table summarizes our net daily production and average prices for our North America and International Exploration and Production business units:
OPERATING HIGHLIGHTS UNOCAL CORPORATION For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------------------------- 2004 2003 2004 2003 - --------------------------------------------------------------------------------------------------------- North America Net Daily Production Liquids (thousand barrels) U.S. (a) 55 67 55 68 Canada 15 17 16 17 - --------------------------------------------------------------------------------------------------------- Total liquids 70 84 71 85 Natural gas - dry basis (million cubic feet) U.S. (a) 511 719 512 742 Canada 83 86 83 91 - --------------------------------------------------------------------------------------------------------- Total natural gas 594 805 595 833 North America Average Prices (excluding hedging activities) (b) Liquids (per barrel) U. S. $ 35.91 $ 26.53 $ 33.66 $ 29.11 Canada $ 29.89 $ 23.52 $ 29.17 $ 26.05 Average $ 34.58 $ 25.93 $ 32.66 $ 28.48 Natural gas (per mcf) U. S. $ 4.80 $ 4.64 $ 5.20 $ 5.25 Canada $ 5.40 $ 5.13 $ 5.37 $ 5.40 Average $ 4.88 $ 4.69 $ 5.23 $ 5.27 - --------------------------------------------------------------------------------------------------------- North America Average Prices (including hedging activities) (b) Liquids (per barrel) U. S. $ 30.52 $ 26.41 $ 29.64 $ 28.49 Canada $ 29.89 $ 23.52 $ 29.17 $ 26.05 Average $ 30.38 $ 25.84 $ 29.54 $ 27.99 Natural gas (per mcf) U. S. $ 4.53 $ 4.50 $ 5.34 $ 4.86 Canada $ 5.08 $ 4.79 $ 5.06 $ 5.07 Average $ 4.61 $ 4.53 $ 5.30 $ 4.89 - --------------------------------------------------------------------------------------------------------- (a)Includes proportional interests in production of equity investees. (b)Excludes gains/losses on derivative positions not accounted for as hedges and ineffective portions of hedges.
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OPERATING HIGHLIGHTS (CONTINUED) For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------------------------- 2004 2003 2004 2003 - --------------------------------------------------------------------------------------------------------- International Net Daily Production (c) Liquids (thousand barrels) Asia 61 59 64 58 Other (a) 20 20 20 20 - --------------------------------------------------------------------------------------------------------- Total liquids 81 79 84 78 Natural gas - dry basis (million cubic feet) Asia 891 977 885 968 Other (a) 31 23 28 22 - --------------------------------------------------------------------------------------------------------- Total natural gas 922 1,000 913 990 International Average Prices (d) Liquids (per barrel) Asia $ 34.02 $ 24.77 $ 32.66 $ 27.06 Other $ 36.01 $ 25.19 $ 34.30 $ 27.10 Average $ 34.52 $ 24.90 $ 33.02 $ 27.07 Natural gas (per mcf) Asia $ 3.02 $ 2.74 $ 2.99 $ 2.75 Other $ 4.01 $ 4.60 $ 4.17 $ 4.38 Average $ 3.03 $ 2.76 $ 3.01 $ 2.76 - --------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Worldwide Net Daily Production (a) (c) Liquids (thousand barrels) 151 163 155 163 Natural gas - dry basis (million cubic feet) 1,516 1,805 1,508 1,823 Barrels oil equivalent (thousands) 404 463 406 467 Worldwide Average Prices (excluding hedging activities) (b) Liquids (per barrel) $ 34.55 $ 25.40 $ 32.86 $ 27.80 Natural gas (per mcf) $ 3.76 $ 3.60 $ 3.89 $ 3.88 Worldwide Average Prices (including hedging activities) (b) Liquids (per barrel) $ 32.61 $ 25.36 $ 31.41 $ 27.54 Natural gas (per mcf) $ 3.65 $ 3.53 $ 3.92 $ 3.71 - --------------------------------------------------------------------------------------------------------- (a)Includes proportional interests in production of equity investees. (b)Excludes gains/losses on derivative positions not accounted for as hedges and ineffective portions of hedges. (c)International production is presented utilizing the economic interest method. (d)International did not have any hedging activities.
-36- BUSINESS SEGMENT RESULTS See note 20 to the consolidated financial statements in Item 1 of this report for details to our reportable segments effective as of January 1, 2004, which are organized as follows: Exploration and Production We engage in oil and gas exploration, development and production worldwide. The results of this segment are discussed under the geographical breakdown of North America and International: North America - Included in this category are the U.S. and Canada oil and gas operations. Second Quarter Results: After-tax earnings totaled $124 million in the second quarter of 2004 compared to $108 million for the same period a year ago, which was an increase of $16 million. Higher natural gas and liquids prices contributed $35 million in higher earnings in the second quarter of 2004 compared with the quarter a year ago. Lower amortization of exploratory leasehold costs in the second quarter of 2004 compared with the same period a year ago increased earnings by approximately $20 million. These positive factors were offset by lower natural gas and liquids production in the second quarter of 2004 compared with the same period a year ago, which reduced after-tax earnings by approximately $50 million. The current quarter results included a $23 million after-tax gain from the sale of certain of our exploratory mineral fee lands in the United States, while the second quarter of 2003 included a $20 million after-tax gain on the sale of our equity interest in Matador. Six Months Results: After-tax earnings totaled $249 million in the first six months of 2004 compared to $255 million for the same period a year ago, which was a decrease of $6 million. Lower natural gas and liquids production in the first six months of 2004 compared to the same period a year ago reduced after-tax earnings by approximately $115 million. This factor was partially offset by higher natural gas and liquids prices, which increased net earnings by approximately $55 million in the first six months of 2004 compared with the same period a year ago. In addition, exploration expenses and dry hole costs were lower in the first six months of 2004 compared with the same period a year ago, primarily due to lower amortization of exploratory leasehold costs and lower drilling activity, which increased net earnings by approximately $50 million. The first six months of 2004 also included the $23 million after-tax gain from the sale of certain of our exploratory mineral fee lands in the United States and a $15 million litigation settlement related to a previous asset sale. The six months results of 2003 included the $20 million after-tax gain on the sale of our equity interest in Matador. International - Our International operations encompass oil and gas exploration and production activities outside of North America. Through our International subsidiaries, we operate or participate in production operations in Thailand, Indonesia, Myanmar, Bangladesh, the Netherlands, Azerbaijan, the Democratic Republic of Congo and Brazil. Second Quarter Results: After-tax earnings totaled $166 million in the second quarter of 2004 compared to $145 million in the second quarter of 2003. The increase was primarily due to higher liquids and natural gas prices, which increased net earnings by approximately $40 million and $10 million, respectively. These positive factors were partially offset by lower natural gas production principally from Myanmar and Indonesia, which reduced after-tax earnings by about $15 million. Higher dry hole costs reduced net earnings by approximately $15 million, primarily from Indonesia and Thailand. Six Months Results: After-tax earnings totaled $341 million in the first six months of 2004 compared to $287 million in the first six months of 2003. The increase was primarily due to higher liquids and natural gas prices, which increased net earnings by approximately $45 million and $25 million, respectively. Higher liquids production benefited the 2004 results by adding approximately $30 million to net earnings and was primarily due to the West Seno production in Indonesia. These positive factors were partially offset by lower natural gas production from Myanmar and Indonesia, which reduced after-tax earnings by approximately $25 million. Higher dry hole costs reduced net earnings by approximately $10 million, primarily from Indonesia and Thailand. -37- Midstream and Marketing The Midstream and Marketing segment is comprised of our equity interests in certain petroleum pipeline companies, wholly-owned pipelines and terminals throughout the U.S., our North America gas storage business and the organization that markets the majority of our worldwide liquids production and North American natural gas production. In addition, the marketing organization conducts our trading activities involving hydrocarbon derivative instruments, for which hedge accounting is not used, to exploit anticipated opportunities arising from commodity price fluctuations. The marketing organization also purchases limited amounts of physical inventories for energy trading purposes when arbitrage opportunities arise. These commodity risk-management and trading activities are subject to internal restrictions, including value at risk limits, which measure our potential loss from likely changes in market prices. Second Quarter Results: Earnings from continuing operations totaled $18 million in the current quarter compared to $21 million in the second quarter of 2003. The results for the second quarter of 2004 reflect lower earnings from our North American gas storage business and lower results from our pipeline business. The segment's sales and operating revenues were $1.01 billion in the current quarter compared to $869 million in the same quarter a year ago. Included in these totals were sales from marketing activities totaling $851 million in the current quarter compared to $738 million in the same quarter a year ago, representing approximately 44 percent and 47 percent of our total sales and operating revenues for the second quarters of 2004 and 2003, respectively. The increase in sales from marketing activities was primarily due to higher international and domestic crude oil revenues, which was partially offset by lower domestic natural gas revenues attributable mainly to property sales in 2003. Six Months Results: Earnings from continuing operations totaled $41 million in the first six months of 2004 compared to $30 million in the same period a year ago. The higher 2004 results reflect gains from crude oil and natural gas trading activities, which were positively impacted by volatile commodity prices. This was partially offset by lower earnings from our North American gas storage business. The segment's sales and operating revenues were $2.0 billion in the first six months of 2004 compared to $1.93 billion in the same period a year ago. Included in these totals were sales from marketing activities totaling $1.68 billion in the current six month period compared to $1.66 billion in the same period a year ago, representing approximately 45 percent and 50 percent of our total sales and operating revenues for the 2004 and 2003 periods, respectively. The increase in sales from marketing activities was primarily due to higher international and domestic crude oil revenues, which was mostly offset by lower domestic natural gas revenues attributable mainly to property sales in 2003. Geothermal The Geothermal segment includes geothermal steam production for power generation, with operations in the Philippines and Indonesia. Geothermal activities also include the operation of geothermal steam-fired power plants in Indonesia and equity interests in gas-fired power plants in Thailand. Second Quarter Results: Earnings from continuing operations totaled $57 million in the current quarter compared to $7 million in the same period a year ago. The current quarter results included a $46 million gain from the settlement of the outstanding contract dispute in our Philippines operations (see "PGI Settlement" below for further detail). The remaining increase was primarily due to improved results from our operations at Gunung Salak on the island of Java, Indonesia. The second quarter of 2003 reflects lost generation and additional repair costs associated with damage caused by landslides at Gunung Salak. Six Months Results: Earnings from continuing operations totaled $94 million in the first six months of 2004 compared to $19 million in the same period a year ago. The 2004 results included the $46 million after-tax gain from the settlement of the outstanding contract dispute in our Philippines operations and the $21 million after-tax gain from the sale of our rights and interests in the Sarulla geothermal project on the island of Sumatra, Indonesia. The remaining increase was primarily due to improved results from our operations at Gunung Salak. The prior year's results reflect lost generation and additional repair costs associated with damage caused by landslides at Gunung Salak. PGI Settlement: Our Philippines Geothermal, Inc. ("PGI") subsidiary obtained in June 2004 final Philippine government and court approvals of a settlement for past contractual issues covering the ongoing operations of the steam -38- resources at Tiwi and Mak-Ban on the island of Luzon. In July, PGI received the majority of all outstanding amounts owed by National Power Corporation and Power Sector Assets and Liabilities Management Corporation. Corporate and Other Corporate and Other includes general corporate overhead, miscellaneous operations (including real estate, carbon and mineral businesses), other corporate unallocated costs (including environmental and litigation expenses) and net interest expense. Second Quarter Results: The results for the current quarter were a loss of $83 million compared to a loss of $116 million in the same period a year ago. After-tax expenses for environmental and litigation matters for the current quarter were $15 million compared to $29 million in the same period a year ago. In the second quarter of 2004, we recorded a provision of $46 million pre-tax ($29 million after-tax) associated with the arbitration ruling regarding Agrium's Kenai, Alaska nitrogen-based fertilizer plant, and our obligations to supply natural gas to the plant. We also recorded a net tax benefit of $27 million for settlements and assessments with various taxing authorities. The current quarter benefited from a $1 million after-tax benefit from an adjustment to the 2003 company-wide restructuring plan, while the prior year quarter included a $17 million restructuring charge (see note 5 to the consolidated financial statements in Item 1 of this report). Six Months Results: The results for the first six months of 2004 were a loss of $177 million compared to a loss of $212 million in the same period a year ago. After-tax expenses for environmental and litigation matters for the six months of 2004 were $35 million compared to $46 million after-tax for the same period a year ago. In the six month period of 2004, we recorded the aforementioned provision of $29 million after-tax associated with the arbitration ruling regarding Agrium's Kenai, Alaska nitrogen-based fertilizer plant and the net tax benefit of $27 million for settlements and assessments with various taxing authorities. The first six months of 2004 included the $1 million after-tax benefit from the adjustment to the 2003 company-wide restructuring, which was originally recorded as a $17 million restructuring charge in the second quarter of 2003. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents on hand totaled $939 million at June 30, 2004, up from $404 million at the end of 2003. Based on current commodity prices and current development projects, we expect cash generated from operating activities, asset sales and cash on hand in 2004 to be sufficient for the remainder of 2004 to cover our operating and capital spending requirements and to make expected dividend payments and to pay down debt. In addition, we believe that our available borrowing capacity is sufficient to enable us to meet any unanticipated cash requirements if needed. As of the date of this report, there are no material restrictions imposed by contracts or credit agreements that would limit the movement of cash between Unocal and its consolidated subsidiaries, equity investees or variable interest entities (including restrictions on the payment of dividends or distributions) or otherwise have a material impact on liquidity. As announced on July 28, 2004, a program to spend up to $511 million in cash on hand began in the third quarter of 2004. We have already made a $100 million contribution to our U.S. pension plan on July 29, 2004. The remaining program, if completed in full, would also consist of (a) repurchasing up to $150 million of Unocal common stock from our previously announced and authorized $200 million repurchase program (of which only approximately $11 million has been expended to date) and (b) the redemption or other repurchase of up to 50 percent of the aggregate liquidation value of the outstanding 6-1/4% Trust Convertible Preferred Securities of the Trust (approximately $261 million). Cash Flows from Operating Activities Cash flows from operating activities, including working capital and other changes, were $1.13 billion for the first six months ended June 30, 2004, compared with $1.09 billion for the same period a year ago. The increase principally reflected the effects of higher worldwide commodity prices. The positive impact from higher prices was partially offset by the negative impact from lower North America production, compared to the same period a year ago. Changes in working capital during the first six months of 2004 reflect the receipt of $35 million relating to a federal income tax refund related to estimated payments for the 2003 tax year, the receipt of payment from the Indonesian government in -39- settlement of disputed value added taxes we paid in prior years and the reduction in receivables from joint venture partners in the U.S. as a result of asset sales in 2003. Asset Sales Pre-tax proceeds from asset sales relating to continuing and discontinued operations were $278 million for the six months ended June 30, 2004. The current year included net proceeds of $176 million from the sale of certain of our mineral fee lands in the United States, $60 million from the sale of our rights and interests in the Sarulla geothermal project in Indonesia and $19 million from the sale of the Cal Ven Pipeline system in Canada. We also received approximately another $23 million from the sale of various properties, primarily in the Gulf of Mexico. Pre-tax proceeds from asset sales were $191 million for the six months ended June 30, 2003. We received $80 million from the 2003 sale of our equity interest in Matador. We also completed the sale of various properties in Canada, onshore U.S. and the Gulf of Mexico in the first half of 2003, which netted us approximately $105 million in proceeds. Capital Expenditures and Other Investing Activities Capital expenditures were $801 million for the first six months of 2004 compared with $917 million in the same period a year ago. This year's expenditures level primarily reflects lower development capital requirements in the Gulf of Mexico deepwater. Last year, capital expenditures in our Midstream and Marketing segment included the BTC pipeline project expenditures prior to its financing by the BTC Pipeline Company. In the first six months of 2004, capital expenditures included approximately $335 million for the development of undeveloped proved oil and gas reserves, primarily in Indonesia, Azerbaijan, Thailand and the deepwater Gulf of Mexico. In the first six months of 2004, cash flows from investing activities included $52 million representing a return of capital from the completion of the BTC financing which closed in February 2004. The BTC Pipeline Company is financing up to 70 percent of the pipeline's cost. We have an 8.9 percent equity interest in the pipeline company. Long-term Debt During the first six months of 2004, we retired $173 million in 6.375% notes and paid down $20 million of medium-term notes that matured during the second quarter of 2004. In addition, we retired the remaining $24 million limited recourse loan balance under the AIOC Early Oil Project in the second quarter of 2004. We also made a $15 million principal payment on the variable rate portion of the Overseas Private Investment Corporation ("OPIC") Financing Agreement for the West Seno project in Indonesia, which is scheduled to mature in June 2009. These decreases were partially offset by $40 million in new borrowing relating to Phase 1 development of the Azeri-Chirag-Gunashli structure in the Azerbaijan sector of the Caspian Sea, scheduled for repayment semiannually from June 2006 through December 2015 and $95 million drawn under two new loans from the OPIC Financing Agreement, both limited recourse loans, for the first phase of the West Seno project in Indonesia. One loan was drawn for $50 million and the other was drawn for $45 million, and they each carried fixed rates that were 3.61% and 4.78%, respectively. Principal payments on the $50 million loan are scheduled semiannually from June 2005 to December 2007, and on the $45 million loan payments are scheduled from June 2005 to June 2008. Credit Facilities and Other Financing Sources We have two primary credit facilities in place: a $400 million 364-day credit agreement, which is due to terminate on September 30, 2004, and a $600 million credit agreement, which is due to terminate on October 31, 2006. No borrowings were outstanding under either facility at June 30, 2004. Our ability to borrow under these facilities is subject to the accuracy of certain representations and warranties and the absence of any events of default that we believe are customary for such facilities. The agreements provide for the termination of the 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 Unocal'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. The agreements do not have drawdown restrictions or prepayment obligations in the event of a credit rating downgrade. Both agreements limit our total debt to total capitalization ratio to 70 percent (total capitalization is defined as total debt plus total equity, with the convertible junior subordinated -40- debentures excluded from total debt and included as equity in the ratio calculation.) We are currently negotiating a $1 billion five-year credit facility to replace our existing $400 million and $600 million credit agreements. In addition, we also have a $295 million Canadian dollar-denominated non-revolving credit facility with a variable rate of interest due to terminate on December 19, 2005. At June 30, 2004, the borrowing under the Canadian credit facility translated to $223 million, using the applicable foreign exchange rate. In addition to our revolving credit facilities, we have historically relied on the commercial paper market and our accounts receivable securitization program to cover near-term borrowing requirements. At June 30, 2004, we had no outstanding balance under the accounts receivable securitization program. We also have in place a universal shelf registration statement as of June 30, 2004, with an unutilized balance of approximately $1.539 billion, which is available for the future issuance of other debt and/or equity securities depending on our needs and market conditions. From time to time, we may also look to fund some of our long-term projects using other financing sources, including multilateral and bilateral agencies. Credit Ratings Maintaining investment-grade credit ratings, that is "BBB- / Baa3" and above from Standard & Poor's Ratings Services and Moody's Investors Service, Inc., respectively, is a significant factor in our ability to raise short-term and long-term financing. As a result of our current investment grade ratings, we have access to both the commercial paper and bank loan markets. We currently have a BBB+ / Baa2 credit rating by Standard & Poor's and Moody's, respectively, and an A-2 / Prime-2 for our commercial paper ratings. Moody's and Standard & Poor's outlooks, as of the date of the filing of this report, remained stable for our long term debt and commercial paper ratings. We do not believe that we have a significant exposure to liquidity risk in the event of a credit rating downgrade. Off-Balance Sheet Arrangements We have a construction completion guarantee related to debt financing associated with our equity interest in the development of the BTC pipeline project. The maximum potential future payments under the guarantee are estimated to be $310 million. Extending guarantees to creditors allows the project to reduce its borrowing costs. We are not the primary beneficiary in this arrangement. See note 16 to the consolidated financial statements for a detailed discussion. ENVIRONMENTAL MATTERS We are committed to operating our business in a manner that is environmentally responsible. This commitment is fundamental to our core values. As part of this commitment, we have procedures in place to audit and monitor our environmental performance. In addition, we have implemented programs to identify and address environmental risks throughout our company. Costs associated with identified and reasonably estimable environmental obligations have been accrued in a reserve for such obligations. At June 30, 2004, our reserves for environmental remediation obligations totaled $249 million, of which $117 million was included in current liabilities. During the first six month period of 2004, cash payments of $39 million were applied against the reserves and $36 million in provisions were added to the reserves. We may also incur additional liabilities at sites where remediation liabilities are probable but future environmental costs are not presently reasonably estimable because the sites have not been assessed or the assessments have not advanced to stages where costs are reasonably estimable. At those sites where investigations or feasibility studies have advanced to the stage of analyzing feasible alternative remedies and/or ranges of costs, we estimate that we could incur possible additional remediation costs aggregating approximately $210 million. -41- The reserve amounts and estimated possible additional costs are grouped into the following four categories:
At June 30, 2004 ------------------------------------ Estimated Possible Millions of dollars Reserve Additional Costs - -------------------------------------------------------------------------------- Superfund and similar sites $ 16 $ 15 Active Company facilities 32 30 Company facilities sold with retained liabilities and former Company-operated sites 93 80 Inactive or closed Company facilities 108 85 - -------------------------------------------------------------------------------- Total $ 249 $ 210 ================================================================================
See notes 15 and 16 to the consolidated financial statements in Item 1 of this report for additional information on environmental related matters. During the first six months of 2004, provisions of $23 million were recorded for the "Company facilities sold with retained liabilities and former Company-operated sites" category. These provisions were primarily for approximately 200 sites where we had operated service stations, bulk plants or terminals. The provisions were based on new and revised cost estimates that were developed for these sites in the first six month of 2004. We recorded provisions of $8 million during the first six months of 2004 for the "Active Company facilities" category of sites. The provisions were primarily for the estimated additional costs of the remedial investigation and feasibility study (RI/FS) that is continuing at a molybdenum mine located in Questa, New Mexico, which is owned by the Company's Molycorp, Inc. ("Molycorp") subsidiary. The estimated additional costs are based on an evaluation that Molycorp performed in the second quarter of 2004 of the remaining work that will be required to complete the RI/FS. Molycorp has been conducting the RI/FS cooperatively with the U.S. Environmental Protection Agency to determine what, if any, adverse impacts past mining operations may have had on the environment. We accrued $4 million related to sites in the "Inactive or closed Company facilities" category during the first six months of 2004 primarily for our former refinery in Beaumont, Texas. A provision was recorded for the updated cost estimates to close impoundments used in the former operations at this site. In the first six months of 2004, final design work and related detailed cost estimates to close these impoundments were completed. We also received final approval of a permit for these projects from the Texas Commission on Environmental Quality. In the first six months of 2004, estimated possible additional costs in excess of amounts included in the reserves for remediation obligations increased by $5 million. The increase was for sites in the "Company facilities sold with retained liabilities and former Company-operated sites" category. The higher costs were primarily for a former oil field in Michigan and for former service station sites at various locations. Estimated possible additional costs for the former Michigan oil field were increased for the cost of assessments and remediation that may need to be performed on certain areas within the site that may have been contaminated by the former oil field operation. These costs are based on an evaluation being performed at the site in 2004. Higher possible additional costs for the former service station sites are based on new and revised estimates of the upper end of remediation costs ranges that were developed during the first six months of 2004. -42- OPERATIONS OUTLOOK The following operations outlook is based upon our current expectations and beliefs. These statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Please see the cautionary statement under "Forward-Looking Statements" on page iii of this report. We expect energy prices to remain volatile due to a variety of fundamental and market perception factors including variability of the weather on a year-to-year basis, worldwide demand, crude oil and natural gas inventory levels, production quotas set by OPEC, current and future worldwide political instability, especially events concerning Iraq, worldwide security and other factors. We have secured fixed price "hedges" to seek to mitigate some of that volatility, primarily relating to a portion of our 2004 and 2005 North America natural gas and crude oil production. We believe the economic situation in Asia, where most of our international activity is centered, is becoming more positive. We look at the natural gas market in Asia as one of our major strategic investments. Our current outlook for full-year 2004 production is about 400,000 BOE per day using a more conservative methodology than the prior estimate of 425,000 BOE per day. The new outlook includes lower volumes due to dispositions of producing assets in the United States and Brazil (4,000 BOE per day) and the impact of higher prices on PSCs (3,000 BOE per day). The new outlook also reflects infrastructure turnarounds and reduced performance at the West Seno field (8,000 BOE per day) plus other various factors (10,000 BOE per day). Our current outlook of important 2004 operational activities is as follows: Exploration and Production - North America United States o Two new deep water Gulf of Mexico developments are moving toward completion in 2004. The Mad Dog field (operated by BP p.l.c. "BP") is expected to come on stream in the second quarter of 2005. The K-2 field (operated by BP) is expected to come on stream late in the first quarter of 2005 or early in the second quarter of 2005. The estimate of initial net production is about 2,000 to 3,000 BOE/d from each field. We have a 15.6 percent working interest in Mad Dog and a 12.5 percent working interest in K-2. o In July, the first appraisal well on the deep water Gulf of Mexico St. Malo discovery was completed on Walker Ridge Block 678. The well encountered more than 400 net feet of oil pay at depths greater than were encountered in the 2003 discovery well. We are currently evaluating the extensive test data conducted on the well. The evaluation will focus on productivity, additional appraisal operations and the viability of development options. We have a 28.75 percent working interest in the St. Malo discovery. o We are currently drilling a deeper zone test on the Sardinia prospect on Keathley Canyon Block 681. Following Sardinia, we expect to drill a deeper zone test called the Sequoia prospect below our Mirage discovery. Other deep water Gulf of Mexico drilling activities expected include follow-up wells on our Puma discovery and a deep test under the Mad Dog structure operated by BP. o In Alaska, first production from our Happy Valley discovery is planned for late 2004 upon completion of an extension of the Kenai Kachemak Pipeline. Other natural gas prospects in the southern Kenai Peninsula are targeted for exploration. -43- Exploration and Production - International Asia Thailand: o Thailand's electricity market continues to grow at approximately 8 percent per annum. Additional supplies of natural gas to meet that growth have been constrained by pipeline capacity. Recent de-bottlenecking activities on the two existing pipelines in the Gulf of Thailand should allow us an opportunity for increased production in 2004 and 2005, prior to the expected completion of the third pipeline in 2006. o Phase 2 development of the Pattani oil project is now underway. Upon expected completion late in the second quarter of 2005 or early in the third quarter of 2005, this project would add initially 7,000 BOE/d net and is expected to rise to about 15,000 BOE/d by the end of 2005. o We anticipate signing final agreements in 2004 or 2005 to extend our existing natural gas sales agreements and expand contract quantities by 15 percent by 2006, and another 50 percent by 2010-2012. o The Arthit field's natural gas sales agreement has been signed and development work is expected during 2004 with first production anticipated in 2006. Indonesia: o At the West Seno field, we expect to complete Phase 1 drilling activities by the end of 2004. In the fourth quarter, we expect to have a two week shut down to make repairs to processing equipment. There are currently 20 wells completed and gross production averaged 24,000 BOE/d in June. By the end of the year, 26 to 28 wells are expected to be on-line with an expected gross exit rate of between 25,000 and 35,000 BOE/d. Bids were recently opened for Phase 2 development, including offshore installation and tension leg platform fabrication. We believe that the bid results were unacceptably high. Accordingly, cost reduction options are being considered, and the construction period will extend beyond 2005. o We are continuing to work on solidifying our development plans for the first deep water natural gas development project. Development will likely be around two major hubs. First production is expected in late 2007 from the Gendalo field where eight appraisal wells have been drilled to date. The second development project is expected to be the Ranggas-Gehem oil and gas complex where first production could come on-line in 2008. o We expect exploration and appraisal drilling to continue in 2004 in the deep water Kutei Basin. This drilling activity will test new areas in recently awarded PSCs in the deep water. Vietnam: o We have recently signed a Heads of Agreement with PetroVietnam for natural gas development. We fulfilled our drilling commitments in the second quarter of 2004 and are continuing to work to bring Vietnam gas to market between 2008 and 2010. China: o The evaluation of our PSC areas in the Xihu Trough off the coast of Shanghai is in the process of being completed. Once the evaluation is complete, we will make a determination whether we will participate in the development program currently underway. -44- Bangladesh: o Facility construction and development drilling on the Moulavi Bazar field is progressing. First production from Moulavi Bazar is expected late in the first quarter of 2005 or early in the second quarter of 2005. As a result of the commencement of this new field, our net production is expected to increase by 15,000 to 25,000 BOE/d over the remainder of 2005. o We are currently negotiating for a third natural gas sales agreement in Bangladesh covering the Bibiyana field. We expect to conclude negotiations before year-end 2004. The Bibiyana field is capable of being developed in stages, which could provide Bangladesh with natural gas resources in the short, medium and long-term time frames. Other International Azerbaijan: o Progress continues in 2004 on the development of the BP operated AIOC project. AIOC participant companies are reviewing Phase 3 and we expect sanctioning of Phase 3 by year-end 2004. Phase 3, which is the deepwater portion of the project, is the final phase of full field development. Gross production is expected to ramp up to more than 200 MBbl/d in 2005, rising to 700 MBbl/d in 2007 and over 1 million Bbl/d by 2009. We have a 10.28 percent working interest. In 2005, we expect additional net production from Phase 1 development to begin in the second quarter at around 6,000 BOE/d and end the year around 18,000 BOE/d. Brazil: o In July, we sold our 50 percent equity interest in a jointly held project company that owns UnoPaso Exploracao e Producao de Petroleo e Gas Ltda., a Brazilian exploration and production venture for $67 million plus possible future payments. The underlying assets sold represent net production of approximately 4.5 MBOE/d and represent our remaining oil and natural gas assets in Brazil. We expect to record an after-tax gain of $1 million in the third quarter of 2004. Midstream and Marketing In parallel with the AIOC field development work in Azerbaijan, the BTC pipeline is expected to be fully operational in the second half of 2005. The portions of the pipeline through Azerbaijan and Georgia are expected to be complete and ready for line-fill in the first quarter of 2005. The BTC pipeline will transport the crude oil from the AIOC field to the Turkish port of Ceyhan and will have a capacity of 1 million Bbl/d. Our interest in this pipeline is 8.9 percent. Corporate and Other On July 29, 2004, we made a voluntary pre-tax contribution of $100 million to our U.S. Qualified Retirement Plan. As a result of this contribution, we expect that the minimum pension liability for this plan at December 31, 2004, will be considerably reduced from the $91 million recorded at year-end 2003. In addition, we expect that mandated employer contributions to the plan will not be payable until 2009. However, less than expected future returns on plan assets or a decrease in the discount rate would impact the reduction in minimum pension liability and could accelerate the requirement to make cash contributions to the plan before 2009. FUTURE ACCOUNTING CHANGES See note 2 to the consolidated financial statements for information about recent accounting pronouncements. -45- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed to market risks, which may give rise to losses from adverse changes in market prices and rates. The primary market risks to which we are exposed are: (1) commodity prices, (2) interest rates and (3) foreign currency exchange rates. Market risk generally represents the risk that losses may occur in the values of financial instruments as a result of changes in interest rates, foreign currency exchange rates and commodity prices. As part of our overall risk management strategies, we use derivative financial instruments to manage and seek to reduce risks associated with these factors. We also trade hydrocarbon derivative instruments, such as futures contracts, swaps and options to exploit anticipated opportunities arising from commodity price fluctuations. To the extent that we engage in hedging activities to seek to protect ourselves from commodity price volatility, we may be prevented from realizing the benefits of price increases above the levels of the hedges. In addition, speculative trading in hydrocarbon commodities and derivative instruments in connection with our risk management activities subjects us to additional risk. We determine the fair values of our derivative financial instruments primarily based upon market quotes of exchange traded instruments. Most futures and options contracts are valued based upon direct exchange quotes or industry published price indices. Some instruments with longer maturity periods require financial modeling to accommodate calculations beyond the horizons of available exchange quotes. These models calculate values for outer periods using current exchange quotes (i.e., forward curve) and assumptions regarding interest rates, commodity and interest rate volatility and, in some cases, foreign currency exchange rates. While we feel that current exchange quotes and assumptions regarding interest rates and volatilities are appropriate factors to measure the fair value of our longer termed derivative instruments, other pricing assumptions or methodologies may lead to materially different results in some instances. Commodity Price Risk - We are a producer, purchaser, marketer and trader of certain hydrocarbon commodities such as crude oil and condensate, natural gas and refined products and are subject to the associated price risks. We use hydrocarbon price-sensitive derivative instruments ("hydrocarbon derivatives"), such as futures contracts, swaps, collars and options to mitigate our overall exposure to fluctuations in hydrocarbon commodity prices. We may also enter into hydrocarbon derivatives to hedge contractual delivery commitments and future crude oil and natural gas production against price exposure. We also actively trade hydrocarbon derivatives, primarily exchange regulated futures and options contracts, subject to internal policy limitations. We use a variance-covariance value at risk model to assess the market risk of our hydrocarbon derivatives. Value at risk represents the potential loss in fair value we would experience on our hydrocarbon derivatives, using calculated volatilities and correlations over a specified time period with a given confidence level. Our risk model is based upon current market data and uses a three-day time interval with a 97.5 percent confidence level. The model includes offsetting physical positions for any existing hydrocarbon derivatives related to our fixed price pre-paid crude oil and pre-paid natural gas sales. The model also includes our net interests in our subsidiaries' crude oil and natural gas hydrocarbon derivatives and forward sales contracts. Based upon our risk model, the value at risk related to hydrocarbon derivatives held for hedging purposes was approximately $22 million at June 30, 2004. The value at risk related to hydrocarbon derivatives held for non-hedging purposes was immaterial at June 30, 2004. See "Hydrocarbon Derivatives Tables." Interest Rate Risk - From time to time, we temporarily invest our excess cash in short-term interest-bearing securities issued by high-quality issuers. Our 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 us. Our primary market risk exposure to changes in interest rates relates to our long-term debt obligations. We manage our exposure to changing interest rates principally with 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. We evaluated the potential effect that near term changes in interest rates would have had on the fair value of our interest rate risk sensitive financial instruments at June 30, 2004. Assuming a ten percent decrease in our weighted average borrowing costs at June 30, 2004, the potential increase in the fair value of our debt obligations and associated interest -46- rate derivative instruments, including the debt obligations and associated interest rate derivative instruments of our subsidiaries, would have been approximately $93 million at June 30, 2004. Foreign Exchange Rate Risk - We conduct business in various parts of the world and in various foreign currencies. To limit our foreign currency exchange rate risk related to operating income, foreign sales agreements generally contain price provisions designed to insulate our 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, we are 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. Our Canadian subsidiaries are paid in Canadian dollars for their crude oil and natural gas sales and have outstanding Canadian-dollar denominated debt. From time to time, we may purchase foreign currency options or enter into foreign currency swap or foreign currency forward contracts to limit the exposure related to our foreign currency debt or other obligations. At June 30, 2004, we had various foreign currency forward contracts outstanding related to operations in Thailand and the Netherlands. We evaluated the effect that near term changes in foreign exchange rates would have had on the fair value of our combined foreign currency position related to our outstanding foreign currency swaps, forward contracts and foreign-currency denominated debt. Assuming an adverse change of ten percent in foreign exchange rates at June 30, 2004, the potential decrease in fair value of the foreign currency swaps, foreign currency forward contracts and foreign-currency denominated debt for us would have been approximately $30 million at June 30, 2004. Hydrocarbon Derivatives Tables - The following tables set forth the future volumes and price ranges of hydrocarbon derivatives we held at June 30, 2004, along with the fair values of those instruments. -47-
Open Hydrocarbon Hedging Derivative Instruments (a) (Thousands of dollars) 2004 2005 2006 2007-2008 Fair Value Asset (Liability) (b)(c) - ----------------------------------------------------------------------------------------------------------------------------------- Natural Gas Futures Positions Volume (MMBtu) 1,220,000 30,000 - - $ 1,996 Average price, per MMBtu $ 4.59 $ 5.01 Volume (MMBtu) (3,490,000) $ (397) Average price, per MMBtu $ 6.22 - ----------------------------------------------------------------------------------------------------------------------------------- Natural Gas Swap Positions Pay fixed price Volume (MMBtu) 9,096,000 11,393,000 7,218,000 14,459,000 $ 110,604 Average swap price, per MMBtu $ 3.85 $ 3.45 $ 2.42 $ 2.50 Receive fixed price Volume (MMBtu) 38,240,000 3,650,000 - - $ (26,138) Average swap price, per MMBtu $ 5.73 $ 6.31 - ----------------------------------------------------------------------------------------------------------------------------------- Natural Gas Basis Swap Positions Volume (MMBtu) 710,000 - - - $ 63 Average price received, per MMBtu $ 5.70 Average price paid, per MMBtu $ 5.69 - ----------------------------------------------------------------------------------------------------------------------------------- Crude Oil Future position Volume (Bbls) (2,020,000) - - - $ (4,630) Average price, per Bbl $ 36.39 - ----------------------------------------------------------------------------------------------------------------------------------- Crude Oil Collar Positions Volume (Bbls) 360,000 - - - $ (4,074) Average ceiling price, per Bbl $ 28.40 Average floor price, per Bbl $ 24.00 =================================================================================================================================== (a) Futures positions reflect long (short) volumes. (b) Net claims against counterparties with non-investment grade credit ratings are immaterial. (c) Includes $1,878 thousand in assumed liabilities which were capitalized as acquisition costs.
-48-
Open Hydrocarbon Non-Hedging Derivative Instruments (a) (Thousands of dollars) 2004 2005 2006 Fair Value Asset (Liability) (b) - ---------------------------------------------------------------- --------------- -------------- ------------------------------------ Natural Gas Futures Positions Volume (MMBtu) - - - $ - Average price, per MMBtu $ - Volume (MMBtu) (940,000) - - $ (1,333) Average price, per MMBtu $ 5.64 - ------------------------------------------------------------------------------------------------------------------------------------ Natural Gas Swap Positions Pay fixed price Volume (MMBtu) 6,202,500 1,400,000 - $ 6,413 Average swap price, per MMBtu $ 5.42 $ 5.92 Receive fixed price Volume (MMBtu) 5,455,988 1,400,000 - $ (6,862) Average swap price, per MMBtu $ 5.29 $ 5.90 - ------------------------------------------------------------------------------------------------------------------------------------ Natural Gas Spread Swap Positions Volume (MMBtu) 19,735,000 21,930,000 1,800,000 $ 1,741 Average price paid, per MMBtu $ 0.50 $ 0.73 $ 1.08 Volume (MMBtu) 20,500,000 20,710,000 - $ (1,536) Average price received, per MMBtu $ 0.51 $ 0.71 - ------------------------------------------------------------------------------------------------------------------------------------ Natural Gas Option (Listed & OTC) Call Volume -Buy-(MMBtu) 1,000,000 - - $ (614) Average Call price $ 6.75 Call Volume -Sell-(MMBtu) 2,000,000 - - $ 558 Average Call price $ 6.65 Put Volume -Buy-(MMBtu) 3,340,000 - - $ (1,097) Average Put Price $ 4.71 Put Volume -Sell-(MMBtu) 6,360,000 - - $ 69 Average Put Price $ 5.24 - ------------------------------------------------------------------------------------------------------------------------------------ Natural Gas Spread Option (Over the Counter) NYMEX / IFERC (c) Call Volume (MMBtu) - $ - Average Strike price $ - Put Volume (MMBtu) - 1,000,000 $ 628 Average Strike price $ - $ 0.50 - ------------------------------------------------------------------------------------------------------------------------------------ Crude Oil Future position Volume (Bbls) 3,410,000 200,000 - $ 5,350 Average price, per Bbl $ 36.20 $ 29.92 Volume (Bbls) (3,210,000) (400,000) - $ (7,742) Average price, per Bbl $ 36.11 $ 30.45 - ------------------------------------------------------------------------------------------------------------------------------------ Crude Oil Option (Listed & OTC) Call Volumes -Buy-(Bbls) 400,000 - - $ (57) Average price, per Bbl $ 44.25 Call Volumes -Sell-(Bbls) 500,000 - - $ 330 Average price, per Bbl $ 45.10 Put Volume -Buy-(Bbls) 200,000 - - $ (12) Average price, per Bbl $ 36.00 Put Volume -Sell-(Bbls) 660,000 - - $ 563 Average price, per Bbl $ 27.27 - ------------------------------------------------------------------------------------------------------------------------------------ Crude Oil Swap Positions Pay fixed price Volume (Bbls) 6,086,304 915,920 38,640 $ 39,746 Average swap price, per Bbl $ 33.10 $ 27.61 $ 29.35 Receive fixed price Volume (Bbls) 5,781,324 1,217,044 37,496 $(38,375) Average swap price, per Bbl $ 33.10 $ 28.00 $ 27.28 ==================================================================================================================================== (a) Futures positions reflect long (short) volumes. (b) Includes $2,233 thousand net claims against counterparties with non-investment grade credit ratings. (c) Prices quoted from the New York Mercantile Exchange (NYMEX) and Inside FERC Gas Report (IFERC).
-49- ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is processed, recorded, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were effective. Internal Controls Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules thereunder will require us to include an internal control report with our 2004 Annual Report on Form 10-K. The internal control report must assert, among other things, (i) management's responsibilities to establish and maintain adequate internal control over financial reporting and (ii) management's assessment of the effectiveness of this internal control as of the end of the most recent fiscal year. Our independent registered public accounting firm will be required to audit, and report on, these assertions. Our management has formed a steering committee and adopted a detailed project work plan to assess the adequacy of our internal controls, remediate any control weaknesses that may be identified and validate through testing that controls are functioning as documented. There was no change in our internal control over financial reporting that occurred during the three months ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We may make changes in our internal control processes from time to time in the future. -50- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. See the information with respect to certain legal proceedings pending or threatened against Unocal previously reported in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2003, as amended, and in Item 1 of Part II of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004. The following is incorporated by reference: the information regarding the environmental remediation reserve and possible additional remediation costs in notes 15 and 16 to the consolidated financial statements in Item 1 of Part I of this report; the discussion of such amounts in the Environmental Matters section of Management's Discussion and Analysis in Item 2 of Part I; and the information regarding certain litigation and claims, tax matters and other contingent liabilities in note 16 to the consolidated financial statements. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES. The following table shows information regarding repurchases we made of our shares of common stock during the second quarter of 2004:
- ---------------------------------------------------------------------------------------------------------------------------- Total Number of Shares Total Purchased as Number of Part of Publicly Maximum Dollar Value of Shares Average Announced Shares That May Yet Be Purchased Price Paid Plans or Purchased Under the Period (1) per share Programs Plans or Progrmas (2) - ---------------------------------------------------------------------------------------------------------------------------- April 1 through April 30, 2004 28,324 $37.78 None $189,000,000 - ---------------------------------------------------------------------------------------------------------------------------- May 1 through May 31, 2004 30,706 $35.98 None $189,000,000 - ---------------------------------------------------------------------------------------------------------------------------- June 1 through June 30, 2004 49,469 $36.21 None $189,000,000 - ---------------------------------------------------------------------------------------------------------------------------- Total 108,499 $36.55 None $189,000,000 - ----------------------------------------------------------------------------------------------------------------------------
1. During the second quarter, we cancelled 13,662 shares repurchased for the payment of withholding taxes due on restricted stock that vested under various employee restricted stock plans. During the second quarter, we purchased 94,837 shares in the open market and distributed these shares to employee participants in Unocal's savings plans, which are defined contribution plans with 401(k) features. 2. In December 1996, the Board of Directors authorized the repurchase of $400 million of our common stock. In January 1998, the Board extended the stock repurchase program, increasing the authorized amount by $200 million. There is no expiration date to the repurchase program. A balance of approximately $189 million remains for additional purchases. We expect to complete our previously announced buyback program for up to $150 million of this $189 million balance by the end of 2004. -51- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Our 2004 annual meeting of stockholders was held on May 24, 2004. The following actions were taken by our stockholders at the annual meeting, for which proxies were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934: 1. The three nominees proposed by our board of directors were elected as directors by the following votes for three-year terms expiring at the 2007 annual meeting of stockholders, or until their successors are duly elected and qualified: Name Votes For Votes Withheld Richard D. McCormick 235,792,241 3,373,105 Marina v.N. Whitman 234,355,351 4,809,995 Charles R. Williamson 231,857,993 7,307,353 2. A proposal to ratify the appointment of PricewaterhouseCoopers LLP as Unocal's independent auditors for 2004 was passed by a vote of 234,111,927 (97.89%) for versus 3,424,384 (1.43%) against and 1,629,035 (0.68%) abstentions. 3. A proposal to approve the 2004 Management Incentive Program was passed by a vote of 177,490,814 (81.82%) for versus 36,985,863 (17.05%) against and 2,456,313 (1.13%) abstentions. There were 22,232,357 broker non-votes. 4. A proposal to approve the 2004 Directors' Deferred Compensation and Restricted Stock Unit Award Plan was passed by a vote of 201,235,643 (92.76%) for versus 13,196,432 (6.09%) against and 2,500,913 (1.15%) abstentions. There were 22,232,359 broker non-votes. 5. A stockholder proposal requiring the Chairman of the Board not to serve concurrently as the Chief Executive Officer was withdrawn by the proponent and no vote was taken on that item. 6. A stockholder proposal to request the board of directors' compensation committee to utilize performance and time-based restricted share programs in lieu of stock options failed to pass, with a vote of 12,123,022 (5.59%) for versus 202,053,473 (93.14%) against and 2,756,492 (1.27%) abstentions. There were 22,232,360 broker non-votes. 7. A stockholder proposal to establish an office of the board of directors for communications on corporate governance matters failed to pass, with a vote of 44,257,798 (20.40%) for versus 169,139,423 (77.97%) against and 3,535,768 (1.63%) abstentions. There were 22,232,358 broker non-votes. 8. A stockholder proposal to request the board of directors to produce a report to the stockholders on how Unocal is responding to rising regulatory, competitive, and public pressure to significantly reduce carbon dioxide and other greenhouse gas emissions failed to pass, with a vote of 13,458,481 (6.20%) for versus 186,490,209 (85.97%) against and 16,984,300 (7.83%) abstentions. There were 22,232,356 broker non-votes. ITEM 5. OTHER INFORMATION. On July 21, 2004, we announced the hiring of Joseph H. Bryant as Unocal's president and chief operating officer, effective September 1, 2004. Mr. Bryant comes to Unocal with more than 27 years of experience in the industry, both domestic and international. Since 2000, Mr. Bryant has been president of BP Angola, one of BP's largest exploration and development operations. From 1997-2000, Mr. Bryant was president, Amoco Canada, and subsequently was named president, BP Canada. -52- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: The Exhibit Index on page 54 of this report lists the exhibits that are filed or furnished, as applicable, as part of this report. (b) Reports on Form 8-K filed or furnished during the second quarter of 2004: (1) Current Report on Form 8-K, dated and furnished April 28, 2004, for the purpose of reporting, under Items 9 and 12, our first quarter 2004 earnings and related information. (2) Current Report on Form 8-K, dated and filed May 25, 2004, for the purpose of reporting under Items 5 and 7, the final voting results from our 2004 annual meeting of stockholders. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNOCAL CORPORATION (Registrant) Dated: August 5, 2004 By: /s/JOE D. CECIL ------------------------------ Joe D. Cecil Vice President and Comptroller (Duly Authorized Officer and Principal Accounting Officer) -53- EXHIBIT INDEX 3. Bylaws of Unocal, as amended through May 24, 2004 and currently in effect (incorporated by reference to Exhibit 4.2 to Unocal's Registration Statement on Form S-8 filed June 7, 2004, File No. 333-116238). 10.1 2004 Directors' Deferred Compensation and Restricted Stock Unit Award Plan (amended and restated effective as of May 24, 2004). 10.2 2004 Management Incentive Program (amended and restated effective as of July 28, 2004). 10.3 Employment Agreement, effective as of July 20, 2004, by and between Unocal and Joseph H. Bryant. 12.1 Statement regarding computation of ratio of earnings to fixed charges of Unocal Corporation for the six months ended June 30, 2004 and 2003. 12.2 Statement regarding computation of ratio of earnings to fixed charges of Union Oil Company of California for the six months ended June 30, 2004 and 2003. 31.1 Chief Executive Officer certifications pursuant to Exchange Act Rule 13a-14(a). 31.2 Chief Financial Officer certifications pursuant to Exchange Act Rule 13a-14(a). 32 Furnished Certifications Pursuant to Exchange Act Rule 13a-14(b). Copies of exhibits will be furnished upon request. Requests should be addressed to the Corporate Secretary. -54- EX-10 2 q22004_ex101.txt EXHIBIT 10.1 - 04 DIRECTORS' DEF. COMP. Exhibit 10.1 UNOCAL CORPORATION 2004 DIRECTORS' DEFERRED COMPENSATION AND RESTRICTED STOCK UNIT AWARD PLAN (As Amended and Restated Effective as of May 24, 2004) 1. General Description..................................................1 2. Definitions..........................................................1 3. Effective Date; Duration.............................................4 4. Administration.......................................................4 5. Restricted Stock Units...............................................5 (a) Initial Awards..............................................5 (b) Annual Awards...............................................5 (c) Maximum Number of Shares; Individual Award Limits...........5 (d) Vesting Period..............................................6 (e) Acceleration of Vesting.....................................6 (f) Distribution Elections......................................6 6. Deferral Units.......................................................6 (a) Deferral of Regular Cash Compensation Into Deferral Units...6 (b) Vesting of Deferral Units...................................7 (c) Deferral Elections..........................................7 7. Dividend Equivalent Units............................................7 8. Restrictions, Distributions and Changes to Distributions; Payment of Units................................................................8 (a) Time and Manner of Distribution.............................8 (b) Change in Time of Distribution..............................9 (c) Early Distributions.........................................9 (d) Distributions for Unforeseeable Emergencies.................9 (e) Payment of Units............................................9 9. Shares Subject To The Plan; Share Limits............................10 (a) Shares Available for Issuance..............................10 (b) Share Limits; Cut Backs....................................10 (c) Fractional Shares; Minimum Issue...........................10 10. General.............................................................10 (a) Government and Other Regulations...........................10 (b) Tax Withholding............................................11 (c) Beneficiaries..............................................11 (d) Non-transferability........................................11 (e) Expenses...................................................11 -1- UNOCAL CORPORATION 2004 DIRECTORS' DEFERRED COMPENSATION AND RESTRICTED STOCK UNIT AWARD PLAN (As Amended and Restated Effective as of May 24, 2004) (f) Titles and headings........................................11 (g) Governing Law..............................................12 (h) Limitation on Participants' Rights; Unfunded Plan..........12 (i) Rights with Respect to Stock Units.........................12 (j) Restricted Stock Unit Agreements...........................12 (k) Plan Construction..........................................12 11. Changes in Capital Structure........................................12 12. Amendments and Termination..........................................13 13. Stockholder Approval................................................13 14. Transfer of Accounts from Former Plan...............................14 -2- UNOCAL CORPORATION 2004 DIRECTORS' DEFERRED COMPENSATION AND RESTRICTED STOCK UNIT AWARD PLAN (As Amended and Restated Effective as of May 24, 2004) 1. General Description. The Plan provides for annual grants of restricted stock units to non-employee directors. Non-employee directors may also elect to defer all or a portion of their annual cash compensation into stock units subject to certain conditions. The purpose of the Plan is to attract, motivate and retain experienced and knowledgeable directors by offering additional stock based compensation and incentives to defer and potentially enhance their compensation and to encourage stock ownership in the Company. 2. Definitions. The following definitions shall be applicable throughout the Plan: "Board" means the Board of Directors of the Company. "Change in Control" means the occurrence of 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 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 in 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 entity controlled by the Company or (iv) any acquisition by any entity pursuant to a transaction which satisfied conditions (i), (ii) and (iii) of clause (c) below. (b) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company's stockholders, 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, except that, 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 -1- threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be considered a member of the Incumbent 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 entity (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 entity resulting from such Business Combination, including, without limitation, an entity 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 (the "Resulting Entity") 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 Resulting Entity from such Business Combination or any employee benefit plan (or related trust) of the Company or such Resulting Entity from such Business Combination) will beneficially own, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the entity resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such entity except to the extent that such ownership level existed (with respect to the Company or Resulting Entity) prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the Resulting Entity 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 stockholders of the Company of a complete liquidation or dissolution of the Company other than in the context of a Business Combination. Notwithstanding the foregoing, the Board may deem "consummation of" an event to include a period of time immediately prior to or contemporaneous with the event to enable the Participant to realize the benefits of the Stock Units with respect to the underlying shares in the same manner as available to common stockholders generally as a result of the event, but subject to the occurrence of a Change in Control. For purposes of clause (c), "entity" means any corporation, limited liability company, partnership or any other statutorily recognized business organization or entity that is similar to a statutory corporation and that can be merged into or combined with a statutory corporation. "Code" means the Internal Revenue Code of 1986, as amended. -2- "Committee" means the Board Governance Committee or any other committee appointed by the Board to administer the Plan, which committee shall be comprised only of two or more "non-employee directors" (within the meaning of Rule 16b-3). "Company" means Unocal Corporation and, if it should cease to exist as a public company, thereafter (on prospective basis) its successors. "Deferral Units" means Stock Units credited pursuant to Section 6 with respect to 120% of the actual amount of compensation deferred by the Eligible Director and any dividend equivalent Stock Units credited thereon pursuant to Section 7. "Disability" means a "total and permanent disability" within the meaning of Section 22(e)(3) of the Code and such other disabilities, infirmities, afflictions or mental or physical conditions that render materially more burdensome or impossible the director's continued service as the Committee by resolution may recognize. "Effective Date" means the date on which the stockholders of the Company approve the Plan. "Eligible Director" means any member of the Board who is not an employee of the Company or a Subsidiary. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means the closing price of the Stock as reported on the New York Stock Exchange - Composite Transactions Summary or any successor principal market for the Stock on the applicable date. "Former Plan" means the Company's 2001 Directors' Deferred Compensation and Stock Award Plan, as amended. "Participant" means each person who has been granted a Restricted Stock Unit award or who has deferred all or a portion of his or her cash compensation into Deferral Units, and each participant in the Former Plan for whom a Stock Unit Account has been established under this Plan. "Plan" means the Unocal Corporation 2004 Directors' Deferred Compensation and Restricted Stock Unit Award Plan, as set forth herein and as it may be amended from time to time. "Restricted Stock Units" or "RSUs" means an award of Stock Units credited pursuant to Section 5 and any dividend equivalent Stock Units credited thereon pursuant to Section 7, which Stock Units are subject to vesting and other restrictions as set forth herein. "Securities Act" means the Securities Act of 1933, as amended. "Stock" means shares of common stock, par value $1.00 per share, of the Company, including any rights attendant thereto upon issuance of the shares, together with any -3- restrictions, limitations or conditions of and to such rights, under the Rights Agreement dated as of January 5, 2000 between the Company and Mellon Investor Services, L.L.C. (as Rights Agent) as it may be amended from time to time and such other stock or other securities or property into which the Stock (or such rights) may be converted or for which it is exchanged or substituted, and any credits thereon, pursuant to Section 11. "Stock Unit" means a non-voting unit of measurement that is (a) deemed for bookkeeping purposes to be equivalent to one outstanding share of Stock solely for purposes of determining benefits under the Plan, (b) credited to a Participant's Stock Unit Account pursuant to the grant of Restricted Stock Units under Section 5, an election to defer cash compensation under Section 6, or in respect of dividend equivalents under Section 7, and (c) payable solely in a share of Stock, on a one-for-one basis, and shall include Stock Units transferred to Stock Unit Accounts from the Former Plan as provided in Section 14. "Stock Unit Account" means the bookkeeping account maintained by the Company for each Eligible Director that is credited with Stock Units in accordance with the Plan, and includes, to the extent applicable, any Stock Unit Subaccount. "Stock Unit Subaccount" means a subaccount of an Eligible Director's Stock Unit Account established to separately account for Stock Units that are subject to different vesting restrictions, different distribution elections or established for different deferral periods. "Subsidiary" means any entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. "Unforeseeable Emergency" means a severe financial hardship to the Eligible Director resulting from a sudden and unexpected illness or accident of the Eligible Director or a dependent of the Eligible Director, loss to the Eligible Director's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Eligible Director. The circumstances that will constitute an Unforeseeable Emergency will depend upon the facts of each case. 3. Effective Date; Duration. The effective date of the Plan is the date on which the stockholders of the Company approve the Plan. No awards may be granted under the Plan after June 1, 2009. The Plan shall continue in effect until all matters relating to Stock Units and the accrual and distribution in respect of compensation deferred on or prior to that date and the administration of the Plan have been completed and all payments of such compensation have been made. 4. Administration. The Plan shall be administered by the Committee. The acts of a majority of the members present at any meeting at which a quorum is present and the acts unanimously approved in writing or by electronic transmission by the Committee shall be deemed the acts of the Committee. -4- The Committee shall have the authority, subject to the provisions of the Plan, to establish, adopt and revise such rules, regulations and forms and agreements and to make all such determinations relating to the Plan as it may deem necessary or advisable in the administration of the Plan. The Committee shall also have the authority, subject to the provisions of the Plan, to delegate ministerial, day-to-day administrative details and non-discretionary duties and functions to officers and employees of the Company. The Committee's interpretation of the Plan or any awards granted pursuant thereto and all decisions and determinations by the Committee with respect to the Plan shall be final, binding, and conclusive on all parties. 5. Restricted Stock Units. (a) Initial Awards. Any person who first becomes an Eligible Director on or after January 1, 2004 shall be granted without further action by the Committee a number of Restricted Stock Units with a total value of $82,500. As to any person who first becomes an Eligible Director on or before the 2004 annual meeting of stockholders, the date of grant of such Initial Award shall be the first day of the month immediately following such annual meeting, and as to any person who subsequently becomes an Eligible Director, the date of grant of such Initial Award shall be the date the person takes office. The number of Restricted Stock Units included in each such award shall be determined by dividing $82,500 by the Fair Market Value of the Stock on the date of grant. The Company shall credit to the Eligible Director's Stock Unit Account the number of whole and fractional RSUs so determined. Notwithstanding the foregoing, the Board may, from time to time, in its sole discretion, adjust (upward or downward) the nominal dollar value of such initial awards; provided however that the Board may not increase the nominal dollar value of an initial award under this Section 5(a) to more than $165,000 in the aggregate during the term of the Plan. (b) Annual Awards. On the first day of the month immediately following the annual meeting of stockholders in 2004, and on June 1 in each calendar year thereafter, each Eligible Director then in office shall be granted without further action by the Committee a number of Restricted Stock Units with a total value of $70,000. The number of Restricted Stock Units included in each such award shall be determined by dividing $70,000 by the Fair Market Value of the Stock on the date of grant. The Company shall credit to the Eligible Director's Stock Unit Account the number of whole and fractional RSUs so determined. Notwithstanding the foregoing, the Board may, from time to time, in its sole discretion, adjust (upward or downward) the nominal dollar value of such annual awards; provided, however that the Board may not increase the nominal value of an annual award under this Section 5(b) to more than $140,000 in the aggregate during the term of the Plan. (c) Maximum Number of Shares; Individual Award Limits. Annual grants that would otherwise exceed the maximum number of shares allotted for issuance under the Plan contained in Section 9(a) shall be prorated within such limitation pursuant to Section 9(b). An Eligible Director shall not receive more than one Restricted Stock Unit award under this Section 5 in any calendar year. Commencing in 2005, if an Eligible Director is first eligible for a Restricted Stock Unit award under the Plan on June 1 of a year, the number of shares subject to the Restricted Stock Unit award will be determined under clause (a) above. -5- (d) Vesting Period. For each initial Restricted Stock Unit award granted under Section 5(a), 33 1/3% of the RSUs subject to the award shall vest and become nonforfeitable on each of the first three (3) anniversaries of the date of grant. For each annual Restricted Stock Unit award granted under Section 5(b), 33 1/3% of the RSUs subject to the award shall vest and become nonforfeitable on each of the first three (3) annual meetings of stockholders following the date of grant. Notwithstanding the foregoing, the Board may modify the vesting schedule for any RSU award, provided that the Board modifies the schedule in advance of the grant of the award and the modified vesting schedule results in vesting in any year of no less than 20% and no more than 50% of the award. (e) Acceleration of Vesting. Notwithstanding Section 5(d), each Restricted Stock Unit award shall become immediately vested and non-forfeitable upon the occurrence of any of the following events: (1) a Participant's service as a director is terminated due to death or Disability, (2) a Change in Control, (3) a Participant retires from service either (A) at the end of the Participant's then current term and after completing five full years of service if the Participant is ineligible to stand for reelection under the Company's director retirement policy or (B) under the Company's director retirement policy on the date of the Annual Meeting of Stockholders immediately following his or her 72nd birthday and after completing five full years of service, or (4) a Participant accepts a public interest position (e.g., community service, philanthropic endeavors, a position with a 501(c)(3) or (c)(4) organization, or government service), provided such acceleration does not adversely affect the Participant's ability to serve in such position. (f) Distribution Elections. Subject to Section 8, Participants may elect the time of payment of the RSUs awarded under this Section 5. For a distribution election to be effective, any such election must be received by the Company no later than the applicable deadline for each RSU award, which (1) with respect to RSUs granted in 2004, shall be no later than 30 days after the Effective Date and (2) with respect to RSUs granted in subsequent calendar years, shall be no later than the immediately preceding December 31 for each calendar year. Notwithstanding the preceding sentence, a person who first becomes an Eligible Director during a calendar year may make a distribution election with respect to the initial RSU award granted pursuant to Section 5(a), provided that the election is received by the Company within the 30-day period following the date that the person first becomes an Eligible Director. An Eligible Director shall be permitted to make a different distribution election with respect to each RSU award. For each Eligible Director who makes one or more distribution elections, his or her Stock Unit Account shall be divided into two or more Stock Unit Subaccounts as necessary or advisable to separately account for RSUs awards that vest or are payable at different times. 6. Deferral Units. (a) Deferral of Regular Cash Compensation Into Deferral Units. -6- Each Eligible Director may also elect annually to defer all or part of his or her cash compensation, in increments of no less than 10%, payable for services rendered as a director, into Deferral Units. An Eligible Director's election to defer cash compensation shall be irrevocable, except as expressly provided in the Plan, and shall be effective for compensation earned for services as a director of the Company for the calendar year with respect to which the deferral election is made. The amount of compensation earned by an Eligible Director under the Plan in any month shall be increased by 20% (as so increased, the "Adjusted Deferral Amount") for purposes of determining the number of Deferral Units to be credited to such Eligible Director. An Eligible Director's deferral election shall be made pursuant to the election procedures in Section 6(c). At the end of each quarter, the number of Deferral Units to be credited to an Eligible Director's Stock Unit Account with respect to deferrals under this Section 6 shall be the Eligible Director's Adjusted Deferral Amount for that quarter divided by the average of the Fair Market Values of the Stock over the quarter. (b) Vesting of Deferral Units. Deferral Units shall be fully vested and non-forfeitable at all times. (c) Deferral Elections. (1) For a deferral election to be effective, any such election must be received by the Company no later than the applicable deadline for the period to which the deferral relates (but, in any event, no later than the immediately preceding December 31 for each calendar year). Notwithstanding the preceding sentence, a person who first becomes an Eligible Director during a calendar year may make a deferral election with respect to the compensation payable through the end of that calendar year, provided that (a) the election is received by the Company within the 30-day period following the date that the person first becomes an Eligible Director, and (b) the election applies only to compensation earned for services as a Board member after the date the election is received by the Company. As provided in Section 14, with respect to compensation earned or to be earned in calendar year 2004, any deferral election made by an Eligible Director under the Former Plan with respect to such 2004 compensation shall be effective for the deferral of such 2004 compensation under this Plan. (2) An Eligible Director shall be permitted to make a different election with respect to each annual deferral period and as to the time in which his or her benefits shall be distributed. For each Eligible Director who makes one or more distribution elections, his or her Stock Unit Account shall be divided into two or more Stock Unit Subaccounts as necessary or advisable to separately account for deferrals which are payable at different times. 7. Dividend Equivalent Units. (a) As of the end of each quarter in which a dividend is paid on Stock, additional Stock Units (or portions thereof) will be credited to the Eligible Director's Stock Unit Subaccounts. The number of Stock Units so credited shall equal the cash dividend (or declared -7- value of any other dividend) per share multiplied by the number of Stock Units in the Eligible Director's Stock Unit Subaccounts as of the end of the immediately preceding quarter divided by the average of the Fair Market Values of a share of Stock over the quarter then ending. Dividend equivalent Stock Units credited in respect of RSU awards shall be vested to the same extent as the RSU awards to which they relate. (b) If a Stock Unit distribution event occurs after a dividend record date and after the dividend payment date but before the dividend equivalent crediting date set forth in Section 7(a), then the crediting of dividend equivalent rights, with respect to such dividend and such distributed shares, will be settled in cash, in lieu of additional Stock Units, as soon as practicable following such Stock Unit distribution based on the total number of shares distributed. Notwithstanding the foregoing, if a Stock Unit distribution event occurs after a dividend record date but before a dividend payment date, the crediting of dividend equivalent rights, with respect to such distributed shares, will be settled in cash, in lieu of additional Stock Units, on the dividend payment date based on the total number of shares distributed. (c) Stock Units credited in respect of dividend equivalents shall be paid in Stock (except as provided in Section 7(b) and Section 9(b)) at the same time and the same manner as the vested Stock Units to which they relate. 8. Restrictions, Distributions and Changes to Distributions; Payment of Units. (a) Time and Manner of Distribution. Unless a Participant elects otherwise, distribution with respect to vested Stock Units will be made in a lump sum as soon as administratively practicable following the earlier to occur of a termination of the Participant's service as a director of the Company or a Change in Control. However, a Participant may elect that the distribution be made (1) on a termination of service as a director, (2) on an alternative date, (3) on the earlier of termination of service or an alternative date or (4) on the later of termination of service or an alternative date. The Participant may also elect whether or not a Change in Control will accelerate distribution. In the case of a Restricted Stock Unit award, the earliest alternative distribution date that a Participant may elect is the later of the date of full vesting of the award or three years after the date of the grant of the award, and the latest alternative distribution date that a Participant may elect is 15 years after the date of the grant of the award. In the case of Deferral Units, the earliest alternative distribution date that a Participant may elect is three years after the calendar year for which the Participant's compensation was deferred into such Deferral Units, and the latest date alternative distribution date that a Participant may elect is 15 years after the calendar year for which the compensation was deferred into such Deferral Units. Any election under this Section 8(a) must be made by the Participant in writing on forms provided by the Company at the time of making the distribution election under Section 5(f) or the deferral election under Section 6(c), whichever is applicable. Notwithstanding any contrary elections or other terms of the Plan, a Participant shall receive an immediate crediting and distribution of vested Stock Units (which includes any Stock Units that become vested pursuant to Section 5(e)(4)) under the Plan if a Participant accepts a public interest position (e.g., community service, philanthropic endeavors, a position with a 501(c)(3) or (c)(4) organization, or government service), provided such acceleration does not adversely affect the Participant's ability to serve in such position. -8- (b) Change in Time of Distribution. An Eligible Director may elect to further defer the commencement of any distribution to be made with respect to Stock Units benefits payable under the Plan by filing a new written election in a form and manner approved by the Committee; provided, however, that (A) no such new election shall be effective until 12 months after such election is filed, (B) no such new election shall be effective with respect to any Stock Units after the distribution of benefits with respect to the applicable Stock Units subaccount shall have commenced, and (C) no more than two new elections with respect to any annual deferral period or single RSU award shall be recognized as to any Participant. In addition, to the extent necessary to preserve the benefits of the exemptive rules under Section 16 of the Exchange Act, any such new election shall be subject to prior approval of the Board or the Committee. (c) Early Distributions. Participant shall be permitted to elect to withdraw (subject to Committee approval to the extent required to avoid any matchable event under Section 16(b) of the Exchange Act) not less than 50% of the vested portion of his or her Stock Unit Account, reduced by the withdrawal penalty described below, prior to the applicable payment date(s) ("Early Distributions"), subject to the following restrictions: (1) The election to take an Early Distribution shall be made in writing on a form provided by and filed with the Committee; (2) The amount of the Early Distribution shall equal 90% of the amount the Eligible Director has elected to withdraw; (3) The remaining 10% of the amount the Eligible Director has elected to withdraw shall be permanently surrendered, and the Eligible Director or his or her Beneficiary shall have no rights with respect to such surrendered amounts; and (4) Unless the Committee otherwise provides, no more than two early distribution elections shall be recognized as to any Participant. The Eligible Director's remaining Stock Units in the Stock Unit Account shall continue to be credited with Dividend Equivalents in accordance with Section 7. (d) Distributions for Unforeseeable Emergencies. A Participant may request a distribution of the vested portion of Participant's Stock Units for an Unforeseeable Emergency (without penalty or surrender of rights). Any distribution for an Unforeseeable Emergency shall be subject to approval by the Committee in its sole discretion and may be made only to the extent necessary to satisfy the hardship. The Committee may treat a distribution as necessary for an Unforeseeable Emergency if it relies on the Eligible Director's written representation, without actual knowledge to the contrary, that the hardship cannot reasonably be relieved through timely reimbursement or compensation by insurance or otherwise, or by liquidation of the Eligible Director's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship. -9- (e) Payment of Units. Upon a distribution event, the Company shall, subject to Section 9(b) hereunder, deliver a number of shares of Stock equal to the number of vested Stock Units (as adjusted pursuant to Section 8(c)(3) if applicable) to which the Participant is then entitled (whether upon his or her previously elected distribution date, determination of Unforeseeable Emergency or voluntary withdrawal under Section 8(c)(3)) under the terms of the Plan. (f) Forfeiture of Unvested Units. To the extent any portion or a Participant's RSUs have not become vested upon the date the Participant's services as a director terminate, such RSUs shall be forfeited and the award shall automatically be terminated without payment of consideration by the Company. 9. Shares Subject To The Plan; Share Limits. (a) Shares Available for Issuance. Subject to adjustment under Section 11, the aggregate number of shares of Stock that may be issued or delivered under the Plan shall not exceed 500,000 shares. Stock delivered by the Company under the Plan shall be shares of authorized and unissued shares of Stock and/or previously issued Stock held as treasury shares and shall be fully paid and non-assessable when issued. Shares issuable on payment of Stock Units shall be reserved for issue, and to the extent that awards terminate without payment in shares, the shares will be available for subsequent awards or accretions of dividend equivalents. (b) Share Limits; Cut Backs. If any award or crediting of Stock Units would cause the sum of the shares of Stock previously issued and shares issuable under outstanding awards under the Plan to exceed the maximum number of shares authorized under the Plan, the Company shall prorate among the Eligible Directors the award of Restricted Stock Units and allocate the number of remaining shares available for issuance first to the award of Restricted Stock Units and second toward the crediting of Deferral Units. If and for so long as no available share authorization remains, no additional Stock Units will be credited, cash shall be paid in lieu of dividend equivalents under Section 7 for such duration and any contrary or inconsistent elections shall be deemed revised or rescinded accordingly. (c) Fractional Shares; Minimum Issue. Fractional share interests may be accumulated but shall not be issued. Cash will be paid or transferred in lieu of any fractional share interests that remain upon a final distribution under the Plan. 10. General. (a) Government and Other Regulations. The obligation of the Company to credit Stock Units, issue or deliver Stock or otherwise make payments under the Plan are subject to compliance with all applicable laws, rules, and regulations (including, without limitation, federal and state securities laws), and to such approvals by any listing, agency, or regulatory or governmental authorities as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. The Company shall be under no obligation to register under the Securities Act any of the securities issued or delivered under the Plan. Any securities issued or delivered under the Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the -10- Company, as the Company may deem necessary or advisable to assure compliance with all applicable legal requirements. (b) Tax Withholding. The Company shall have the right to deduct from all cash payments any federal, state or local taxes as required by laws to be withheld with respect to such cash payments and, with respect to the delivery of Stock, the Company has the right to require the person receiving such Stock to pay to the Company the amount of any such taxes which the Company is required to withhold. The Company may, in lieu of requiring cash payment of any such taxes, elect to withhold from Stock payments a number of whole shares of Stock whose value is at least equal to the amount of such taxes. Valuation for this purpose shall be the Fair Market Value on the date of distribution. (c) Beneficiaries. (1) Beneficiary Designation. Upon and subject to the terms of forms provided by the Company each Eligible Director may designate in writing the Beneficiary or Beneficiaries (as defined in Section 10(c)(2)) whom such Eligible Director desires to receive any amounts payable under the Plan after his or her death. Beneficiary designation forms shall be effective on the date that the form is received by the Corporate Secretary. An Eligible Director may from time to time change his or her designated Beneficiary or Beneficiaries without the consent of such Beneficiary or Beneficiaries by filing a new designation in writing with the Corporate Secretary. However, if a married Eligible Director wishes to designate a person other than his or her spouse as Beneficiary, such designation shall be consented to in writing by the spouse. The Eligible Director may change any election designating a Beneficiary or Beneficiaries without any requirement of further spousal consent if the spouse's consent so provides. Notwithstanding the foregoing, spousal consent shall not be necessary if it is established that the required consent cannot be obtained because the spouse cannot be located or because of other circumstances prescribed by the Committee. The Company and the Committee may rely on the Eligible Director's designation of a Beneficiary or Beneficiaries last filed in accordance with the terms of the Plan. (2) Definition of Beneficiary. An Eligible Director's "Beneficiary" or "Beneficiaries" shall be the person, persons, trust or trusts so designated by the Eligible Director or, in the absence of such designation, entitled by will or the laws of descent and distribution to receive the Eligible Director's benefits under the Plan in the event of the Eligible Director's death, and shall mean the Eligible Director's executor or administrator if no other Beneficiary is identified and able to act under the circumstances. (d) Non-transferability. Except as provided in Section 10(c), a Participant's rights and interests under the Plan in respect of Stock Units, including amounts payable or Stock deliverable under or in respect thereof, may not be assigned, pledged, or transferred. (e) Expenses. The expenses of administering the Plan shall be borne by the Company. -11- (f) Titles and headings. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. (g) Governing Law. The validity of the Plan or any of its provisions and any agreements entered into under the Plan shall be construed, administered and governed in all respects under the laws of the State of Delaware. If any provisions of the Plan shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. (h) Limitation on Participants' Rights; Unfunded Plan. Participation in the Plan shall not give any person the right to continue to serve as a member of the Board or any rights or interests other than as expressly provided herein. No Participant shall have any right to any payment or benefit hereunder except to the extent provided herein. The Plan shall create only a contractual obligation on the part of the Company as to such amounts and shall not be construed as creating a trust or fiduciary relationship between the Company, the Board, the Committee, and any Participant or other person. Participants and their Beneficiaries shall have no legal or equitable rights, claims, or interest in any specific property or assets of the Company. No assets of the Company shall be held under any trust, or held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan. Any and all of the Company's assets shall be, and remain, the general unpledged, unrestricted assets of the Company. The Company's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay benefits in the future, and the rights of the Participants and Beneficiaries shall be no greater than those of unsecured general creditors. (i) Rights with Respect to Stock Units. A Participant's Stock Unit Account shall be a memorandum account on the books of the Company. The Stock Units credited to such account shall be used solely as a device to determine the number of shares of Stock to be eventually distributed to the Participant, subject to applicable vesting requirements, in accordance with the Plan. The Stock Units shall not be treated as property or as a trust fund of any kind. No Participant shall be entitled to any voting or other stockholder rights with respect to Stock Units credited under the Plan. (j) Restricted Stock Unit Agreements. Each Restricted Stock Unit award granted to an Eligible Director under the Plan shall be evidenced by a writing approved by the Committee and will contain the terms and conditions consistent with the Plan as approved by the Committee relating to the RSUs. (k) Plan Construction. By its approval of the Plan, the Board intends that the transactions contemplated by the Plan satisfy and be interpreted in a manner that satisfies the applicable requirements of Rule 16b-3 promulgated under the Exchange Act so that, among other transactions, the elective deferrals, the crediting of Stock Units and payment in Stock, and other elections in respect thereof will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act. -12- 11. Changes in Capital Structure. Upon or in contemplation of any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend) or reverse stock split; any merger, combination, consolidation or other reorganization; any split-up; spin-off, or similar extraordinary dividend distribution in respect of the Stock (whether in the form of securities or property); any exchange of Stock or other securities of the Company, or any similar, unusual or extraordinary corporate transaction in respect of the Stock; or a sale of substantially all the assets of the Company as an entirety; then the Board shall, in such manner, to such extent (if any) and at such time as it deems appropriate and equitable in the circumstances proportionately adjust any or all of (a) the number and type of shares of Stock (or other securities or property) that thereafter may be made the subject of Stock Units and Stock Unit Accounts (including the specific maxima and numbers of shares set forth elsewhere in the Plan), (b) the number, amount and type of shares of Stock (or other securities or property) payable in respect of Stock Units, and (c) and the number and type of Stock Units (both credited and vested), and applicable vesting schedule thereof, under the Plan. Any rights in respect of cash or any equivalent into which the Stock or rights to receive stock may be or have been converted as a result of an event contemplated by this Section 11 shall include a right to quarterly interest credits based upon the rate (quoted as an annual rate) that is 120% of the federal rate for compounding for the applicable period of time to payment, determined and published by the Secretary of the United States Department of Treasury under Section 1274(d) of the Code, for the month in which interest is credited. 12. Amendments and Termination. Subject to Section 13, the Board shall have the right to amend the Plan (including outstanding awards) in whole or in part from time to time or may at any time suspend or terminate the Plan; provided, however, that no amendment or termination shall cancel or otherwise adversely affect in any way, without his or her written consent, any Participant's rights with respect to Stock Units credited to his or her Stock Unit Account. Notwithstanding the foregoing, Participant consent shall not be required to the extent that the Board determines that applicable law requires amendment or termination of the Plan (and/or outstanding awards) to preserve the intended tax benefits to the Participants and the Company hereunder. Any amendments authorized hereby shall be stated in an instrument in writing, and all Participants (subject to any applicable consent requirement above) shall be bound thereby upon receipt of notice thereof. Changes contemplated by Section 11 shall not be deemed to constitute changes or amendments for purposes of this Section 12. 13. Stockholder Approval. The Plan shall be subject to approval of the Plan by the stockholders of the Company at the 2004 annual meeting. To the extent required under applicable law, listing agency rule, deemed necessary or advisable by the Board any subsequent amendment to the Plan shall be subject to stockholder approval. Changes contemplated by Section 11 shall not be deemed to constitute changes or amendments for purposes of this Section 13. Without limiting the -13- amendment authority set forth in Section 12, changes specifically contemplated by Section 5 are deemed approved by the stockholders upon their approval of the Plan. 14. Transfer of Accounts from Former Plan. The Stock Units (and dividend equivalents credited with respect thereto) credited to the Stock Unit Account of each Eligible Director who is a Participant in the Former Plan as of the Effective Date will be transferred to a Stock Unit Account under this Plan for such Participant as of such date and thereafter shall be governed by the terms of this Plan. Any deferral election with respect to compensation earned and to be earned in calendar year 2004 filed under the Former Plan shall be effective for the deferral of such compensation under this Plan, and any distribution election and beneficiary designation made by any Participant under the Former Plan with respect to such transferred Stock Units (and dividend equivalents credited with respect thereto) shall remain in effect and apply to such Participant's Accounts and participation under this Plan unless and until the Participant makes a different election in accordance with the terms of this Plan. All Stock Units so transferred shall be fully vested and nonforfeitable. -14- EX-10 3 q22004_ex102.txt EXHIBIT 10.2 - 04 MANAGEMENT ICP Exhibit 10.2 2004 MANAGEMENT INCENTIVE PROGRAM TABLE OF CONTENTS Page INCENTIVE COMPENSATION PLAN...................................................1 1. General Description................................................1 2. Definitions........................................................1 3. Effective Date and Duration........................................2 4. Administration.....................................................3 5. Determination of Bonus Pool and Awards.............................3 6. Payment and Deferral of Awards.....................................4 7. General............................................................4 8. Amendments and Termination.........................................5 LONG-TERM INCENTIVE PLAN OF 2004..............................................5 1. General Description................................................5 2. Definitions........................................................5 3. Effective Date and Duration........................................9 4. Administration.....................................................9 5. Grant of Options, Restricted Stock Awards, and Performance Share Awards: Shares Subject to the Plan................................9 6. Eligibility.......................................................10 7. Stock Options.....................................................10 8. Performance Shares................................................11 9. Restricted Stock Awards...........................................12 10. Performance Restricted Stock Awards...............................13 11. General...........................................................14 12. Changes in Capital Structure......................................15 13. Amendments and Termination........................................15 2004 MANAGEMENT INCENTIVE PROGRAM As Amended July 28, 2004 The purpose of the 2004 Management Incentive Program (the "Program") is to provide a means through which Unocal Corporation (the "Company") and its subsidiaries may attract and retain able employees upon whom the success of the Company rests, and provide a means whereby those employees will be fairly compensated and can acquire and maintain stock ownership, thereby strengthening their commitment to maximizing the value of the Company for its stockholders. The Program has two major components: 1. The Incentive Compensation Plan; and 2. The Long-Term Incentive Plan of 2004 A total of 12,000,000 shares will be subject to issuance under the Incentive Compensation Plan and under the Long-Term Incentive Plan of 2004. Of 1this amount of 12,000,000 shares, not more than 6,000,000 shares may be issued as Performance Share Awards, Restricted Stock Awards and Performance Restricted Stock Awards. Each of the components of the Program is described in the sections which follow. INCENTIVE COMPENSATION PLAN 1. General Description The Incentive Compensation Plan provides for annual cash awards to Employees of the Company and its Subsidiaries. Participants may elect to defer a portion of their annual Award into Restricted Stock, which shall be granted under and subject to the terms of the Long-Term Incentive Plan of 2004, and may also elect to defer payment of cash Awards pursuant to a cash deferral program. 2. Definitions The following definitions shall be applicable throughout the Plan: a. "Award" means a cash award granted under the Plan. b. "Award Period" means a period of one year. c. "Board" means the Board of Directors of the Company, except those members who are Employees. d. "Code" means the Internal Revenue Code of 1986, as amended. e. "Committee" means the Management Development and Compensation Committee of the Board, which shall consist solely of two or more directors who qualify as "outside directors" as defined in the regulations under Section 162(m) of the Code and as "non-employee directors" within the meaning of Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934. In the event that one or more members of the Committee is determined not to comply with these requirements, then the entire Board may serve as the Committee for purposes of the Plan, including ratification of prior grants made by the Committee. f. "Company" means Unocal Corporation. g. "Comparative Return to Stockholders" means the Company's return to stockholders compared to the return to stockholders of selected Peer Group Companies. The Committee shall, in its sole discretion, determine the basis for comparing stockholder returns. -1- h. "Employee" means any person regularly employed by the Company or a Subsidiary on a full-time salaried basis. i. "Fair Market Value" for purposes of determining the number of shares subject to a Restricted Stock Award under Section 6 means the average of the closing prices of the Stock as reported in the New York Stock Exchange Composite Transactions quotations for the 30 consecutive trading days prior to the first day of the calendar year in which the Award is payable. j. "Free Cash Flow" means cash flow from operating activities less cash flow used in investing activity. k. "Future Year Value Creation" means the sum of (i) the present value of additions to oil and gas reserves through new commercial discoveries, (ii) the increase of the present value of existing assets due to accelerated development or commercialization and (iii) such other value additions as the Committee shall establish. l. "Holder" means an Employee of the Company who has deferred a portion of his Award into Restricted Stock. m. "Net Cash Provided by Operating Activities" means net cash provided by operating activities as determined in accordance with Statement of Financial Accounting Standards No. 95, Statement of Cash Flows. n. "162(m) Participant" means an Employee who is an executive officer whose compensation may be subject to the limitation on deductibility under Section 162(m) of the Code, as determined by the Committee in its sole discretion. o. "Peer Group Companies" means those companies selected by the Committee prior to the expiration of the first 90 days of an Award Period for the purpose of comparing returns to stockholders during the Award Period. Unless otherwise provided by the Committee at the time target awards are established, if, during an Award Period, a member of the Peer Group of Companies is acquired by or merged into another company and separate reports with respect to its return to stockholders are not available, or a member is liquidated or for any other reason does not have separate reports with respect to its return to stockholders, then such company shall cease to be a member of the Peer Group of Companies. p. "Plan" means the Incentive Compensation Plan, as amended from time to time. q. "Program" means the 2004 Management Incentive Program, as amended from time to time. r. "Restricted Stock Award" means a restricted stock award as defined in the Long Term Incentive Plan of 2004. s. "Return on Capital Employed" or "ROCE" means the Company's net earnings generated relative to the total level of capital (debt and equity) utilized. t. "Subsidiary" means any corporation of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. 3. Effective Date and Duration The Plan shall be effective on February 10, 2004, the date of its approval by the Board (the "Effective Date"). This Plan shall be submitted for and subject to stockholder approval no later than twelve months after the Effective Date. Unless earlier terminated by the Board, this Plan shall terminate at the close of business on March 31, 2009. After the termination of this Plan either upon such stated expiration date or its earlier termination by the Board, no additional awards may be granted under this Plan, but previously granted awards (and the authority of the Committee with respect thereto, including the authority to amend such awards) shall remain outstanding in accordance with their applicable terms and conditions and the terms and conditions of this Plan. -2- 4. Aministration The Committee shall administer the Plan. The acts of a majority of the members present at any meeting at which a quorum is present and acts unanimously approved in writing by the Committee shall be deemed the acts of the Committee. The Committee may conduct meetings in person or by telephone. The Committee may, in its discretion, delegate the authority to grant Awards under the Plan to Employees other than executive officers to a committee of the Board of Directors of the Company. No member of the Committee, while serving as such, shall be eligible to receive an Award under the Plan. The Committee shall have the authority, subject to the provisions of the Plan, to establish, adopt, or revise such rules and regulations and to make all such determinations relating to the Plan as it may deem necessary or advisable in the administration of the Plan. The Committee's interpretation of the Plan or any Awards granted pursuant thereto and all decisions and determinations by the Committee with respect to the Plan shall be final, binding, and conclusive on all parties. 5. Determination of Bonus Pool and Awards The Committee shall elect Employees to participate in the Plan. The bonus pool for each Award period shall be an amount equal to two percent (2%) of the Company's Net Cash Provided by Operating Activities during the Award Period. The aggregate amount of Awards under the Plan, without giving effect to any augmentation upon deferral into Restricted Stock, may not exceed this bonus pool. Within the first 90 days of each Award Period, the Committee shall establish the level of Awards for 162(m) Participants. The amount of each such Award shall be expressed as a percentage of the bonus pool. The Committee shall have the sole discretion to determine whether the full amount of such Awards will be paid to such participants and may reduce, but may not increase, the amount payable under an Award based on such criteria as the Committee, in its sole discretion may determine, which criteria may include, but shall not be limited to, one or more of the following: Comparative Return to Stockholders, ROCE, Free Cash Flow, Future Year Value Creation and individual performance. The Committee shall also establish individual target Awards, expressed as a percentage of salary, for the remaining participants. Subject to the amount of the bonus pool available after payment of the Awards described in the preceding paragraph, the Committee shall have the sole discretion to determine the actual amounts paid out under these Awards, which amounts may be greater than or less than the target amounts, on the basis of factors such as, but not limited to, the following: a. Comparative Return to Stockholders, b. ROCE, c. Free Cash Flow, d. Future Year Value Creation, e. Comparison of actual operational or financial results to plans or goals, adjusted for external factors such as changes in market prices, f. Individual performance of Employees selected to participate in the Plan, and g. Reasonableness of total cash compensation. Notwithstanding any other provision of the Plan, the maximum cash Award payable to a participant in the Plan in any calendar year shall be 0.25% of the Company's Net Cash Provided By Operating Activities for the calendar year or, if less, $2,500,000; provided, however, that any portion of an Award deferred in the form of Restricted Stock may be adjusted pursuant to Section 6. In the event of a "Change of Control" (as such term is defined in the Long-Term Incentive Plan of 2004) the Award Period shall be reduced to the period ending on the date of such Change of Control. The amount payable to 162(m) Participants shall be determined as set forth in Section 5, but based on the bonus pool for the shortened Award Period. Each other 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. -3- 6. Payment and Deferral of Awards Awards under the Plan shall be paid in cash from general funds of the Company in a manner to be prescribed by the Committee. An Award may be paid all or in part as a Restricted Stock Award, granted under and subject to the terms of the Long-Term Incentive Plan of 2004, as determined by the Committee or pursuant to an annual election of the recipient under such terms as the Committee may establish. In consideration for forgoing cash compensation, the Committee may, in its discretion, make a Restricted Stock Award with a total dollar value greater than the Award deferred, provided that any such increase shall not exceed 100% of the dollar value of the Award deferred, and provided further, with respect to 162(m) Participants, the Committee shall establish any applicable percentage increase at the same time that it establishes their Award levels for the Award Period. The number of shares of Restricted Stock issued in consideration of Awards deferred shall be equal to the dollar value of the Award after any such increase divided by the Fair Market Value of the Stock. Any fractional shares shall be paid in cash. The Committee may also permit participants in the Plan to defer payment of cash Awards pursuant to a cash deferral program on such terms, including interest which may be credited thereon, as the Committee may approve in its sole discretion. 7. General a. Government and Other Regulations. The obligation of the Company to make payment of distributions under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by governmental agencies as may be required. b. Tax Withholding. The Company or a Subsidiary, as appropriate, shall have the right to deduct from all Awards paid in cash any federal, state or local taxes as required by law to be withheld with respect to such cash payments. The provisions of the Long Term Incentive Plan of 2004 shall govern tax withholding with respect to any portion of an Award paid in the form of a Restricted Stock Award. c. Claim to Awards and Employment Rights. No Employee or other person shall have any claim or right to be granted an Award under the Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any Employee any right to be retained in the employ of the Company or a Subsidiary. d. Beneficiaries. Any payment due under the Plan to a deceased participant shall be paid to the beneficiary designated by the participant in writing and filed with the Committee. If no such beneficiary has been designated, payment shall be made to the participant's surviving spouse. If a participant does not designate a beneficiary or have a surviving spouse, payment shall be made to the participant's legal representative. A beneficiary designation may be changed or revoked by a participant at any time, provided the change or revocation is filed in writing with the Committee. e. Nontransferability. A person's rights and interests under the Plan, including amounts payable, may not be assigned, pledged, or transferred except, in the event of an Employee's death, to a designated beneficiary as provided in the Plan, or in the absence of such designation, by will or the laws of descent and distribution, except as may be permitted by the Committee in its sole discretion. The transfer restrictions set forth in provisions of the Long Term Incentive Plan of 2004 shall apply to any Restricted Stock Awards granted in lieu of cash under an Award. f. Indemnification. Each person who is or shall have been a member of the Committee or the Board, including the Employee directors, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action or failure to act under the Plan and against and from any and all amounts paid by him in satisfaction of judgment in any such action, suit or proceeding against him. He shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. -4- g. Reliance on Reports. Each member of the Committee and the Board, including the Employee directors, shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of the Company and its Subsidiaries and upon any other information furnished in connection with the Plan by any person or persons other than himself. In no event shall any person who is or shall have been a member of the Committee or of the Board be liable for any determination made or other action taken or any omission to act in reliance upon any such report or information or for any action taken, including the furnishing of information, or failure to act, if in good faith. h. Relationship to Other Benefits. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, profit sharing, group insurance or other benefit plan of the Company or any Subsidiary, unless specifically so provided under such plan. i. Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries. j. Pronouns. Masculine pronouns and other words of masculine gender shall refer to both men and women. k. Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 8. Amendments and Termination The Board may at any time terminate the Plan, and with the express written consent of a Holder, the Board or Committee may cancel, reduce or otherwise alter his outstanding Awards thereunder if, in its judgment, the tax, accounting, or other effects of the Plan or potential payouts thereunder would not be in the best interest of the Company. The Board may, at any time, or from time to time, amend or suspend and, if suspended, reinstate, the Plan in whole or in part; provided, however, that, to the extent then required by applicable law or any applicable listing agency, or as deemed necessary or advisable by the Board, any amendment to this Plan shall be subject to shareholder approval. LONG-TERM INCENTIVE PLAN OF 2004 As Amended July 28, 2004 1. General Description The Long-Term Incentive Plan of 2004 provides for granting Nonqualified Stock Options, Restricted Stock Awards, Performance Shares and Performance Restricted Stock Awards. The Plan succeeds the Unocal Long-Term Incentive Plan of 1998. 2. Definitions The following definitions shall be applicable throughout the Plan but shall not be deemed to apply in other contexts unless specifically provided otherwise: a. "Award" means, individually or collectively, any Nonqualified Stock Option, Restricted Stock Award, Performance Share Award or Performance Restricted Stock Award. b. "Award Period" means the period of time (which shall not be less than three years) used to determine any payments of Performance Share Awards. c. "Board" means the Board of Directors of the Company, except those members who are Employees. d. "Cause" means (i) conduct or action by a Holder that violates the Company's code of conduct or is materially harmful to the Company, (ii) theft, forgery, fraud, misappropriation, embezzlement, moral turpitude or other act of material misconduct against the Company or any of its affiliates, (iii) willful failure by a Holder to follow an order of the Board, except in such case where the Holder believes in good faith that following such order would be materially detrimental to the interests of the Company, (iv) a Holder's -5- conviction of or pleading guilty or nolo contendere to a felony or (v) performance by a Holder falls below the reasonable expectations of the Company. e. "Change of Control" means: (i) 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 (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) 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 paragraph (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company or (D) any acquisition by any entity pursuant to a transaction which complies with clauses (A), (B) and (C) of paragraph (iii) of this Section 2(e); or (ii) Individuals who, as of February 10, 2004, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to February 10, 2004 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 (iii) 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 entity (a "Business Combination"), in each case, unless, following such Business Combination, (A) 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 beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Business Combination (including, without limitation, an entity 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) (the "Resulting Entity") 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, (B) no Person (excluding any Resulting Entity or any employee benefit plan (or related trust) of the Company or such Resulting Entity) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the Resulting Entity or the combined voting power of the then outstanding voting securities of such entity except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the Resulting Entity 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 (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, the Board may deem "consummation of" an event to include a period of time immediately prior to or contemporaneous with the event to enable the Holder to exercise the Award or otherwise realize the benefits of the Award with respect to the underlying shares in the same manner as available to the common stockholders generally as a result of the event, but subject to the occurrence of a Change of Control, and, in the case of an Option, -6- subject to the payment or any permitted offset of the exercise price and any applicable withholding taxes. For purposes of clause (iii), "entity" means any corporation, limited liability company, partnership or any other statutorily recognized business organization or entity that is similar to a statutory corporation and that can be merged into or combined with a statutory corporation. f. "Code" means the Internal Revenue Code of 1986, as amended. g. "Committee" means the Management Development and Compensation Committee of the Board, which shall consist solely of two or more directors who qualify as "outside directors" as defined in the regulations under Section 162(m) of the Code and as "non-employee directors" within the meaning of Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934. In the event that one or more members of the Committee is determined not to comply with these requirements, then the entire Board may serve as the Committee for purposes of the Plan, including ratification of prior grants made by the Committee. h. "Company" means Unocal Corporation. i. "Comparative Discretionary Cash Flow per Share (Debt Adjusted)" means the Company's Discretionary Cash Flow per Share (Debt Adjusted) compared to the Discretionary Cash Flow per Share (Debt Adjusted) of a selected group of Peer Group Companies. j. "Comparative Finding and Development Costs per BOE Added" means the Company's Finding and Development Costs per BOE Added compared to the Finding and Development Costs per BOE Added of the Peer Group Companies. k. "Comparative Production and G&A Costs per BOE Added" means the Company's Production and G&A Costs per BOE Added compared to the Production and G&A Costs per BOE Added of the Peer Group Companies. l. "Comparative Production Growth per Share (Debt Adjusted)" means the Company's Production Growth per Share (Debt Adjusted) compared to the Production Growth per Share (Debt Adjusted) of the Peer Group Companies. m. "Comparative Return to Stockholders" means the Company's return to stockholders compared to the return to stockholders of a selected group of Peer Group Companies. The Committee shall, in it sole discretion, establish the basis for comparing stockholder returns within the first 90 days of the applicable Award Period or Performance Year. n. "Date of Grant" means the date on which the granting of an Award is authorized by the Committee or such later date as may be specified by the Committee in such authorization. o. "Discretionary Cash Flow Per Share (Debt Adjusted)" means the debt adjusted discretionary cash flow per share for the Company and each applicable Peer Group Company as determined based on such data and pursuant to such procedures as the Committee establishes within the first 90 days of the applicable Award Period. p. "Employee" means any person regularly employed by the Company or a Subsidiary on a full-time salaried basis. q. "Fair Market Value" means: (i) For Options, the average of the reported high and low prices of the Stock as reported in the New York Stock Exchange Composite Transactions quotations on a specified date. (ii) For Performance Share Awards, the average of the closing prices of the Stock as reported in the New York Stock Exchange Composite Transactions quotations for the 30 consecutive trading days prior to the "Valuation Date." The "Valuation Date" for the purpose of granting Performance Share Awards shall be the first day of the calendar year in which the Award is made. The "Valuation Date" for the purpose of Performance Share payments shall be the trading day on which the Committee approves the payment. -7- r. "Finding and Development Costs Per BOE Added" means finding and development costs per barrel of oil equivalent added as determined in accordance with generally accepted accounting principles and reported in the Company's or a Peer Group Company's 10-K Supplemental Information on Oil and Gas and Exportation and Production Activities. s. "Free Cash Flow" means cash flow from operating activities less cash flow used in investing activity. t. "Future Year Value Creation" means the sum of (i) the present value of additions to oil and gas reserves through new commercial discoveries, (ii) the increase of the present value of existing assets due to accelerated development or commercialization and (iii) such other value additions as the Committee shall establish within the first 90 days of a Performance Year, each of which shall be determined based on such data and pursuant to such procedures as the Committee establishes within the first 90 days of the applicable Performance Year. u. "Holder" means an Employee of the Company or a Subsidiary who has been granted an Option, a Restricted Stock Award, a Performance Share Award or a Performance Restricted Stock Award. v. "Net Cash Provided by Operating Activities" means net cash provided by operating activities as determined in accordance with Statement of Financial Accounting Standards No. 95, Statement of Cash Flows. w. "162(m) Participant" means an Employee who is an executive officer whose compensation may be subject to the limitation on deductibility under Section 162(m) of the Code, as determined by the Committee in its sole discretion. x. "Option" or "Nonqualified Stock Option" means an Award granted under Section 7. y. "Peer Group Companies" means those companies selected by the Committee, in its sole discretion prior to the expiration of the first 90 days of an Award Period or Performance Year, for the purpose of comparing applicable Performance Criteria during the Award Period or Performance Year. Unless otherwise determined by the Committee at the time of grant, if, during an Award Period or Performance Year, a member of the Peer Group of Companies is acquired by or merged into another company and separate reports with respect to its Performance Criteria are not available, or a member is liquidated or for any other reason does not have separate reports with respect to its Performance Criteria, then such company shall cease to be a member of the Peer Group of Companies. z. "Performance Criteria" means: (i) with respect to Performance Shares for 162(m) Participants, any one or more of the following: Comparative Return to Stockholders, Comparative Discretionary Cash Flow Per Share, Comparative Production Growth Per Share, Comparative Finding and Development Costs Per BOE Added, and Comparative Production and G&A Costs Per BOE Produced, and (ii) with respect to Performance Restricted Stock Awards, any one or more of the following: Comparative Return to Stockholders, ROCE, Future Year Value Creation, and Net Cash Provided by Operating Activities. aa. "Performance Restricted Stock" means an Award granted under Section 10. bb. "Performance Share" means an Award granted under Section 8. cc. "Plan" means the Long-Term Incentive Plan of 2004, as amended from time to time. dd. "Production and G&A Costs per BOE Produced" means the Company's or a Peer Group Company's production and general and administrative costs per barrel of oil equivalent determined based on such data and pursuant to such procedures as the Committee establishes within the first 90 days of the applicable Award Period and reported in its 10-K Supplemental Information on Oil and Gas and Exploration and Production Activities. ee. "Production Growth Per Share (Debt-Adjusted)" means the Company's or a Peer Group Company's debt adjusted production growth per share determined based on such data and pursuant to such procedures as the Committee establishes within the first 90 days of the applicable Award Period. -8- ff. "Program" means the 2004 Management Incentive Program, as amended from time to time. gg. "Restricted Stock Award" means an Award granted under Section 9. hh. "Retirement" means termination of employment on or after attaining age 65. ii. "Return on Capital Employed" or "ROCE" means the Company's net earnings generated relative to the total level of capital (debt and equity) utilized as determined based on such data and pursuant to such procedures as the Committee establishes within the first 90 days of the applicable Performance Year. jj. "Stock" means shares of common stock of the Company as defined in Article Fourth of the Company's Certificate of Incorporation and such other stock as shall be substituted for such shares as provided in Section 12. kk. "Subsidiary" means any corporation of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. ll. "Voluntary Termination" means any termination of employment by a Holder prior to Retirement other than a termination without Cause or a termination due to death or disability. 3. Effective Date and Duration The Plan shall be effective on February 10, 2004, the date of its approval by the Board (the "Effective Date"). This Plan shall be submitted for and subject to stockholder approval no later than twelve months after the Effective Date. Unless earlier terminated by the Board, this Plan shall terminate at the close of business on the day before the fifth anniversary of the Effective Date. After the termination of this Plan either upon such stated expiration date or its earlier termination by the Board, no additional awards may be granted under this Plan, but previously granted awards (and the authority of the Committee with respect thereto, including the authority to amend such awards) shall remain outstanding in accordance with their applicable terms and conditions and the terms and conditions of this Plan. 4. Administration The Committee shall administer the Plan. The acts of a majority of the members present at any meeting at which a quorum is present and acts unanimously approved in writing by the Committee shall be deemed the acts of the Committee. The Committee may conduct its meetings in person or by telephone. The Committee may, in its discretion, delegate the authority to grant Awards under the Plan for Employees other than executive officers to a committee of the Board of Directors of the Company. No member of the Committee, while serving as such, shall be eligible to receive an Award under the Plan. The Committee shall have the authority, subject to the provisions of the Plan, to establish, adopt, or revise such rules and regulations and to make all such determinations relating to the Plan as it may deem necessary or advisable in the administration of the Plan. The Committee's interpretation of the Plan or any Awards granted pursuant thereto and all decisions and determinations by the Committee with respect to the Plan shall be final, binding, and conclusive on all parties. 5. Grant of Options, Restricted Stock Awards, and Performance Share Awards: Shares Subject to the Plan The Committee may, from time to time, grant and amend Awards to Employees in accordance with the provisions of the Plan; provided however that: a. Subject to Section 12, the aggregate number of shares of Stock made subject to Awards under the Plan may not exceed 12,000,000 shares. b. To the extent an Award lapses or the rights of its Holder terminate or are forfeited, any shares of Stock subject to such Award that are not exercised or are forfeited shall again be available to be granted as an Award. Upon the full or partial payment of any option price by the transfer to the Company of Stock or upon satisfaction of tax withholding obligations in connection with any such exercise or any other payment made or benefit realized under this Plan by the transfer or relinquishment of Stock, there shall be deemed to have been issued or transferred under this Plan only the number of shares of Stock -9- actually issued or transferred by the Company less the number of shares of Stock so transferred or relinquished. c. Stock delivered by the Company in settlement under the Plan may be from the Company's authorized and unissued Stock or Stock purchased on the open market or by private purchase. d. Except as provided in Sections 7(d)(v), 7(e), 8(c), 9(a) or 10(d), the Company shall not distribute Stock until six months have elapsed from the date of the Award under the Plan. e. Awards may contain such other provisions as the Committee may determine that are not inconsistent with the terms of the Plan. 6. Eligibility All Employees of the Company and its Subsidiaries (including officers or Employees who are members of the Board of Directors) shall be eligible to be granted Awards under the Plan. 7. Stock Options One or more Options may be granted to any Employee. No person may be granted during any 12-month period Options to acquire more than 600,000 shares of Stock under this Plan. Each Option so granted shall be subject to the following conditions: a. Option Price. The option price per share of Stock shall be established by the Committee at the time of grant, but shall be not less than Fair Market Value on the Date of Grant. b. Form of Payment. At the time of the exercise of the Option, the option price shall be payable in a combination of cash and/or shares of Stock acceptable to the Committee valued at the Fair Market Value as of the date the Option is exercised, including (if permitted by the Company) proceeds from the sale of Stock acquired by exercise of the Option (a cashless exercise). c. Restrictions on Shares Acquired. The Committee may impose restrictions for a specified period (the "Restriction Period") on a portion or all of the shares acquired through exercise of Options in order to promote the share ownership objectives of the Plan. d. Stock Option Agreement. Each Option granted under the Plan shall be evidenced by a "Stock Option Agreement" between the Company and the Holder of the Option containing provisions determined by the Committee, which shall include the following terms and conditions: (i) Any Option or portion thereof that is exercisable shall be exercisable for the full amount or for any part thereof, except as otherwise determined by the Committee and set forth in the Stock Option Agreement. (ii) Every share purchased through the exercise of an Option shall be paid for in full prior to delivery of stock or, if permitted by the Company, through a cashless exercise. Each Option shall cease to be exercisable, as to any share, when the Holder purchases the share or when the Option lapses. (iii) Options shall not be transferable by the Holder except by will or the laws of descent and distribution and shall be exercisable during the Holder's lifetime only by the Holder, his guardian or legal representative, except as permitted pursuant to Section 11(e). (iv) Notwithstanding any other provision of the Plan, in the event (A) of a public tender for all or any portion of the Stock of the Company, (B) that a proposal to merge, consolidate, or otherwise combine with another company is submitted for stockholder approval, or (C) another situation exists that the Committee determines is similar thereto then, the Committee may in its sole discretion declare outstanding Options to be immediately exercisable, and it may also include provisions for such events in the Stock Option Agreement. (v) The Committee may in its sole discretion declare that outstanding Options that are immediately exercisable, but have not been exercised, will terminate upon (A) a dissolution of the Company, (B) a merger, reorganization, consolidation or similar event that the Company does not survive, or (C) the consummation of a merger, reorganization, consolidation or similar event -10- approved by the Board of Directors, and it may also include provisions for such events in the Stock Option Agreement. e. Other Terms and Conditions. Each Option shall become exercisable in such manner (which may include cumulative annual or other installments) on or after such date or dates and within such period or periods, not to exceed ten years from its Date of Grant, as set forth in the Stock Option Agreement. Except as provided in Section 7(d)(v) or upon a Change of Control, no Option granted hereunder shall become exercisable prior to one year from the date of grant. f. Option Repricing/Cancellation and Regrant. Except as provided in or pursuant to Section 12, the Committee may not authorize, generally or in specific cases only, for the benefit of any Participant any adjustment in the exercise or purchase price or the number of shares subject to an Option by cancellation of an outstanding Option and a subsequent regranting of an Option, by amendment or by substitution of an outstanding Option without prior approval of the Company's stockholders. 8. Performance Shares a. Awards. Grants of Performance Shares may be made by the Committee during the term of the Plan, which shall be credited to a Performance Share account to be maintained for each such Holder. Each Performance Share shall represent a bookkeeping unit of measurement that is deemed to have a value equivalent to one share of Stock of the Company. Grants of Performance Shares shall be made within the first 90 days to 162(m) Participants and within the first calendar year to other participants of the applicable Award Period. All such grants shall be deemed to have been made on January 1 of the calendar year in which grants are made. In determining the size of Awards, the Committee may take into account a Holder's responsibility level, performance, potential, cash compensation level, and the Fair Market Value of the Company's Stock at the time of Awards, as well as such other considerations as it deems appropriate. During any 12-month period no person may receive more than 30% of the aggregate number of Performance Shares granted or more than 90,000 Performance Shares. Within the first 90 days of the applicable Award Period, the Committee shall establish (i) performance goals based on one or more of the Performance Criteria and (ii) a matrix for determining the percentage by which participants' Performance Shares will be multiplied based on the Company's achievement of such performance goals. In no event shall the matrix allow for a percentage in excess of 200%. b. Right to Payment of Performance Shares. Following the end of the Award Period, the Committee shall determine the extent to which the performance goals for the Award Period have been achieved. The Committee shall then multiply the number of each Holder's Performance Shares by the percentage determined under the pre-established matrix to determine the amount payable to each Holder (the "Payout Shares"). Each Holder of Performance Shares shall be entitled at the end of an Award Period to a dollar amount equal to the Fair Market Value of his Payout Shares as of the Valuation Date. In no event shall the Fair Market Value of the Payout Shares exceed 400% of the Fair Market Value of the initial Award of Performance Shares. c. Timing and Form of Payment. No payment of Performance Shares shall be made prior to the end of an Award Period, but payment shall be made as soon as practicable thereafter. The Committee may authorize payment in a combination of cash and/or Stock, as it deems appropriate. Stock delivered in payment of Performance Shares may be shares purchased for the account of the Holder or authorized and unissued shares, or any combination thereof. The number of shares of Stock to be paid in lieu of cash will be determined by dividing the portion of the payment not paid in cash by: (i) The average of the reported high and low prices of the Stock as reported in the New York Stock Exchange Composite Transactions quotations on the date on which the shares are issued, or (ii) The price per share paid for shares purchased for a Holder's account should the Company purchase shares on behalf of a Holder. Notwithstanding any other provision of the Plan, in the event (A) of any public tender for all or any part of the Stock of the Company, (B) that any proposal to merge, consolidate or otherwise combine the Company with another company is submitted for stockholder approval, or (C) another situation exists -11- which the Committee determines is similar thereto, then the Committee may in its sole discretion declare any Award Period ended as of a specific date and accelerate payments of such Performance Share Awards to Holders in amounts at least equal to the number of Performance Shares credited to each Holder's Performance Share account at the beginning of the Award Period, and it may also include provisions for such events in the Performance Share Award. d. Termination of Employment. In the event a Holder terminates employment during an Award Period, payout shall be as follows: (i) Termination determined by the Committee to be at the convenience of the Company and not for Cause or for performance inadequacy: - Payout shall be made at the end of the Award Period and shall be prorated for service during the period. (ii) Resignation or discharge other than pursuant to Section 8(d)(i): - The Award shall be completely forfeited. (iii) Retirement: - Payout shall be made at the end of the Award Period and shall be prorated for service during the period. (iv) Early retirement: - If at the Holder's request, the Award shall be completely forfeited. - If at the Company's request, payout shall be at the end of the Award Period and shall be prorated for service during the period. (v) Death or Total and Permanent Disability: - Payout shall be at the end of the Award Period and shall be prorated for service during the period. 9. Restricted Stock Awards a. Restriction Period. A Restricted Stock Award may be granted by the Committee to any Employee. At the time a Restricted Stock Award is made, the Committee shall establish a period of time (the "Restriction Period") applicable to such Award which shall be not less than four years. Each Restricted Stock Award may have a different Restriction Period, at the discretion of the Committee. In the event (i) of a public tender for all or any portion of the Stock of the Company, (ii) that any proposal to merge, consolidate, or otherwise combine the Company with another company is submitted for stockholder approval, or (iii) another situation exists which the Committee determines is similar thereto, then the Committee may in its sole discretion change or eliminate the Restriction Period, and it may also include provisions for such events in the Restricted Stock Award. b. Other Terms and Conditions. Subject to the terms of the Plan, the Committee shall determine the terms and conditions applicable to any particular grant of a Restricted Stock Award. The Holder shall have the right to enjoy all stockholder rights during the Restriction Period with the exception that: (i) The Holder may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of the Stock during the Restriction Period, except as permitted pursuant to Section 11(e). (ii) Any breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Award shall cause a forfeiture of the Restricted Stock Award, and any dividends withheld thereon. (iii) Cash and stock dividends may either be currently paid or withheld by the Company for the Holder's account. At the discretion of the Committee, interest may be paid on the amount of cash dividends withheld, including cash dividends on stock dividends, at a rate and subject to such terms as determined by the Committee. -12- c. Termination of Employment. The Committee shall establish, and set forth in the applicable Restricted Stock Award, the effect of a termination of employment on the rights and benefits of a Restricted Stock Award and, in doing so, may make distinctions based upon, inter alia, the reason for the termination of employment. 10. Performance Restricted Stock Awards a. General. Grants of Performance Restricted Stock Awards may be made by the Committee during the term of the Plan. A Performance Restricted Stock Award is an award of restricted shares based on the Company's performance over the immediately preceding calendar year (a "Performance Year"). The first Performance Year shall be 2004. The maximum number of shares that may be granted subject to Performance Restricted Stock Awards in any Performance Year is 800,000 shares. b. Awards to 162(m) Participants. Within the first 90 days of a Performance Year, the Committee shall establish (i) the target number of restricted shares to be granted as a Performance Restricted Stock Award to each 162(m) Participant, (ii) the performance goals based on one or more of Comparative Return to Shareholders, ROCE, Free Cash Flow and Net Cash Provided by Operating Activities for the Performance Year, and (iii) the extent to which the individualized target Performance Restricted Stock Awards will be granted, if at all, based on the attainment of those performance goals. Following the end of such Performance Year, the Committee shall determine the extent to which the pre-established performance goals were met and the corresponding number of restricted shares subject to each 162(m) Participant's Performance Restricted Stock Award, if any. The Committee may reduce (but not increase) the number of shares subject to each such Award based on such criteria as the Committee, in its sole discretion may determine, including but not limited to Future Year Value Creation and individual performance. c. Awards to Non-162(m) Participants. For each Performance Year, the Committee shall establish individual target restricted stock awards for the participants who are not 162(m) Participants based upon such criteria as the Committee, in its sole discretion may determine, which criteria may include, but is not limited to, one or more of the following: ROCE, Free Cash Flow, Future Year Value Creation, salary grade and salary. Following the end of the Performance Year and subject to the number of restricted shares available for grant after the award of Performance Restricted Stock Awards to 162(m) Participants, the Committee shall have the sole discretion to determine the actual number of shares subject to each Performance Restricted Stock Award, which amounts may be greater or lesser than the target amounts, on the basis of factors such as, but not limited to, the following: (i) Comparison of actual operational or financial results to plans or goals, adjusted for external factors such as changes in market prices, (ii) Individual performance of Employees selected to participate in the Plan, and (iii) Reasonableness of total cash compensation. d. Restriction Period. At the time a Performance Restricted Stock Award is made, the Committee shall establish a period of time (the "Restriction Period") applicable to such Performance Restricted Stock Award, which shall be not less than four years (subject to Section 10(b)). Each Performance Restricted Stock Award may have a different Restriction Period, at the discretion of the Committee. In the event (i) of a public tender for all or any portion of the Stock of the Company, (ii) that any proposal to merge, consolidate or otherwise combine the Company with another company is submitted for stockholder approval, or (iii) another situation exists that the Committee determines is similar thereto, then the Committee may in its sole discretion change or eliminate the Restriction Period, and it may also include provisions for such events in the Performance Restricted Stock Award. e. Other Terms and Conditions. The provisions of Section 9(b) shall apply to Performance Restricted Stock Awards granted pursuant to Section 10. f. Termination of Employment. The provisions of Section 9(c) shall apply to Performance Restricted Stock Awards granted pursuant to Section 10. g. Distribution. Except as provided in Section 10(d), in no event shall Stock be delivered prior to six months from the date of grant. -13- 11. General a. Government and Other Regulations. The obligation of the Company to make payment of Awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by governmental agencies as may be required. The Company shall be under no obligation to register under the Securities Act of 1933, as amended ("Act") any of the shares of Stock paid under the Plan. If the Stock issued under the Plan may in certain circumstances be exempt from registration under the Act, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption. b. Tax Withholding. The Company or a Subsidiary, as appropriate, shall have the right to deduct from all Awards paid in cash any federal, state or local taxes as required by law to be withheld with respect to such cash payments, and, in the case of Awards paid in Stock, the Employee or other person receiving such Stock may be required to pay to the Company or a Subsidiary, as appropriate, the amount of any such taxes which the Company or Subsidiary is required to withhold with respect to such Stock. The Company may, in lieu of requiring cash payment of any such taxes, elect to withhold from Stock payments a number of whole shares of Stock with a value equal to the minimum applicable withholding obligation on vesting or payment. Valuation for this purpose shall be the average of the reported high and low prices of the Stock as reported in the New York Stock Exchange Composite Transactions quotations for the first trading date following the Award or Restriction Period, unless the Committee determines that it is appropriate to value the Stock on some other date for this purpose. Shares in no event may be withheld in excess of the minimum number required for tax withholding under applicable law. c. Claim to Awards and Employment Rights. No Employee or other person shall have any claim or right to be granted an Award under the Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any Employee any right to be retained in the employ of the Company or a Subsidiary. d. Beneficiaries. Any payment of Awards due under this Plan to a deceased Holder shall be paid to the beneficiary designated by the Holder in writing and filed with the Company. If no such beneficiary has been designated, payment shall be made to the Holder's surviving spouse. If the Holder has not designated a beneficiary and has no surviving spouse, payment shall be made to the Holder's legal representative. A beneficiary designation may be changed or revoked by a Holder at any time, provided the change or revocation is filed in writing with the Committee. e. Nontransferability. A Holder's rights and interests under the Plan, including amounts payable, may not be assigned, pledged, or transferred except, in the event of an Employee's death, to a designated beneficiary as provided in the Plan, or in the absence of such designation, by will or the laws of descent and distribution, except as may be permitted by the Committee in its sole discretion. The Committee, in its sole discretion, may permit transfers of Options, Performance Restricted Stock and/or Restricted Stock Awards to an Employee's family members and entities (including trusts, corporations, partnerships, and limited liability companies) that are established for the exclusive benefit of or are owned solely by family members and may prescribe such rules and limitations as it deems appropriate regarding such transfers, taking into account tax considerations, the impact of Section 16 of the Securities Exchange Act of 1934, the need to register shares under the Securities Act of 1933 and any applicable State Blue Sky Laws, and any other relevant considerations. The above transfer restrictions shall not apply to transfers pursuant to a court order, including, but not limited to, any domestic relations orders. f. Indemnification. Each person who is or shall have been a member of the Committee or the Board, including the Employee directors, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action or failure to act under the Plan and against and from any and all amounts paid by him in satisfaction of judgment in any such action, suit or proceeding against him. He shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. -14- g. Reliance on Reports. Each member of the Committee and the Board, including the Employee directors, shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of the Company and its Subsidiaries and upon any other information furnished in connection with the Plan by any person or persons other than himself. In no event shall any person who is or shall have been a member of the Committee or of the Board be liable for any determination made or other action taken or any omission to act in reliance upon any such report or information or for any action taken, including the furnishing of information, or failure to act, if in good faith. h. Relationship to Other Benefits. No payment under the Plan shall be taken into account in determining any benefits under a pension, retirement, profit sharing, group insurance or other benefit plan of the Company or any Subsidiary. i. Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries. j. Pronouns. Masculine pronouns and other words of masculine gender shall refer to both men and women. k. Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 12. Changes in Capital Structure Options, Restricted Stock Awards, Performance Share Awards, Performance Restricted Stock Awards and any agreements evidencing such Awards shall be subject to adjustment by the Committee as to the number and price of shares of Stock or other considerations subject to such Awards in the event of changes in the outstanding Stock by reason of stock dividends, stock splits, recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the Date of Grant of any such Options or Awards. In the event of any such change in the outstanding Stock, the aggregate number of shares available under the Plan and Program may be appropriately adjusted by the Committee, whose determination shall be conclusive. 13. Amendments and Termination The Board may at any time terminate the Plan and, subject to Section 7(f), with the express written consent of a Holder, the Board or Committee may cancel, reduce or otherwise alter his outstanding Awards thereunder if, in its judgment, the tax, accounting, or other effects of the Plan or potential payouts thereunder would not be in the best interest of the Company. The Board may, at any time, or from time to time, amend or suspend and, if suspended, reinstate, the Plan in whole or in part. Notwithstanding the foregoing, to the extent then required by Section 7(f), applicable law or any applicable listing agency, or deemed necessary or advisable by the Board, any amendment to this Plan shall be subject to stockholder approval. -15- EX-10 4 q22004_ex103.txt EXHIBIT 10.3 - COO EMPLOYMENT AGREEMENT Exhibit 10.3 UNOCAL EMPLOYMENT AGREEMENT This employment agreement (the "Agreement") is made effective as of July 20, 2004 (the "Effective Date"), by and between Unocal Corporation, a Delaware corporation (the "Company") and Joseph H. Bryant ("Employee"). In consideration of the mutual promises and agreements set forth herein, the Company and Employee agree as follows: 1. Term. 1.1 Employee's initial date of active employment shall be September 1, 2004, or such other date as the Company and Employee shall mutually agree (the "Employment Date"). The term of this Agreement (the "Term") shall commence on the Employment Date and shall be for three (3) years, subject to earlier termination in accordance with the provisions of Paragraph 4 hereinbelow. If the Agreement has not been subject to early termination in accordance with the provisions of Paragraph 4 hereinbelow, beginning on the Employment Date and on each day thereafter, the Term shall automatically be extended for an additional day unless the Company notifies Employee in writing that it does not wish to further extend the Term. Notwithstanding the foregoing, this Agreement shall end automatically and without additional notice on the date of the Company's Annual Meeting of Shareholders that next follows the date of Employee's sixty-fifth (65th) birthday. The parties agree that this Agreement shall be subject to satisfactory completion by Employee of the Company's standard pre-employment procedures prior to the Employment Date. 2. Position and Title. 2.1 The Company on behalf of itself and its affiliates and subsidiaries hereby employs Employee as President and Chief Operating Officer and Employee hereby accepts such employment. Employee shall report solely to the Chief Executive Officer of the Company. 2.2 Employee shall devote substantially all of his efforts on a full time basis to the business and affairs of the Company and shall not engage in any business or perform any services in any capacity whatsoever adverse to the interests of the Company. 2.3 Employee shall at all times faithfully, industriously, and to the best of his ability, experience, and talents, perform all of the duties of his position. 3. Compensation. 3.1 As of the Employment Date, Employee's annual base salary is $725,004. Employee's base salary and performance shall be reviewed periodically at intervals approved by the Management Development and Compensation Committee of the Board of Directors of the Company (the "Committee"), and Employee's base salary may be increased from time to time based on merit or such other consideration as the Committee may deem appropriate. 3.2 During the Term, Employee shall participate in all of the Company's incentive plans, benefit plans and perquisites, and in any new or successor incentive plans, benefit plans and perquisites, that are generally provided to executives of the Company with a level of responsibility and stature comparable to Employee. Performance goals, award opportunity, benefit levels, and administrative guidelines for such plans shall be subject to review and approval by the Committee. 3.3 Employee will be entitled to the compensation described in Annex A, which is incorporated herein. 4. Termination of Employment. 4.1 During the Term, the Company may terminate Employee's employment herein at any time for Cause, provided however that, except in the case of conviction of a felony, the Board of Directors shall provide Employee with not less than sixty (60) days prior written notice describing the behavior or conduct which is alleged by the Board of Directors to constitute Cause, and Employee shall be provided with reasonable opportunity to correct such behavior or conduct within the notice period. For purposes of this Agreement, Cause shall be defined as any or all of the following: (1) Conduct or action by Employee which, in the opinion of a majority of the Board of Directors, is materially harmful to the Company, but excluding any conduct which the Employee believes, in good faith, to be in, or not opposed to, the Company's best interest; (2) Willful failure by Employee to follow an order of the Board of Directors, except in such case where the Employee believes in good faith that following such order would be materially detrimental to the interests of the Company; (3) Employee's conviction of a felony. 4.2 A termination of Employee's employment shall be considered a Termination Without Cause in the event that Employee's employment is terminated by the Company for any reason other than those set forth in Paragraph 4.1 hereinabove, or in the event Employee terminates employment voluntarily following one or more of the following (a) Employee's annual base salary is reduced below the amount then in effect under Paragraph 3.1 hereinabove (unless such reduction is part of an across the board reduction affecting all Company executives with a comparable level of responsibility, title or stature), or (b) Employee is removed from or denied participation in incentive plans, benefit plans, or perquisites generally provided by the Company to other executives with a comparable level of responsibility, title or stature, or (c) Employee's target incentive opportunity, benefits or perquisites are reduced relative to other executives with comparable responsibility, title or stature, or (d) Employee is assigned duties or obligations inconsistent with his position with the Company or (e) There is a significant change in the nature and scope of Employee's authority or his overall working environment, including, without limitation, any change in the reporting responsibilities described in Paragraph 2.1, or (f) Employee's work location is changed to a location other than Houston or Sugarland, Texas, -2- or such other location as Employee and the Company shall mutually agree, or (g) the Company shall be in material breach of any other provision of this Agreement. 4.3 In the event of Employee's Termination Without Cause at any time during the Term of this Agreement, then, in addition to the Employee's rights under any applicable stock or benefit plans: (1) The Company shall pay Employee a lump-sum severance amount within thirty (30) days following Termination Without Cause equal to three (3) times the sum of (a) the higher of the Employee's annual base salary at the time of Termination Without Cause or the annual base salary stated in Paragraph 3.1 hereinabove, and (b) the annual target Bonus applicable to Employee as of the beginning of the calendar year in which such Termination Without Cause occurs. Such sum shall be reduced by the amount of any Unocal Employee Redeployment Program and Unocal Termination Allowance benefits payable to Employee. (2) The Company shall provide medical, dental, life, and disability insurance coverage for Employee (and, with respect to medical and dental coverage, for his dependents) for two (2) years following Termination Without Cause at levels and a net cost to Employee comparable to that provided to Employee immediately prior to Employee's Termination Without Cause. In lieu of the foregoing continued benefits (but not in lieu of health and dental insurance continuation coverage under COBRA), the Company in its sole discretion may elect to pay the Employee the sum of $25,000 (twenty-five thousand U.S. Dollars). (3) The Company shall pay Employee an additional lump-sum severance amount within thirty (30) days following Employee's Termination Without Cause equal to three (3) times the base salary used to determine the lump-sum severance benefit in paragraph 4.3(1) hereinabove, multiplied by 6% (.06). 4.4 In the event that during the Term of this Agreement Employee (i) should voluntarily resign from the Company for any reason other than those described in Paragraph 4.2, (ii) should terminate employment with the Company due to death, permanent disability or incapacitation, or (iii) is terminated by the Company for Cause, then Employee shall not be entitled to any of the termination benefits provided for in Paragraph 4.3 (1) through (3) hereinabove, and the Term of the Agreement shall immediately end. 4.5 Employee shall not be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Employee under any provisions of this Agreement. 5. Change of Control. 5.1 In the event of a Change of Control of the Company at any time during the Term of this Agreement, then: -3- (1) In the event of Employee's Termination Without Cause within a period of twenty-four (24) months following the date of a Change of Control, Employee shall be entitled to the termination benefits described in Paragraph 4.3 hereinabove (provided that for purposes of Paragraph 4.3(1)(a), annual base salary shall be the amount in effect immediately prior to the Change of Control, if greater) plus the benefit described in Paragraph 5.1(2) below. (2) Employee shall be entitled to an amount equal to the increase in the lump sum value of Employee's Unocal Retirement Plan and non-qualified retirement plans of the Company if three years were added to Employee's benefit service and age thereunder and if Employee were fully vested, with covered compensation based on actual full months of employment, if less than 36 months 5.2 For the purpose of this Agreement, a "Change of Control" shall mean: (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 Paragraph 5.2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors -4- 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 beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then 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) beneficially owns, 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. 5.3 Certain Additional Payments by the Company may be due as follows: (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company or its affiliates to or for the benefit of the Employee (whether paid or payable or -5- distributed or distributable pursuant to the terms of this Agreement or otherwise but determined without regard to any additional payments required under this Paragraph 5.3), (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Paragraph 5.3, if it shall be determined that the Employee is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Employee such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Employee and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Paragraph 5.3(c), all determinations required to be made under this Paragraph 5.3, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst and Young or such other certified public accounting firm as may be designated by the Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the receipt of notice from the Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Employee shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Paragraph 5.3, shall be paid by the Company to the Employee within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the -6- time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Paragraph 5.3(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Employee is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii)cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without -7- limitation on the foregoing provisions of this Paragraph 5.3(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee, on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to the such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Paragraph 5.3(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's employing with the requirements of Paragraph 5.3 promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Paragraph 5.3(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. -8- 6. Covenants. 6.1 Employee agrees that any and all confidential knowledge or information, including but not limited to customer lists, books, records, data, formulae, specifications, inventions, processes and methods, and developments and improvements, which have been or may be obtained or learned by Employee in the course of his employment with the Company, will be held confidential by Employee, and that Employee shall not disclose the same to any person outside of the Company either during his employment with the Company or after his employment by the Company has terminated, provided, however, that Employee shall be entitled to make such disclosures as necessary to satisfy applicable federal or state law or to cooperate with governmental or regulatory investigation or legal, judicial or administrative proceedings. 6.2 Employee agrees that upon termination of his employment with the Company he will immediately surrender and turn over to the Company all books, records, forms, specifications, formulae, data, and all papers and writings relating to the business of the Company and all other property belonging to the Company, it being understood and agreed that the same are the sole property of the Company and that Employee shall not make or retain any copies thereof. 6.3 Employee agrees that all inventions, developments or improvements which he has made or may make, conceive, invent, discover or otherwise acquire during his employment with the Company in the scope of his responsibilities or otherwise shall become the sole property of the Company. 6.4 Employee agrees to provide a release of any claims with respect to termination of his or her employment on such form as requested by the Company upon payment of the sums provided in Paragraph 4.3 above. 7. Miscellaneous Provisions. 7.1 All terms and conditions of this Agreement are set forth herein, and in the Exhibits attached hereto and there are no warranties, agreements or understandings, express or implied, except those expressly set forth herein. 7.2 Any modification to this Agreement shall be binding only if evidenced in writing signed by all parties hereto. 7.3 Any notice or other communication required or permitted to be given hereunder shall be deemed properly given if personally delivered or deposited in the United States mail, registered or certified and postage prepaid, addressed to the Company at 2141 Rosecrans Ave., Suite 4000, El Segundo, CA (Attention: General Counsel), or to Employee at his or her most recent home address on file with Company, or at other such addresses as may from time to time be designated in writing by the respective parties. 7.4 The laws of the State of California shall govern the validity of this Agreement, the construction of its terms, and the interpretation of the rights and duties of the parties involved. -9- 7.5 In the event that any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable, the same shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein. 7.6 This Agreement shall be binding upon, and inure to the benefit of, the successors and assigns of the Company and the personal representatives, heirs and legatees of Employee. 7.7 "Bonus" refers to the Unocal Incentive Compensation Plan and any replacement or successor plan thereof 7.8 Company shall pay 90% (ninety percent) of Employee's out-of-pocket litigation expenses, including reasonable attorney's fees, in connection with any judicial proceeding to enforce this Agreement or construe or determine the validity of this Agreement, whether or not the Employee is successful in such proceeding. 7.9 The term "Company" shall include with respect to employment hereunder, any subsidiary or affiliate of the Company, as well as any successor employer following a Change in Control. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. BY: _____________________________________________ Terry G. Dallas Executive Vice President and Chief Financial Officer Unocal Corporation BY: _____________________________________________ EMPLOYEE -10- ANNEX A 1. Annual Bonus. Employee will be eligible to participate in the Company's annual incentive plan at a target bonus award level of no less than 100% of Employee's annual base salary; provided, however, that for the 2004 calendar year the award will be prorated based on the number of days in the year from and after the Employment Date. 2. Stock Awards. Effective as of the Employment Date, Employee shall receive an award of an option (the "Option") to acquire 50,000 shares of common stock of the Company ("Common Stock"), pursuant to the terms of the Company's Long-Term Incentive Plan (the "LTIP"). The Option shall become exercisable in three equal installments on each anniversary of the Employment Date. The exercise price will be the fair market value (as defined in the LTIP) on the Employment Date. The Option will have ten-year term, subject to earlier expiration in the event of termination of employment in accordance with the Company's customary option award terms. In addition, as of the Employment Date, Employee shall be awarded 7,500 shares of restricted Common Stock ("Restricted Stock") under the terms of the LTIP. These shares will become vested on the fourth anniversary of the Employment Date, subject to continued service with the Company. Both the Option and the shares of Restricted Stock awarded pursuant to this Paragraph 2 shall become fully vested in the event of a Change of Control, and in the event of a Termination Without Cause a pro-rata portion of the Restricted Stock will become vested in accordance with the rights afforded an employee who terminates for the convenience of the Company. The terms of both the Option and the award of Restricted Stock are more fully reflected in the award agreements attached hereto as Exhibits A and B, respectively. The Company hereby acknowledges that the Option and shares of Restricted Stock awarded pursuant to this Paragraph 2 are intended to induce Employee to enter into employment with the Company and are not intended to reduce the long-term incentive awards which may otherwise be granted by the Company to Employee by reason of Employee's employment hereunder. 3. Deferred Compensation. Employee shall be entitled to participate in the Company's Deferred Compensation Plan. As of the Employment Date, the Company shall credit a company contribution account under the Deferred Compensation Plan for Employee with the amount of $890,000 (the "Initial Account"). The amount credited to the Initial Account, with any corresponding earnings or losses, shall be forfeited in the event Employee's employment hereunder terminates prior to the third anniversary of the Employment Date for any reason other than a Termination Without Cause, death or disability; provided, however, that the Initial Account shall be fully vested in the event of a Change of Control. EXHIBIT A UNOCAL CORPORATION NONQUALIFIED STOCK OPTION UNDER THE LONG-TERM INCENTIVE PLAN OF 2004 Award Document UNOCAL CORPORATION (hereinafter called the "Company"), desiring to provide an incentive to the success of the Company and its subsidiaries, hereby grants to Joseph H. Bryant (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 2004, as amended (the "Plan") and upon the following terms and conditions: A. Amount And Term Of Option 1. The exercise price is $________ per share, subject to adjustment as contemplated by Section 12 of the Plan and paragraphs B.8 and C.3 below. 2. 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 _____________. 3. The total number of shares which may be purchased pursuant to this Option shall be 50,000, subject to adjustment as contemplated by Section 12 of the Plan and paragraphs B.8 and C.3 below. This Option shall become exercisable in accordance with the following schedule: 1/3 of the shares may be purchased on or after one year from the date of grant. 2/3 of the shares may be purchased on or after two years from the date of grant. 100% of the shares may be purchased on or after three years from the date of grant. 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. The foregoing restrictions shall not apply to transfers pursuant to Section 11(e) of the Plan. The foregoing restrictions shall not apply to transfers pursuant to a court order, including, but not limited to any domestic relations order. 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. This Option shall continue to be exercisable in accordance with Section A.3 and may be exercised during the Option Period for the number of shares Option Holder was entitled to purchase on the date of his or her termination of employment if the Option Holder terminates employment under the following circumstances: a. Because of retirement at or after attaining age 65; b. Because of "early retirement" at the convenience of the Company. "Early retirement" shall mean that on the date of termination the Option Holder is at least 55 years of age and has at least 5 years of vesting service under the Unocal Retirement Plan or would have 5 years of vesting service if he or she had been employed by Union Oil Company of California on the day prior to termination of employment. The determination that an early retirement is "at the convenience of the Company" shall be made at the sole discretion of the Company; c. Because of total disability (as defined in the Unocal Medical Plan) or death 4. If the employment of the Option Holder by the Company or any of its subsidiaries terminates within the Option Period at the convenience of the Company, such determination to be made by the Committee in its sole discretion, and not because of voluntary resignation or inadequate performance, 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. 5. If the Option Holder has a "Termination of Employment Event," as defined in the Unocal Retirement Plan following a Change of Control, as defined below, or dies during the Option Period while still employed by the Company or any of its subsidiaries without having fully exercised this Option, this Option shall become immediately exercisable and may be exercised within the Option Period. 6. If the Option Holder's employment with the Company and/or a subsidiary terminates other than in the circumstances described in paragraph B.3, B.4 or B.5 above, this Option shall lapse and terminate as of the date of such termination of employment. 7. The Committee may at its sole discretion elect to reinstitute any lapsed Options upon the rehire of a terminated Option Holder. 8. 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.4 through a plan of reorganization or otherwise for the survival, assumption, exchange or other settlement of the Option or right. -2- 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.8 if the outstanding shares of the Company of the class then subject to this Option shall be changed into or exchanged for a different number or class of shares of stock of the Company or of another entity, whether through reorganization, recapitalization, split-up, spin off, combination of shares, merger or consolidation, then there shall be, in such manner and to such extent (if any) as the Committee deems appropriate in the circumstances, substituted for each such share then subject to this Option (and for each share reserved for issuance pursuant thereto), the number and class of shares of stock or other securities, cash or property (or combination thereof) into which each such outstanding share of the Company shall be so changed or exchanged, all without any change in the aggregate purchase price for the shares then subject to this Option. D. Manner of Exercise 1. This Option may be exercised from time to time, in accordance with its terms, by written notice thereof signed by the Option Holder and delivered to the Secretary of the Company at its head office in the City of El Segundo, State of California. Such notice shall state the number of shares being purchased, be accompanied by payment of the full option price for such number of shares and payment for any applicable withholding tax (unless otherwise provided for). Payment may be in the form of cash or shares of the common stock of the Company (provided the shares have been owned at least six (6) months, if originally acquired from the Company). Additionally, this Option may be exercised in accordance with such other arrangements, including "cashless" exercise procedures, as are approved from time to time by the Board or the Committee. To the extent exercisable, an Option shall be exercisable for all or a part of whole shares, but not as to any fractional interest. 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. 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- 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 or (to the extent necessary in the circumstances to enable the Option Holder, subject to payment or permitted offset of the exercise price and any applicable withholding taxes, to exercise the Option or otherwise realize the benefits of the Option with respect to the underlying shares in the same manner as available to the common stockholders generally as a result of the event) immediately prior to but subject to 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 paragraph (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 entity pursuant to a transaction that satisfies the conditions of clauses (i), (ii) and (iii) of paragraph (c) of this Section D.4. (b) Individuals who, as of May 21, 2001, constituted the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to May 21, 2001 whose election, or nomination for election by the Company's stockholders, 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, except that 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 shall not be considered a member of the Incumbent Board. (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 entity (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 the Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Business Combination (or, without limitation, an entity 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 (a "resulting parent")) in substantially the same proportions as their ownership, immediately prior to such Business Combination of -4- the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any resulting entity or resulting parent in such Business Combination or any employee benefit plan (or related trust) of the Company or such resulting entity or resulting parent) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the entity resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such entity, 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 resulting entity from such Business Combination or resulting parent 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. For purposes of this paragraph (c), "entity" means any corporation, limited liability company, partnership or any other statutorily recognized business organization or entity that is similar to a statutory corporation and that can be merged into or combined with a statutory corporation. (d) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. E. Miscellaneous 1. This Option is granted pursuant to the Plan and is subject to all of the terms and provisions of the Plan. 2. The Option Holder agrees during 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. -5- IN WITNESS WHEREOF, The Company has granted this Option, at El Segundo, California effective on ________________, which date is the date of grant of this Option. UNOCAL CORPORATION -6- EXHIBIT B UNOCAL CORPORATION LONG-TERM INCENTIVE PLAN OF 2004 RESTRICTED STOCK AWARD AGREEMENT Unocal Corporation (hereinafter called the "Company") desiring to provide to Joseph H. Bryant (hereinafter called the "Recipient") an incentive and proprietary interest in the success of the Company and its subsidiaries, and to obligate Recipient to perform services with the Company or a subsidiary thereof, hereby grants, as of __________________, to the Recipient, and the Recipient hereby accepts, subject to all the terms and conditions of this Agreement 7,500 restricted shares of the Common Stock, $1 par value, of the Company. This Restricted Stock Award is subject to the Long-Term Incentive Plan of 2004 and the following terms and conditions: A. Retention and Delivery of Share Certificates 1. The shares granted pursuant to this award shall be retained by the Company, or a party selected by the Company, while any restrictions apply. 2. The Recipient shall not be entitled to the delivery of any certificates representing the shares granted pursuant to this award unless and until all terms and conditions of the grant have been satisfied and all restrictions have lapsed. 3. Any delivery of share certificates pursuant to this award is also conditioned upon the payment to the Company of all state, local, federal or other taxes which the Company shall deem necessary or appropriate to withhold upon the delivery of such certificates. The Company may, in lieu of requiring cash payment of any such taxes, elect to withhold a number of whole shares of Stock whose value is at least equal to the amount of such taxes. B. Dividends All cash dividends on restricted shares which are held by the Company pursuant to this Agreement as of the date used for determining eligibility to receive dividend payments, shall be paid to the Recipient. No such dividend payments shall be made to the Recipient on any shares which have been forfeited as of said date. C. Voting and Consents During the period when restricted shares pursuant to this award are held by the Company under Section A above, Recipient shall have all voting rights with respect thereto. In the event the Recipient shall not exercise said voting rights with respect to this award or with respect to a prior award, then the Management Development and Compensation Committee of the Board of Directors (hereinafter the "Committee") shall be entitled to vote such shares. D. Vesting and Forfeiture of Shares 1. The Recipient shall be entitled to the delivery of all the shares which are subject to this award and all restrictions thereon shall lapse if the Recipient is continuously employed by the Company and/or its subsidiaries until ________________. 2. If the employment of the Recipient is terminated prior to the end of the restriction period by a Normal or Deferred Retirement, as defined in and pursuant to the Company's Retirement Plan (or the retirement plan of a subsidiary, if applicable); by death or total disability (as defined in the Company Medical Plan); by an involuntary termination of employment which the Company indicates to the Committee is for the convenience of the Company; or an Early Retirement which the Company indicates to the Committee is for the convenience of the Company; then the Recipient shall be entitled to the delivery of a pro rata portion (not in excess of 1) of the shares subject to the award determined by the number of calendar days of employment with the Company or a subsidiary since the date of this award, divided by the number of calendar days from the date of this award until ________________. 3. The shares which are the subject of this award shall be completely forfeited and revert to the Company in the event the Recipient voluntarily terminates employment, or in the event the termination does not satisfy the conditions indicated in Paragraph 2 above. 4. Upon the occurrence of a Change in Control Event (as such term is defined below), the Recipient shall be entitled to the delivery of all the shares which are subject to this award and all restrictions shall lapse. The shares subject to this award shall be subject to the same provisions as then apply generally to the outstanding shares of the Common Stock of the Company. As used herein, Change in Control 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") 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 -2- (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; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) The approval by the shareholders of the Company 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"), or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent either explicitly or implicitly by consummation of the 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 then 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 will have been 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 -3- (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 5. Unless the Committee or the Board otherwise provides prior to the Change in Control Event, the Recipient shall be entitled to refuse by advance written notice to the Company all or any portion of any payment or benefit (including shares) accelerated by reason of these amendments if the Recipient determines that receipt of such payment or benefit may result in adverse tax consequences to the Recipient under Section 4999 of the Internal Revenue Code. Unless the Committee or the Board otherwise provides prior to the Change in Control Event, the Company shall be totally permanently relieved of any obligation to pay any amount or provide any benefit to the Recipient which the Recipient explicitly so refuses. E. Stock Dividends and Recapitalization 1. In the event a dividend is declared upon the shares of the Company of the class then subject to this award, payable in such shares, the number of shares then subject to this award shall be increased proportionately. 2. In the event the outstanding shares of the Company of the class then subject to this award shall be changed into or exchanged for a different number or class of shares of stock of the Company or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger or consolidation, then there shall be substituted for each such share then subject to this award the number and class of shares of stock into which each such outstanding share of the Company shall be so exchanged. F. Miscellaneous 1. Nothing in this Agreement shall confer on the Recipient any right to continue in the employ of the Company or a subsidiary or shall interfere with or restrict in any way the ability of the Company or a subsidiary, which are hereby reserved, to discharge the Recipient at any time for any reason whatsoever, with or without cause. Recipient as part of this Agreement hereby acknowledges that the Recipient is an at-will employee. 2. No Recipient may assign, transfer, pledge, hypothecate by either voluntary action or involuntary action any or all of the shares which are the subject of this award and held pursuant to Section A hereof. 3. The Recipient shall file with the Company a beneficiary designation with respect to any distributions to be made in the event of Recipient's death. In the event no such designation is on file, or if said beneficiary or beneficiaries do not survive the Recipient or if the Committee is in doubt as to the appropriate beneficiary, the Committee may deliver the shares to the legal representative of the Recipient's -4- estate and thereby be relieved of all liability with respect to distributions payable on account of the Recipient's death. 4. This Agreement shall be governed in accordance with the laws of the State of California. 5. The headings of this Agreement are for convenience only and are to be ignored if inconsistent with the text. 6. This Agreement shall be binding on any successor of the Company. 7. The Company and Committee shall retain all rights and authority under the Long-Term Incentive Plan of 2004 with respect to this Award to the extent not expressly inconsistent with this Agreement. All definitions and terms used in this Agreement are qualified in their entirety by reference to said Plan. IN WITNESS WHEREOF, The Company has granted this Restricted Stock Award on _____________, at El Segundo, California, which date is the date of this Award. UNOCAL CORPORATION EX-12 5 q22004_ex121.txt EXHIBIT 12.1 UNOCAL EARNINGS/FIXED RATIO Exhibit 12.1 UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Six Months Ended June 30, ------------------------------- Millions of dollars 2004 2003 - ------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations $ 548 $ 379 Provision for income taxes 323 297 Minority Interests 4 4 Distributions less than earnings from equity investments (16) (5) - ------------------------------------------------------------------------------------------------------------------ Earnings subtotal (a) 859 675 Fixed charges included in earnings: Interest expense 87 74 Distribution on convertible preferred securities - 16 Interest portion of rentals (b) 12 11 - ------------------------------------------------------------------------------------------------------------------ Fixed charges subtotal 99 101 Earnings from continuing operations available before fixed charges $ 958 $ 776 ================================================================================================================== Fixed charges: Fixed charges included in earnings $ 99 $ 101 Capitalized interest 26 35 - ------------------------------------------------------------------------------------------------------------------ Total fixed charges $ 125 $ 136 - ------------------------------------------------------------------------------------------------------------------ Ratio of earnings from operations to fixed charges 7.7 5.7 - ------------------------------------------------------------------------------------------------------------------ (a) Includes pre-tax Impairment of: 14 3 The ratio of earnings, excluding impairment, to fixed charges would be: 7.8 5.7 (b) Calculated as one-third of operating rental expense.
EX-12 6 q22004_ex122.txt EXHIBIT 12.2 UNION OIL RATIO Exhibit 12.2
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES For the Six Months Ended June 30, ------------------------------- Millions of dollars 2004 2003 - ------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations $ 566 $ 397 Provision for income taxes 327 301 Minority Interests 4 4 Distributions less than earnings from equity investments (16) (5) - ------------------------------------------------------------------------------------------------------------------ Earnings subtotal 881 697 Fixed charges included in earnings: Interest expense 70 74 Interest portion of rentals 12 11 - ------------------------------------------------------------------------------------------------------------------ Fixed charges subtotal 82 85 Earnings from continuing operations available before fixed charges $ 963 $ 782 ================================================================================================================== Fixed charges: Fixed charges included in earnings $ 82 $ 85 Capitalized interest 26 35 - ------------------------------------------------------------------------------------------------------------------ Total fixed charges $ 108 $ 120 - ------------------------------------------------------------------------------------------------------------------ Ratio of earnings from operations to fixed charges 8.9 6.5 - ------------------------------------------------------------------------------------------------------------------ (a) Includes pre-tax Impairment of: 14 3 The ratio of earnings, excluding impairment, to fixed charges would be: 9.0 6.5 (b) Calculated as one-third of operating rental expense.
EX-31 7 q22004_ex311.txt EXHIBIT 31.1 CEO CERTIFICATION Exhibit 31.1 CERTIFICATIONS I, Charles R. Williamson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Unocal Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 5, 2004 /s/ CHARLES R. WILLIAMSON -------------------------------- Charles R. Williamson Chief Executive Officer EX-31 8 q22004_ex312.txt EXHIBIT 31.2 CFO CERTIFICATION Exhibit 31.2 CERTIFICATIONS I, Terry G. Dallas, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Unocal Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 5, 2004 /s/ TERRY G. DALLAS -------------------------------- Terry G. Dallas Chief Financial Officer EX-32 9 q22004_ex32.txt EXHIBIT 32 CEO/CFO 906 CERTIFICATION Exhibit 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Charles R. Williamson, Chief Executive Officer of Unocal Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to my knowledge: (1) our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, our financial condition and results of operations. Dated: August 5, 2004 /s/ CHARLES R. WILLIAMSON -------------------------------- Charles R. Williamson CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Terry G. Dallas, Chief Financial Officer of Unocal Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to my knowledge: (1) our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, our financial condition and results of operations. Dated: August 5, 2004 /s/ TERRY G. DALLAS ------------------------------ Terry G. Dallas -----END PRIVACY-ENHANCED MESSAGE-----