-----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, RLUfbmCNzzlIRWEsZgj1a2aKVrIgZpznXQx3FVWRp9+cTgjoNLaHj2qSJOZRVGj7 +laKRqRISir45VlDfOSnbw== 0000716039-97-000038.txt : 19970815 0000716039-97-000038.hdr.sgml : 19970815 ACCESSION NUMBER: 0000716039-97-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNOCAL CORP CENTRAL INDEX KEY: 0000716039 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] 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: 97663846 BUSINESS ADDRESS: STREET 1: 2141 ROSECRANS AVE STREET 2: STE 4000 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107267600 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- ------------------- Commission file number 1-8483 UNOCAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-3825062 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2141 Rosecrans Avenue, Suite 4000, El Segundo, California 90245 --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (310) 726-7600 -------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of Common Stock, $1 par value, outstanding as of July 31, 1997: 247,001,749
PART I - FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED EARNINGS UNOCAL CORPORATION (Unaudited) For the Three Months For the Six Months Ended June 30 Ended June 30 --------------------------------------------- Dollars in millions except per share amounts 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------------- REVENUES Sales and operating revenues ........................................ $ 1,494 $ 1,260 $ 2,902 $ 2,403 Gain on sales of assets and other revenues .......................... 160 145 208 203 - --------------------------------------------------------------------------------------------------------------------- Total revenues ................................................ 1,654 1,405 3,110 2,606 COSTS AND OTHER DEDUCTIONS Crude oil and product purchases ..................................... 633 400 1,092 675 Operating expense ................................................... 365 324 653 636 Selling, administrative and general expense ......................... 27 25 55 68 Depreciation, depletion and amortization ............................ 244 214 455 425 Dry hole costs ...................................................... 27 5 43 19 Exploration expense ................................................. 36 28 64 50 Interest expense .................................................... 49 69 110 147 Property and other operating taxes .................................. 16 20 36 41 Distributions on convertible preferred securities of subsidiary trust ................................... 8 -- 16 -- - --------------------------------------------------------------------------------------------------------------------- Total costs and other deductions .............................. 1,405 1,085 2,524 2,061 - --------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes .............................................. 249 320 586 545 Income taxes ........................................................ 93 132 242 226 - --------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before discontinued operations and extraordinary item ................................ $ 156 $ 188 $ 344 $ 319 Discontinued operations Earnings from operations (a) ..................................... -- 50 -- 43 Loss on disposal (b) ............................................. -- -- (44) -- - --------------------------------------------------------------------------------------------------------------------- Earnings (loss) from discontinued operations .................. -- 50 (44) 43 Extraordinary item Early extinguishment of debt (c) .................................. (38) -- (38) -- - --------------------------------------------------------------------------------------------------------------------- NET EARNINGS ........................................................ $ 118 $ 238 $ 262 $ 362 Dividends on preferred stock ........................................ -- 9 -- 18 - --------------------------------------------------------------------------------------------------------------------- NET EARNINGS APPLICABLE TO COMMON STOCK ....................... $ 118 $ 229 $ 262 $ 344 ============================================== Earnings (loss) per share of common stock assuming no dilution (d) Continuing operations ............................................ $ 0.63 $ 0.72 $ 1.38 $ 1.22 Discontinued operations .......................................... -- 0.20 (0.18) 0.17 Extraordinary item ............................................... (0.15) -- (0.15) -- ---------------------------------------------- NET EARNINGS PER SHARE ........................................ $ 0.48 $ 0.92 $ 1.05 $ 1.39 Cash dividends declared per share of common stock ................... $ 0.20 $ 0.20 $ 0.40 $ 0.40 - --------------------------------------------------------------------------------------------------------------------- (a) Net of tax of $ -- $ 30 $ -- $ 26 (b) Net of tax benefit of: $ -- $ -- $ (27) $ -- (c) Net of tax benefit of: $ (14) $ -- $ (14) $ -- (d) Based on net earnings applicable to common stock divided by weighted average shares outstanding (in thousands) ....... 249,583 248,294 250,047 247,983 See notes to the consolidated financial statements.
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CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION June 30 December 31 ---------------------- Millions of dollars 1997* 1996 - ----------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 884 $ 217 Accounts and notes receivable 831 1,027 Net assets of discontinued operations -- 1,774 Inventories 138 125 Deferred income taxes 54 57 Other current assets 31 28 - ----------------------------------------------------------------------------------------------- Total current assets 1,938 3,228 Investments and long-term receivables 1,060 1,206 Properties (net of accumulated depreciation and other allowances of $9,642 in 1997 and $9,502 in 1996) 4,712 4,590 Deferred income taxes 22 21 Other assets 89 78 - ----------------------------------------------------------------------------------------------- Total assets $ 7,821 $ 9,123 - ----------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 655 $ 1,012 Taxes payable 99 231 Current portion of long-term debt and capital lease obligations 1 118 Interest payable 55 70 Current portion of environmental liabilities 73 73 Other current liabilities 97 118 - ----------------------------------------------------------------------------------------------- Total current liabilities 980 1,622 Long-term debt 2,320 2,940 Deferred income taxes 305 348 Accrued abandonment, restoration and environmental liabilities 650 677 Other deferred credits and liabilities 690 739 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely 6-1/4% convertible junior subordinated debentures of Unocal 522 522 Common stock ($1 par value) 251 251 Capital in excess of par value 437 412 Foreign currency translation adjustment (13) (13) Unearned portion of restricted stock issued (30) (14) Retained earnings 1,801 1,639 Treasury stock - at cost (2,365,400 shares in 1997) (92) -- - ----------------------------------------------------------------------------------------------- Total stockholders' equity 2,354 2,275 - ----------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 7,821 $ 9,123 - ----------------------------------------------------------------------------------------------- * Unaudited See notes to the consolidated financial statements.
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CONSOLIDATED CASH FLOWS UNOCAL CORPORATION (Unaudited) For the Six Months Ended June 30 --------------------------- Millions of dollars 1997 1996 - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 262 $ 362 Adjustments to reconcile net earnings to net cash provided by operating activities Loss on disposal of discontinued operations (before-tax) 71 -- Depreciation, depletion and amortization 455 496 Dry hole costs 43 19 Deferred income taxes 29 33 Gain on sales of assets (before-tax) (61) (137) Other (158) 77 Working capital and other changes related to operations Accounts and notes receivable 206 (73) Inventories (25) 27 Accounts payable (360) 53 Taxes payable (134) 16 Other 109 (180) - --------------------------------------------------------------------------------------------------- Net cash provided by operating activities 437 693 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (includes dry hole costs) (645) (622) Proceeds from sale of discontinued operations 1,786 -- Proceeds from sales of assets 48 539 - --------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 1,189 (83) CASH FLOWS FROM FINANCING ACTIVITIES Long-term borrowings 360 110 Reduction of long-term debt and capital lease obligations (1,078) (499) Dividends paid on preferred stock -- (18) Dividends paid on common stock (100) (99) Repurchases of common stock (92) -- Other (49) 11 - --------------------------------------------------------------------------------------------------- Net cash used in financing activities (959) (495) Increase in cash and cash equivalents 667 115 Cash and cash equivalents at beginning of year 217 94 - --------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 884 $ 209 - --------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest (net of amount capitalized) $ 176 $ 152 Income taxes (net of refunds) $ 227 $ 166 See notes to the consolidated financial statements.
3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) The consolidated financial statements included herein are unaudited and, in the opinion of management, include all adjustments necessary for a fair presentation of financial position and results of operations. All adjustments are of a normal recurring nature. Such financial statements are presented in accordance with the Securities and Exchange Commission's (Commission) disclosure requirements for Form 10-Q. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto filed with the Commission in Unocal Corporation's 1996 Annual Report on Form 10-K (as amended). Results for the six months ended June 30, 1997, are not necessarily indicative of future financial results. Certain items in the prior year financial statements have been reclassified to conform to the 1997 presentation. (2) For the purpose of this report, Unocal Corporation and its consolidated subsidiary, Union Oil Company of California (Union Oil), together with the consolidated subsidiaries of Union Oil, are referred to as "Unocal" or "the company". (3) Discontinued Operations On March 31, 1997, the company sold its West Coast refining, marketing and transportation assets to Tosco Corporation (Tosco). In addition to cash proceeds of $1.4 billion, the company received 14,092,482 shares of Tosco common stock valued at $397 million. The value of the stock was based on the average of the high and low market prices of the Tosco stock for the last 10 trading days prior to the sale. On May 8, 1997, the company sold the stock back to Tosco for $394 million (net of expenses). During the first six months of 1997, the company recorded an additional loss on disposal of $44 million (net of a $27 million tax benefit). The additional provision was required primarily due to adjustments in closing inventory amounts and higher than anticipated termination costs. Included in the $44 million amount is a favorable adjustment of $6 million (net of $4 million tax) related to a lower than expected first quarter operating loss. The consolidated earnings statement reflects the results for the refining, marketing and transportation operations as discontinued operations for the quarters and first six months ended June 30, 1997 and 1996. At December 31, 1996, the assets have been reclassified in the consolidated balance sheet from their historical classifications to separately reflect them as net assets of discontinued operations. Cash flows related to discontinued operations have not been segregated in the consolidated statement of cash flows for 1996. Consequently, amounts on the consolidated earnings statement may not agree with certain captions on the consolidated statement of cash flows for 1996. (4) Other Financial Information Sales and operating revenues are principally derived from the sale of crude oil, natural gas, natural gas liquids, geothermal steam, specialty minerals and nitrogen-based agricultural products produced by the company. Sales and operating revenues also include amounts received from the sale of purchased crude oil, natural gas and products. Related purchase costs are classified as expense in the crude oil and product purchases category of the consolidated earnings statement. Capitalized interest totaled $11 million and $3 million for the second quarters of 1997 and 1996, respectively. For the first six months of 1997 and 1996, capitalized interest was $16 million and $6 million, respectively. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (5) Income Taxes: The components of earnings from continuing operations and the provision for income taxes were as follows: For Three Months For Six Months Ended June 30 Ended June 30 ---------------------------------- Millions of Dollars 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Earnings from continuing operations before income taxes United States (a) ................ $ 178 $ 198 $ 320 $ 282 Foreign .......................... 71 122 266 263 - -------------------------------------------------------------------------------- Total ...................... 249 320 586 545 Income Taxes Current Federal ........................... 12 59 74 87 State ............................. 4 (3) 11 2 Foreign ........................... 63 56 166 112 - -------------------------------------------------------------------------------- Total ...................... 79 112 251 201 Deferred Federal ........................... 9 3 (11) (1) State ............................. 3 12 2 11 Foreign ........................... 2 5 -- 15 - -------------------------------------------------------------------------------- Total ...................... 14 20 (9) 25 - -------------------------------------------------------------------------------- Total income taxes ....... $ 93 $ 132 $ 242 $ 226 - -------------------------------------------------------------------------------- (a) Includes corporate and unallocated expenses. Reconciliation of income taxes at the federal statutory income tax rates to income taxes as reported in the consolidated earnings statement: For Three Months For Six Months Ended June 30 Ended June 30 ---------------------------------- Millions of Dollars 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Federal statutory rate: ................. 35% 35% 35% 35% Earnings from continuing operations before income taxes .................. $ 249 $ 320 $ 586 $ 545 Tax at federal statutory rate ........... 87 112 205 191 Foreign taxes in excess of statutory rate 12 23 45 41 Dividend exclusion ...................... (4) (4) (7) (8) Other ................................... (2) 1 (1) 2 - -------------------------------------------------------------------------------- Total ...................... $ 93 $ 132 $ 242 $ 226 - -------------------------------------------------------------------------------- 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) (6) Inventories
June 30 December 31 ----------------------------- Millions of dollars 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Crude oil and other petroleum products ............................................. $ 22 $ 12 Agricultural products .............................................................. 24 31 Carbon and Minerals ................................................................ 54 31 Supplies, merchandise and other .................................................... 38 51 - ------------------------------------------------------------------------------------------------------------------------------------ Total ....................................................................... $138 $125 - ------------------------------------------------------------------------------------------------------------------------------------
(7) Long Term Debt and Credit Agreements: Second quarter 1997 financing activities primarily consisted of: increased borrowings of $20 million on the $250 million Thailand revolving credit facility, bringing the balance to $150 million, and debt retirements of $911 million in aggregate principal amount. The debt retirements consisted of approximately $404 million in commercial paper repayments and approximately $507 million in debt securities purchased in a tender offer on May 15, 1997. The debt securities consisted of $161 million in debentures with an interest rate of 9-1/4 percent and $346 million in notes with interest rates of 8-3/4 percent and 9-3/4 percent. The debt securities were purchased for an aggregate price of approximately $555 million, including a pre-tax premium of approximately $48 million over their aggregate carrying value. The premium, together with related costs, was recorded as an extraordinary item in the company's consolidated statement of earnings. The company anticipates annual interest expense savings of approximately $34 million (after-tax) due to the debt buyback. The debt repayments and debt securities purchases substantially completed the company's program to reduce outstanding debt by $800 million and were made with the proceeds from the sale of the company's West Coast refining, marketing and transportation assets. (8) Financial Instruments Risk Management and Derivative Instruments The primary objectives of the company's risk management policies are to reduce the overall volatility of the company's cash flows and to preserve revenues. As part of its overall risk strategy, the company enters into various derivative instrument contracts to hedge its exposure to changes in interest rates, changes in foreign currency exchange rates, and fluctuations in crude oil and natural gas prices. The company enters into interest rate swap agreements to manage the interest cost of its debt with the objective of minimizing the volatility and magnitude of the company's borrowing costs. Net amounts under the agreements are recorded on a current basis as interest expense in the consolidated earnings statement. Related counterparty amounts are included in interest payable in the consolidated balance sheet. Cash flow effects are presented in the "other" category under working capital and other changes in the operating activities section of the consolidated cash flows statement. Various foreign currency forward and swap contracts are entered into by the company to manage its exposures to adverse impacts of foreign currency fluctuations under debt and other obligations. Foreign currency gains and losses on the outstanding contracts are recognized in income and offset the foreign currency gains or losses of the underlying obligations. Related counterparty amounts are included in accounts receivable in the consolidated balance sheet. Changes in foreign currency forward and swap contracts are included with associated changes in foreign currency obligations and offset in the statement of cash flows. Generally, commodity futures contracts with maturities of 18 months or less are entered into to hedge the company's exposure to fluctuations in crude oil and natural gas prices. While the intent of the company is to initially establish hedged positions for its forecasted oil and gas transactions, market conditions may arise causing certain hedged positions to be closed prior to their scheduled maturity dates. Accordingly, all of the company's crude oil and natural gas risk management derivative instrument activities are marked to market and gains and losses are recognized on a current basis in the underlying commodity revenues. Related counterparty amounts are included in accounts receivable in the consolidated balance sheet. Cash flow effects for changes in the value of open contracts are presented in accounts 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) receivable under working capital and other changes in the operating activities section of the consolidated cash flows statement and offset the associated gains and losses reported in net earnings. Cash flows related to derivative contracts settled during the period are reported in net earnings. The fair values of the company's financial instruments at June 30, 1997 are described below: The Deutsche Mark currency swap agreement had a notional value of $110 million and a fair value of approximately $33 million based on dealer quotes. The company had outstanding commodity futures contracts covering the sale of 800 thousand barrels of crude oil with a notional amount of $16 million and 32 billion cubic feet of natural gas with a notional amount of $71 million. The fair values of the contracts, based on quoted market prices, were insignificant. The estimated fair value of the company's long-term debt and capital lease obligations was $2,383 million. The fair values of debt instruments were based on the discounted amount of future cash outflows using the rates offered to the company for debt with similar remaining maturities. The estimated fair value of the mandatorily redeemable convertible preferred securities of the company's subsidiary trust was $591 million, based on dealer quotes. (9) Accrued Abandonment, Restoration And Environmental Liabilities: At June 30, 1997, the company had accrued $489 million for the estimated future costs to abandon and remove wells and production facilities. The total costs for abandonments are accrued predominately on a units-of-production basis and are estimated to be approximately $675 million. This estimate was derived in large part from abandonment cost studies performed by an independent firm and is used to calculate the amount to be amortized. At June 30, 1997, the company's reserve for environmental remediation obligations totaled $234 million, of which $73 million was included in current liabilities. The reserve included estimated probable future costs of $27 million for federal Superfund and comparable state-managed multiparty disposal sites; $27 million for formerly-operated sites for which the company has remediation obligations; $83 million for sites related to businesses or operations that have been sold with contractual remediation or indemnification obligations; $69 million for company-owned or controlled sites where facilities have been closed or operations shut down; and $28 million for sites owned and/or controlled by the company and utilized in its ongoing operations. (10) Contingent Liabilities: The company has certain contingent liabilities with respect to material existing or potential claims, lawsuits and other proceedings, including those involving environmental, tax and other matters, certain of which are discussed more specifically below. The company accrues liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, the company's estimates of the outcomes of these matters and its experience in contesting, litigating and settling other matters. As the scope of the liabilities becomes better defined, there may be changes in the estimates of future costs, which could have a material effect on the company's future results of operations and financial condition or liquidity. Environmental Matters The company is subject to loss contingencies pursuant to federal, state and local environmental laws and regulations. These include existing and possible future obligations to investigate the effects of the release or disposal of certain petroleum, chemical and mineral substances at various sites; to remediate or restore these sites; to compensate others for damage to property and natural resources, for remediation and restoration costs and for personal injuries; and to pay civil penalties and, in some cases, criminal penalties and punitive damages. These obligations relate to sites owned by the company or others and are associated with past and present operations, including sites at which the company has been identified as a potentially responsible party (PRP) under the federal Superfund laws and comparable state laws. Liabilities are accrued when it is probable that future costs will be incurred and such costs can be reasonably estimated. However, in 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) many cases, investigations are not yet at a stage where the company is able to determine whether it is liable or, if liability is probable, to quantify the liability or estimate a range of possible exposure. In such cases, the amounts of the company's liabilities are indeterminate due to the potentially large number of claimants for any given site or exposure, the unknown magnitude of possible contamination, the imprecise and conflicting engineering evaluations and estimates of proper cleanup 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, and the fact that the company is usually just one of a number of companies identified as a PRP. As disclosed in Note 9, at June 30, 1997, the company had accrued $234 million for estimated future environmental assessment and remediation costs at various sites where liabilities for such costs are probable. At those sites where investigations or feasibility studies have advanced to the stage of analyzing feasible alternative remedies and/or ranges of costs, the company estimates that it could incur additional remediation costs aggregating approximately $200 million. Tax Matters In December 1994, the company received a Notice of Proposed Deficiency (Notice) from the Internal Revenue Service (IRS) related to the years 1985 through 1987. In February 1995, the company filed a protest of the proposed tax deficiency with the Appeals section of the IRS. Discussions with the Appeals Officer are ongoing, but it is possible that the most substantial issues raised in the Notice will proceed to litigation. In an effort to resolve these issues without litigation, in October 1996, the company and the IRS entered into an Agreement to Mediate. While the parties have selected a mediator, no date for the mediation has been set. The most significant issue raised in the Notice relates to an IRS challenge of a $341 million deduction taken by the company in its 1985 tax return for amounts paid under a settlement agreement with Mesa Petroleum, T. Boone Pickens and Drexel Burnham Lambert, Incorporated, and certain others which ended a hostile takeover attempt by that group. The IRS contends that the deduction is not allowable because the payment was related solely to the purchase of the company's common stock. Although the company purchased shares under the settlement agreement, it properly reflected the purchase in its records at the fair market value of the shares purchased. The deduction at issue relates to that portion of the payment made under the settlement agreement that exceeded the value of the shares purchased. The second largest issue raised in the Notice relates to an IRS challenge of a continued deferral of intercompany gains which arose from sales of property between subsidiaries in 1982 and 1983. The IRS contends that the $201 million balance of deferred gain must be recognized in the company's taxable income for 1985 when the subsidiaries contributed the property to a wholly-owned master limited partnership. The total amount of tax and interest that the company would be required to pay if the IRS were ultimately to prevail on both of the issues described in the two preceding paragraphs, after application of foreign tax credits and overpayments related to other issues, and assuming a full disallowance of the claim for refund discussed below, is estimated at $414 million as of June 30, 1997. During the first quarter of 1997, the IRS examination team completed its review of a claim for refund recently filed by the company relating to its 1985 tax liability. If the company ultimately prevails in its claim for refund, the liability for the issues described above would be eliminated and the company would be entitled to a refund for overpayment of tax. Although the IRS has not formally disallowed the claim, the company has been informed that the IRS examination team believes the claim should be disallowed. In April 1997, the IRS examination team sent the issue raised by the claim to the IRS National Office for technical advice. The company intends to vigorously defend the claim and dispute the proposed deficiency and hopes to resolve these matters during 1997. Should that effort fail, final resolution of these matters is likely to be several years away as they are not yet before a court. The company believes it has adequately provided in its accounts for items and issues not yet resolved. In the opinion of management, a successful outcome of these matters is reasonably likely. However, substantial adverse decisions could have a material effect on the company's financial condition, operating results and liquidity in a given quarter and year 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) when such matters are resolved. Other Matters The company also has certain other contingent liabilities with respect to litigation, claims and contractual agreements arising in the ordinary course of business. Although these contingencies could result in expenses or judgments that could be material to the company's results of operations for a given reporting period, on the basis of management's best assessment of the ultimate amount and timing of these events, such expenses or judgments are not expected to have a material adverse effect on the company's consolidated financial condition or liquidity. (11) Sale of Accounts Receivable In December 1995, the company entered into an agreement to sell an undivided interest in a pool of its trade receivables. As collections reduced the amount of receivables included in the pool, the company sold new receivables bringing the amounts sold up to the $200 million maximum permitted by the agreement. This amount of sold receivables had remained at the $200 million maximum level. Effective January 1, 1997, Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", disqualified the continued treatment of this transaction as a sale. Thus, at March 31, 1997, $200 million was reflected in the financial statements as accounts receivable with an offsetting credit to accounts payable. In April 1997, the company repurchased this interest in the receivables. (12)Unocal guarantees certain indebtedness of Union Oil. Summarized below is financial information for Union Oil and its consolidated subsidiaries:
Summarized Financial Data of Union Oil For the Three Months For the Six Months Ended June 30 Ended June 30 ---------------------------------------------------- Millions of dollars 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues ............................................................... $ 1,655 1,406 3,110 $ 2,607 Total costs and other deductions (including income taxes) .................................................. 1,489 1,218 2,748 2,287 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations .......................................... 166 188 362 320 Discontinued operations Earnings from operations (net of $30 million and $26 million tax) ......... -- 50 -- 43 Loss on disposal (net of a $27 million tax benefit) ....................... -- -- (44) -- Extraordinary Item Early extinguishment of debt (net of tax benefit of $14 million) .......... (38) -- (38) -- - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings ................................................................. $ 128 $ 238 $ 280 $ 363 - ------------------------------------------------------------------------------------------------------------------------------------
At At June 30 December 31 Millions of dollars 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Current assets ........................................................... $1,936 $3,228 Noncurrent assets ........................................................ 5,906 5,905 Current liabilities ...................................................... 955 1,622 Noncurrent liabilities ................................................... 3,965 4,704 Shareholder's equity ..................................................... 2,922 2,807 - ------------------------------------------------------------------------------------------------------------------------------------
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OPERATING HIGHLIGHTS UNOCAL CORPORATION (Unaudited) For the Three Months For the Six Months Ended June 30 Ended June 30 --------------------------------------------------- 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- NET DAILY PRODUCTION CRUDE OIL AND CONDENSATE (thousand barrels daily) United States Spirit Energy 76 ......................................... 46.1 51.4 47.2 51.8 Other (a) ................................................ 31.2 37.1 32.4 53.4 --------------------------------------------------- Total United States .................................... 77.3 88.5 79.6 105.2 International Far East (b) ............................................. 95.1 84.1 94.2 82.4 Other .................................................... 26.2 27.9 26.4 28.2 --------------------------------------------------- Total International .................................... 121.3 112.0 120.6 110.6 WORLDWIDE ................................................... 198.6 200.5 200.2 215.8 --------------------------------------------------- NATURAL GAS (million cubic feet daily) United States Spirit Energy 76 ......................................... 873.7 918.6 891.6 911.3 Other (a) ................................................ 127.4 134.5 141.6 173.8 --------------------------------------------------- Total United States .................................... 1,001.1 1,053.1 1,033.2 1,085.1 International Far East (b) ............................................. 773.6 612.5 789.3 605.6 Other .................................................... 63.0 63.2 65.3 75.3 --------------------------------------------------- Total International .................................... 836.6 675.7 854.6 680.9 WORLDWIDE ................................................... 1,837.7 1,728.8 1,887.8 1,766.0 --------------------------------------------------- NATURAL GAS LIQUIDS (thousand barrels daily) (a) ............... 19.0 18.8 19.3 19.6 GEOTHERMAL (million kilowatt-hours daily) ...................... 17.1 16.8 16.5 15.4 --------------------------------------------------- (a) Includes production from California upstream properties of: Crude oil and condensate .................................... -- 1.0 -- 16.0 Natural gas ................................................. -- -- -- 25.5 Natural gas liquids ......................................... -- -- -- 0.3 (b) Includes host country share in Indonesia of: Crude oil and condensate .................................... 29.8 24.0 29.8 26.9 Natural gas ................................................. 25.3 23.8 28.9 24.8
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OPERATING HIGHLIGHTS (continued) UNOCAL CORPORATION (Unaudited) For the Three Months For the Six Months Ended June 30 Ended June 30 ------------------------------------------------- 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------- AVERAGE SALES PRICES CRUDE OIL AND CONDENSATE (per barrel) United States Spirit Energy 76 ............................$ 18.97 $ 20.59 $ 20.77 $ 19.59 Other ....................................... 14.23 16.85 16.45 15.95 Total United States ....................... 17.08 19.03 19.02 17.60 International Far East ....................................$ 17.97 $ 18.17 $ 19.41 $ 18.03 Other ....................................... 16.11 18.93 18.01 17.90 Total International ....................... 17.44 18.40 19.01 17.99 WORLDWIDE ......................................$ 17.28 $ 18.71 $ 19.02 $ 17.77 - ------------------------------------------------------------------------------------------------------- NATURAL GAS (per thousand cubic feet) United States Spirit Energy 76 ............................$ 1.99 $ 2.25 $ 2.42 $ 2.40 Other ....................................... 1.35 1.44 1.35 1.43 Total United States ....................... 1.91 2.14 2.28 2.25 International Far East ....................................$ 2.25 $ 2.21 $ 2.33 $ 2.20 Other ....................................... 2.08 1.70 2.16 1.73 Total International ....................... 2.24 2.16 2.31 2.14 WORLDWIDE ......................................$ 2.06 $ 2.15 $ 2.29 $ 2.21 - ------------------------------------------------------------------------------------------------------- AGRICULTURAL PRODUCTS PRODUCTION VOLUMES (thousand tons) Ammonia ........................................... 367 378 758 729 Urea .............................................. 233 277 508 570 Other products .................................... 171 182 348 345 AGRICULTURAL PRODUCTS SALES VOLUMES (thousand tons) Ammonia ........................................... 247 274 403 368 Urea .............................................. 289 336 499 581 Other products .................................... 455 438 707 669 - ------------------------------------------------------------------------------------------------------- Total .......................................... 991 1,048 1,609 1,618 - -------------------------------------------------------------------------------------------------------
11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
CONSOLIDATED RESULTS For the Three Months For the Six Months Ended June 30 Ended June 30 ---------------------------------------------------- Millions of Dollars 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Reported net earnings .......................................................... $ 118 $ 238 $ 262 $ 362 Special items: Bangladesh well blowout .................................................... (7) -- (7) -- UNO-VEN restructuring ...................................................... 39 -- 39 -- Indonesian deferred tax adjustment - Sarulla ............................... 7 -- 7 -- Litigation provision ....................................................... (5) (8) (5) (12) Environmental remediation provisions ....................................... -- (20) (9) (26) Asset sales ................................................................ 25 68 32 82 Other ...................................................................... -- (9) -- (9) Net earnings (loss) on disposal of discontinued operations ................. -- 2 (44) 2 Extraordinary item ......................................................... (38) -- (38) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total special items ......................................................... 21 33 (25) 37 - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted net earnings .......................................................... $ 97 $ 205 $ 287 $ 325 - ------------------------------------------------------------------------------------------------------------------------------------
Adjusted net earnings for the second quarter of 1997 reflected lower average sales prices for worldwide crude oil and domestic natural gas compared with the second quarter of 1996. In addition, the second quarter and first six months of 1997 adjusted net earnings were impacted by lower domestic crude oil and natural gas production and increased international exploration expenses. Partially offsetting these negative factors were increased crude oil and natural gas production in the Far East.
EXPLORATION AND PRODUCTION For the Three Months For the Six Months Ended June 30 Ended June 30 --------------------------------------------------------------- Millions of Dollars 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Reported net earnings United States Spirit Energy 76 ............................... $ 38 $ 84 $ 138 $ 160 Other .......................................... 11 84 32 104 International ..................................... 28 68 131 138 - ----------------------------------------------------------------------------------------------------------------------------------- Total .......................................... 77 236 301 402 Special items: Bangladesh well blowout ......................... (7) -- (7) -- Asset sales ..................................... (17) 68 (14) 74 - ------------------------------------------------------------------------------------------------------------------------------------ Total special items ......................... (24) 68 (21) 74 - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted net earnings ................................ $ 101 $ 168 $ 322 $ 328 - ------------------------------------------------------------------------------------------------------------------------------------
The Exploration and Production business segment was impacted primarily by price, expense and production factors during the second quarter and first six months of 1997. Second quarter 1997 adjusted net earnings were adversely impacted by lower average sales prices for worldwide crude oil and domestic natural gas. Compared with the second quarter of 1996, average sales prices for worldwide crude oil decreased by eight percent to $17.28 per barrel and average sales prices for worldwide natural gas decreased by four percent to $2.06 per thousand cubic feet (mcf). Although average sales prices for worldwide crude oil and natural gas were lower during the second quarter of 1997, they were higher for the first six months of 1997 due to strong first quarter prices. During the first six months of 1997, average sales prices for worldwide crude oil increased by seven percent to $19.02 per barrel and average sales prices for worldwide natural gas increased by four percent to $2.29 per mcf. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Second quarter and first six months of 1997 adjusted net earnings were also affected by increased exploration expenses, primarily related to activities in Thailand and Indonesia. Further reducing net earnings for the second quarter and first six months of 1997 was an $11 million dry hole charge for an exploratory well located offshore Brunei. Increased Far East crude oil and natural gas production partially offset these negative factors during the second quarter and first six months of 1997. Far East crude oil and natural gas production increased by 13 percent and 26 percent, respectively, compared with the second quarter of 1996. For the first six months of 1997, Far East crude oil and natural gas production increased by 14 percent and 30 percent, respectively, compared with the same period a year ago. Increased natural gas production for the second quarter and first six months of 1997 was primarily due to the start-up of a new pipeline system in Thailand. Although Far East crude oil and natural gas production were higher, domestic and other foreign crude oil and natural gas production were down due to natural declines and maintenance related platform shut-ins in the Gulf of Mexico. During the second quarter and first six months of 1997, special items consisted of a $7 million charge related to a gas-ignited exploration well blowout in northeast Bangladesh and a $17 million loss on the sale of the company's United Kingdom operations.
GEOTHERMAL OPERATIONS For the Three Months For the Six Months Ended June 30 Ended June 30 ----------------------------------------------------- Millions of Dollars 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Reported net earnings .................................................. $ 13 $ 4 $ 19 $ 9 Special items: Indonesian deferred tax adjustment - Sarulla ........................ 7 -- 7 -- - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted net earnings .................................................. $ 6 $ 4 $12 $ 9 - ------------------------------------------------------------------------------------------------------------------------------------
Increased second quarter and first six months of 1997 adjusted net earnings were the result of higher steam generation at The Geysers and in the Philippines and lower depreciation expense due to the sale of domestic geothermal assets in 1996. Partially offsetting these positive factors were decreased revenues in the Philippines due to the deferral of 60 percent of the revenues and related earnings pending the settlement of a dispute regarding extension of the company's service contract. During the second quarter and first six months of 1997, the company recognized a $7 million deferred tax benefit on exploration expense incurred for the Sarulla project.
DIVERSIFIED BUSINESS GROUP For the Three Months For the Six Months Ended June 30 Ended June 30 ------------------------------------------------------- Millions of Dollars 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Reported net earnings Agricultural Products ....................................... $ 26 $ 37 $ 46 $ 53 Carbon and Minerals ......................................... 56 9 66 27 Pipelines ................................................... 16 14 30 37 Other ....................................................... 36 5 37 6 - ------------------------------------------------------------------------------------------------------------------------------------ Total ....................................................... 134 65 179 123 Special items: UNO-VEN restructuring (Other) ............................... 39 -- 39 -- Carbon and Minerals (asset sales) ........................... 41 -- 41 -- Pipeline (asset sales) ...................................... -- -- -- 7 - ------------------------------------------------------------------------------------------------------------------------------------ Total special items ......................................... 80 -- 80 7 - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted net earnings .......................................... $ 54 $ 65 $ 99 $116 - ------------------------------------------------------------------------------------------------------------------------------------
Compared to the second quarter and first six months of 1996, decreased adjusted net earnings were principally the result of lower urea sales prices. Second quarter 1997 adjusted net earnings were also adversely impacted by lower agricultural 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) products sales and production volumes. In the second quarter of 1997, the company sold its Illinois-based Unocal Hydrocarbon Sales business unit and completed the restructuring of the UNO-VEN partnership, generating after-tax gains of $41 million and $39 million, respectively. During the first six months of 1996, the company sold its interest in Platte Pipeline. Corporate and Unallocated
CORORATE AND UNALLOCATED For the Three Months For the Six Months Ended June 30 Ended June 30 ------------------------------------------------------- Millions of Dollars 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Reported net earnings effect Administrative and general expense .......................... $ (14) $ (16) $ (27) $ (34) Net interest expense ........................................ (23) (48) (65) (98) Environmental and litigation expense ........................ (10) (33) (21) (47) New Ventures ................................................ (15) (4) (22) (6) Other ....................................................... (6) (16) (20) (30) - ------------------------------------------------------------------------------------------------------------------------------------ Total ....................................................... (68) (117) (155) (215) Special items: Environmental and litigation provisions ................... (5) (17) (14) (38) Asset sales (Other) ....................................... 1 (20) 5 1 Miscellaneous (Other) ..................................... -- -- -- (9) - ------------------------------------------------------------------------------------------------------------------------------------ Total special items ......................................... (4) (37) (9) (46) - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted net earning effect .................................... $ (64) $ (80) $(146) $(169) - ------------------------------------------------------------------------------------------------------------------------------------
Compared with the second quarter and first six months of 1996, net interest expense decreased by 52 percent and 34 percent, respectively, as a result of increased capitalized interest and paying down debt. Asset sales for the first six months of 1997 primarily consisted of the sale of a company airplane. During the second quarter and first six months of 1996, assets sales primarily consisted of miscellaneous real estate properties. DISCONTINUED OPERATIONS During the first six months of 1997, the company recorded an additional loss on disposal of its West Coast refining, marketing and transportation operations of $44 million (net of a $27 million tax benefit). See note 3 to the consolidated financial statements for additional information. Financial Condition and Capital Expenditures For the first six months of 1997, cash flow from operating activities, including working capital changes, was $437 million, compared with $693 million in 1996. During the first six months of 1997, the discontinued refining, marketing and transportation operations had a negative cash flow of $20 million, compared with a positive cash flow of $159 million for the same period in 1996. The 1997 cash flow from operations also reflected an $81 million escrow payment related to the settlement of the "Catacarb" litigation and $27 million for the company's buy-out of environmental liabilities related to the UNO-VEN partnership restructuring. Lower commodity prices, higher exploration expense and higher non-exploration and production international project expense also contributed to reduced operating cash flow. Partially offsetting these negative factors were higher production and product prices in Thailand and Indonesia and lower net interest expense. Proceeds from asset sales were $1,834 million for the first six months of 1997. The amount consisted of: $1,786 million from the sale of the West Coast refining, marketing and transportation assets; $25 million for Unocal Hydrocarbon Sales, $6 million from the sale of one of the company's airplanes, $8 million for miscellaneous real estate properties and $9 million from the sale of miscellaneous assets including various oil and gas properties. Capital expenditures for the first six months of 1997 totaled $645 million, an increase of $23 million from the 1996 level of $622 million, primarily due to increased international oil and gas activity. Estimated expenditures for the full year 1997 are expected to reach $1.5 billion. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Consolidated working capital at June 30, 1997 was $958 million, a decrease of $648 million from the year-end 1996 level of $1,606 million. Included in the 1996 amount was $1,774 million in net assets of discontinued operations. The company's total debt was $2,321 million at June 30, 1997, a decrease of $737 million from the year-end 1996 level of $3,058 million. The debt-to-total capitalization ratio decreased to 45 percent from 52 percent at year-end 1996. The company used a portion of the proceeds from the sale of its West Coast refining, marketing and transportation assets to reduce long term debt. See notes 7 and 8 to the consolidated financial statements for related information. Through June 30, 1997, the company had repurchased approximately 2.4 million shares of common stock for a total cost of approximately $92 million. During July 1997, the company repurchased approximately 2.1 million additional shares of common stock for a cost of approximately $80 million. ENVIRONMENTAL MATTERS At June 30, 1997, the company's reserves for environmental remediation obligations totaled $234 million, of which $73 million was included in current liabilities. During the second quarter, cash payments of $13 million were applied against the reserve. The company also estimates that it could incur additional remediation costs aggregating approximately $200 million, as discussed in note 10 to the consolidated financial statements. The company's total environmental reserve amount is grouped into the following five categories: RESERVE SUMMARY June 30 Millions of Dollars 1997 - -------------------------------------------------------------------------------- Superfund and similar sites ................................. $ 27 Former company-operated sites ............................... 27 Company facilities sold with retained liabilities ...................................... 83 Inactive or closed company facilities ....................... 69 Active company facilities ................................... 28 - -------------------------------------------------------------------------------- Total reserves ........................................... $234 - -------------------------------------------------------------------------------- At year-end 1996, Unocal had received notification from the U.S. Environmental Protection Agency that the company may be a potentially responsible party (PRP) at 39 sites and may share certain liabilities at these sites. In addition, various state agencies and private parties had identified 37 other similar PRP sites that may require investigation and remediation. During the first six months of 1997, seven sites were added and four sites were resolved resulting in a total of 79 sites. Of the total, the company has denied responsibility at 6 sites and at another 8 sites the company's liability, although unquantified, appears to be de minimis. The total also includes 24 sites which are under investigation or in litigation, for which the company's potential liability is not presently determinable. At another two sites, the company has made settlement payments and is in the final process of resolving its liabilities. Of the remaining 39 sites, where probable costs can be estimated, reserves of $27 million have been established for future remediation and settlement costs. These 79 sites exclude 61 sites where the company's liability has been settled, or where the company has both 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. Unocal does not consider the number of sites for which it has been named a PRP as a relevant measure of liability. Although the liability of a PRP is generally joint and several, the company is usually just one of several companies designated as a PRP. The company's ultimate share of the remediation costs at those sites often is not determinable due to many unknown factors as discussed in Note 10. The solvency of other responsible parties and disputes regarding responsibilities may also impact the company's ultimate costs. The company is subject to a number of federal, state and local environmental laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the Resource Conservation and Recovery Act (RCRA). Under these laws, the company is subject to possible obligations to remove or mitigate the environmental effects of the disposal or release of certain chemical and petroleum substances at various sites. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Corrective investigations and actions pursuant to RCRA are being performed at the company's Beaumont, Texas, facility, its closed Colorado shale oil project, and its Washington, Pennsylvania, facility. The company also must provide financial assurance for future closure and post-closure costs of its RCRA-permitted facilities. Because these costs will be incurred at different times and over a period of many years, the company believes that these obligations are not likely to have a material adverse effect on the company's results of operations or financial condition. On May 14, 1997, a draft environmental impact report (EIR) prepared by a consultant to the County of San Luis Obispo, California, was issued for use by the County, the Regional Water Quality Control Board -- Central Coast Region and others in evaluating the company's previously proposed remedial action plan, as well as alternative courses of action, for remediation of the underground petroleum hydrocarbon contamination at Avila Beach, California, resulting from former company operations. Certain of the alternatives addressed in the draft EIR would, if implemented, entail remediation costs significantly higher than the costs for the company's plan. The company is currently reviewing the draft EIR and the potential financial implications to the company of the various alternatives addressed therein. The county accepted public comments on the EIR for a 60-day period through July 14, 1997. These comments will be used to determine the final EIR which is not expected to be issued until late 1997. See notes 9 and 10 for related information. OTHER MATTERS In the Philippines, National Power Corporation (Napocor) agreed to extend the period of negotiations related to the service agreement dispute between Napocor and the company's subsidiary, Philippine Geothermal Inc., another six months to year-end 1997. FUTURE ACCOUNTING CHANGES The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Both statements are effective for fiscal years beginning after December 15, 1997. The company is reviewing the potential financial statement impacts of adopting these new accounting standards. OUTLOOK Certain of the statements in this discussion, as well as other forward-looking statements within this document, contain estimates and projections of amounts of or increases in future revenues, earnings, cash flows, capital expenditures, assets, liabilities and other financial items and of future levels of or increases in reserves, production, sales including related costs and prices, and other statistical items; plans and objectives of management regarding the company's future operations, products and services; and certain assumptions underlying such estimates, projection plans and objectives. While these forward-looking statements are made in good faith, future operating, market, competitive, legal, economic, political, environmental, and other conditions and events could cause actual results to differ materially from those in the forward-looking statements. In an effort to stabilize its economy, Thailand implemented a new managed-float currency regime allowing its currency to depreciate in line with market conditions. The economic impact from allowing Thailand's currency to depreciate is not expected to be material to the company due to price control adjustments for exchange rate differentials provided in existing sales agreements. In addition, the decrease in the exchange rates lowers the company's operating costs that are denominated in Thailand's currency. In June 1997, a gas exploration well in northern Bangladesh blewout and ignited resulting in a shut-down of operations at the site. A relief well is expected to be drilled by mid August to seal off the gas. The company's interest in this project is substantially insured, subject to deductibles for which the company provided in its second quarter 1997 provision. Additional charges related to earnings are not expected to be material. The company holds a 50 percent working interest in this well. In Thailand, the company expects average gross natural gas production from the nine fields it operates to be at or above one billion cubic feet per day (650 million cubic feet net) for the remainder of the year. The expected increase in production is due to Petroleum Authority of Thailand's pipeline and related onshore pipelines and processing facilities becoming fully 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) operational. Unocal has a 65 percent average net interest in the nine fields it operates in the Gulf of Thailand. In Indonesia, at the Salak geothermal field on the island of Java, the company began supplying steam at one of four 55-megawatt power plants, Unit 3, in July 1997. The company expects to begin supplying steam to the remaining three 55-megawatt power plants, Units 4, 5 and 6, in September, October and November of 1997, respectively. In Bangladesh, the company is negotiating for the development of a gas field, pipeline and power plants in the western region. Although much of the company's investment focus is targeted at higher-return growth opportunities in Asia, domestic exploration and production spending could average $500 million annually if investment opportunities become available. The company is moving aggressively into deepwater exploration and expanding its onshore and outer continental shelf activities in the Gulf of Mexico. By year-end 1997, the company plans to advance five to seven deepwater prospects to drillable status and drill four to six wells by the end of 1998. The company anticipates that urea and ammonia sales prices in international markets will remain below 1996 levels. Consequently, the Agricultural Products group's 1997 earnings are expected to be significantly lower than the 1996 results. PART II - OTHER INFORMATION Item 1. Legal Proceedings There is incorporated by reference the information previously reported in Item 3 of Unocal's Annual Report on Form 10-K (as amended) for the year ended December 31, 1996 (1996 Form 10-K (as amended)) and in Item 1 of Part II of Unocal's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (First Quarter 1997 Form 10-Q), the information regarding environmental remediation reserves in Note 9 to the consolidated financial statements in Item 1 of Part I, the discussion thereof in the Environmental Matters section of Management's Discussion and Analysis in Item 2 of Part I, and the information regarding contingent liabilities in Note 10 to the consolidated financial statements in Item 1 of Part I. (1) With reference to the "Catacarb" civil lawsuits, described in Paragraph (7) of Item 3 of the 1996 Form 10-K (as amended) and in Paragraph (1) of Item 1 of Part II of the First Quarter 1997 Form 10-Q, the company paid $81 million into a settlement escrow fund in May 1997, and the court certified the settlement in June 1997. (2) With reference to the litigation involving the Yadana gas project in Myanmar, described in Paragraph (13) of Item 3 of the 1996 Form 10-K (as amended) and in Paragraph (5) of Item 1 of Part II of the First Quarter 1997 Form 10-Q, several developments have occurred that may affect the course of the litigation: In John Doe I, et al. v. Unocal Corp., et al., U.S. District Court for the -------------------------------------------- Central District of California, Civil No. 96-6959-RAP, the company filed a motion on June 2, 1997, asking the Court to strike from the plaintiffs' complaint all allegations concerning claims of wrongful taking of property. This motion is scheduled to be heard on August 25, 1997. The hearing on the plaintiffs' motion for a preliminary injunction, previously scheduled for June 9, 1997, has been continued. The hearing on the plaintiffs' motion for class certification is set for September 22, 1997. On June 3, 1997, the plaintiffs' original complaint was served upon defendant Total in Paris, France. On July 23, 1997, Total filed a motion to dismiss for lack of personal jurisdiction and insufficiency of service of process. Total's motion to dismiss is scheduled to be heard on September 22, 1997. In National Coalition Government of the Union of Burma, et al. v. Unocal, -------------------------------------------------------------------------- Inc., et al., U.S. District Court for the Central District of California, ------------ Civil No. 96-6112-RAP, the company's motion to dismiss remains pending before the Court. 17 PART II - OTHER INFORMATION (continued) With respect to both of the above actions, the Court had solicited the views of the United States Department of State as to whether the Court should continue to entertain the actions in light of the foreign policy issues involved. On July 9, 1997, the United States filed a Statement of Interest with the Court, together with a letter from the United States Department of State setting forth the Department's response to the Court's request. In the letter, the Department stated, among other things, that because the current record in the two cases "is undeveloped," the Department "is not in a position at this time to express a view as to whether the act of state doctrine is necessarily implicated in the cases before the Court, nor would we want this letter to imply that we have reviewed or taken a position on any other legal issues in the litigation." The Department also stated that "[n]evertheless, in response to Judge Paez's request, the Department can state that at this time adjudication of the claims based on allegations of torture and slavery would not prejudice or impede the conduct of U.S. foreign relations with the current government of Burma." (3) On June 12, 1997, the State of Arizona filed a lawsuit against the company (State of Arizona v. Union Oil Company of California, Superior Court of ------------------------------------------------------ Maricopa County, No. CV97-10829) alleging that it has not diligently pursued the investigation of the extent of contamination resulting from a release of petroleum from underground storage tanks at a service station formerly operated by the company in Tempe, Arizona. The state seeks civil penalties of up to $10,000 per day. The company is in the process of investigating this matter, and it is possible that penalties aggregating in excess of $100,000 could be imposed. (4) On July 2, 1997, the company received a Notice of Violation from the U.S. Environmental Protection Agency, Region X (EPA), regarding alleged violations of the Prevention of Significant Deterioration Standards and the New Source Performance Standards of the Federal Clean Air Act, as amended, at the company's Kenai, Alaska, fertilizer plant. The company has been engaged in negotiations with the EPA to settle these allegations pursuant to a consent decree which is expected to involve the payment of civil penalties in excess of $500,000. Item 2. Changes in Securities During the second quarter of 1997, the company awarded 5,377 restricted stock units to certain nonemployee directors pursuant to the terms of the company's Directors' Restricted Stock Plan. The units were not registered under the Securities Act of 1933 (the Act) in reliance upon the exemption contained in Section 4(2) of the Act for transactions by an issuer not involving any public offering. The units were awarded (1) as annual grants equal to 20 percent of each of the nonemployee director's fees earned during the prior 12 months, (2) in consideration of the prior election by each of the nonemployee directors to defer all or a portion of his or her cash fees and (3) upon the credit of dividend equivalents upon units previously issued. The units are paid out in an equal number of shares of Unocal common stock at the end of a restriction period elected by each director, or upon his or her earlier termination of service as a director. During the second quarter of 1997, 2,134 restricted stock units held by one nonemployee director, Mr. MacDonald G. Becket, were paid out in shares of Unocal common stock upon his retirement from the Board. The shares were not registered under the Act in reliance upon the exemption contained in Section 3(a)(9) of the Act for securities exchanged by the issuer with its existing security-holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. During the second quarter of 1997, Unocal issued 47 shares of its common stock upon the conversion of 41 of the 6-1/4 percent trust convertible preferred securities of Unocal Capital Trust. The common shares were not registered under the Act in reliance upon the exemption contained in Section 3(a)(9) of the Act for securities exchanged by the issuer with its existing security-holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. Item 4. Submission of a Vote of Security Holders The Annual Meeting of Stockholders of Unocal Corporation was held on June 2, 1997. The following actions were taken by the stockholders at the Annual Meeting, for which proxies were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended: 18 PART II - OTHER INFORMATION (continued) 1. The four nominees proposed by the board of directors were elected as directors by the following votes for three-year terms expiring at the 2000 Annual Meeting of Stockholders, or until their successors are duly elected and qualified: Name Votes For Votes Withheld ----- --------- -------------- John W. Amerman 200,777,031 6,408,259 Roger C. Beach 201,693,851 5,491,439 John W. Creighton Jr. 202,736,501 4,448,789 Kevin W. Sharer 202,722,150 4,463,140 2. A proposal to ratify the selection of Coopers & Lybrand L.L.P. as Unocal's independent accountants for 1997 was passed by a vote of 204,759,748 for versus 1,577,016 against. There were 848,526 abstentions and no broker non-votes. 3. A proposal for approval of a performance goal under the company's Management Incentive Program for tax purposes passed by a vote of 197,935,756 for versus 7,215,728 against. There were 2,033,806 abstentions and no broker non-votes. 4. A stockholder proposal that the Board report on the costs and benefits of doing business in Myanmar failed to pass by a vote of 9,983,244 for versus 170,661,043 against. There were 9,000,903 abstentions and 17,540,100 broker non-votes. 5. A stockholder proposal that the Board research and report on the Myanma Oil and Gas Enterprise and drug money laundering failed to pass by a vote of 9,284,755 for versus 170,983,064 against. There were 9,378,372 abstentions and 17,539,099 broker non-votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: The Exhibit Index on page 22 of this report lists the exhibits that are filed as part of this report. (b) Current Reports on Form 8-K During the second quarter of 1997: 1. Report dated April 1, 1997 and filed April 10, 1997, for the purpose of reporting, under Item 2, the completion of the sale of the company's West Coast refining, marketing and transportation assets to Tosco Corporation, and filing, as exhibits under Item 7, certain agreements relating to such sale. 2. Report dated April 11, 1997 and filed April 14, 1997, for the purpose of reporting, under Item 5, the signing of a definitive agreement for the restructuring of The UNO-VEN Company. 3. Report dated April 22, 1997 and filed April 23, 1997, for the purpose of reporting, under Item 5, Unocal's response to the Clinton Administration's Myanmar sanctions. 4. Report dated and filed April 24, 1997, for the purpose of reporting, under Item 5, Unocal's first quarter 1997 earnings and related information. 5. Report dated and filed May 23, 1997, for the purpose of reporting, under Item 5, the restatement of Unocal's third quarter and full year 1996 earnings-per-common-share amounts to reflect a non-cash charge related to its September 1996 exchange of 6-1/4 percent Trust Convertible Preferred Securities of Unocal Capital Trust for shares of Unocal's $3.50 Convertible Preferred Stock. 19 PART II - OTHER INFORMATION (continued) 6. Report dated May 30, 1997 and filed June 3, 1997, for the purpose of reporting, under Item 5, Unocal's purchase of $507 million of debt securities pursuant to a tender offer. During the third quarter of 1997 to the date hereof: 1. Report dated and filed July 23, 1997, for the purpose of reporting, under Item 5, Unocal's second quarter and first six months of 1997 earnings and related information. 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNOCAL CORPORATION (Registrant) Dated: August 14, 1997 By: /s/ JOSEPH A. HOUSEHOLDER -------------------------- Joseph A. Householder Vice President, Tax and Comptroller (Duly Authorized Officer and Principal Accounting Officer) 21 EXHIBIT INDEX 2.1 Sale and Purchase Agreement for 76 Products Company, dated December 14, 1996, between Union Oil Company of California and Tosco Corporation (without attachments or schedules) (incorporated by reference to Exhibit 2.1 to Unocal's Current Report on Form 8-K dated December 16, 1996 and filed January 3, 1997, File No. 1-8483). 2.2 Stock Purchase and Shareholder Agreement, dated as of January 15, 1997, by and between Tosco Corporation and Union Oil Company of California, together with form of Supplement No. 1 thereto (incorporated by reference to Exhibit 2.2 to Unocal's Current Report on Form 8-K dated December 16, 1996 and filed January 3, 1997, File No. 1-8483). 2.3 Amendment No. 1 and Supplement, dated as of March 31, 1997, to Stock Purchase and Shareholder Agreement, dated as of January 15, 1997, by and between Tosco Corporation and Union Oil Company of California (incorporated by reference to Exhibit C to Unocal's and Union Oil Company of California's statement on Schedule 13D relating to Tosco Corporation, dated and filed April 10, 1997, File No. 1-7910). 2.4 Environmental Agreement, dated as of March 31, 1997, by and between Union Oil Company of California and Tosco Corporation (without schedules) (incorporated by reference to Exhibit 2.3 to Unocal's Current Report on Form 8-K dated December 16, 1996 and filed January 3, 1997, File No. 1-8483). 11 Statement regarding computation of earnings per common share for the three months and six months ended June 30, 1997 and 1996. 12.1 Statement regarding computation of ratio of earnings to fixed charges of Unocal for the six months ended June 30, 1997 and 1996. 12.2 Statement regarding computation of ratio of earnings to combined fixed charges and preferred stock dividends of Unocal for the six months ended June 30, 1997 and 1996. 12.3 Statement regarding computation of ratio of earnings to fixed charges of Union Oil Company of California for the six months ended June 30, 1997 and 1996. 27 Financial data schedule for the period ended June 30, 1997 (included only in the copy of this report filed electronically with the Commission). 22 EX-11.1 2 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE ASSUMING NO DILUTION
For the Three Months For Six Months Ended June 30 Ended June 30 ----------------------------------------------------- Dollars and shares in thousands, except per share amounts 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations per share assuming no dilution (a) Earnings from continuing operations .......................... $ 156,440 $ 188,624 $ 344,110 $ 319,641 Preferred stock dividend ..................................... -- (8,969) -- (17,938) ---------------------------------------------------- Earnings from continuing operations applicable to common stock ............................. 156,440 179,655 344,110 301,703 Weighted average common stock outstanding .................... 249,583 248,294 250,047 247,983 ---------------------------------------------------- Earnings from continuing operations per common share .................................... $ 0.63 $ 0.72 $ 1.38 $ 1.22 ---------------------------------------------------- Earnings (loss) from discontinued operations per share assuming no dilution (a) Earnings (loss) applicable to common stock ................... $ -- $ 49,257 $ (44,243) $ 42,501 Weighted average common stock outstanding .................... 249,583 248,294 250,047 247,983 ---------------------------------------------------- Earnings (loss) from discontinued operations per common share .................................... $ -- $ 0.20 $ (0.18) $ 0.17 ---------------------------------------------------- Loss from extraordinary item per share assuming no dilution (a) Early extinguishment of debt .............................. $ (37,820) $ -- $ (37,820) $ -- Weighted average common stock outstanding ................... 249,583 -- 250,047 -- ---------------------------------------------------- Loss from extraordinary item per common share ................................... (0.15) -- (0.15) -- 4 ---------------------------------------------------- Net earnings per common share assuming no dilution............................ $ 0.48 $ 0.92 $ 1.05 $ 1.39 ---------------------------------------------------- (a) The dilutive effect of common stock equivalents is less than 3 percent for the three and six months ended June 30, 1997 and 1996.
EX-11.2 3 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.2 UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE ASSUMING FULL DILUTION
For Three Months For Six Months Ended June 30 Ended June 30 -------------------------------------------- Dollars and shares in thousands, except per share amounts 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations Per Share Assuming Full Dilution Earnings from continuing operations ................................... $ 156,440 $188,624 $344,110 $ 319,641 Distribution on convertible preferred securities (net of tax) ......... 5,953 -- 11,906 -- --------------------------------------------- Earnings from continuing operations applicable to common stock ....................................... 162,393 188,624 356,016 319,641 Weighted average common stock outstanding ............................. 249,583 248,294 250,047 247,983 Dilutive common stock equivalents ..................................... 2,911 1,933 2,668 1,794 Conversion of preferred stock ......................................... -- 16,667 -- 16,667 Conversion of preferred securities .................................... 12,263 -- 12,263 -- --------------------------------------------- Weighted average common stock and stock equivalents outstanding ..................................... 264,757 266,894 264,978 266,444 --------------------------------------------- Earnings from continuing operations per common share ............................................ $ 0.61 $ 0.71 $ 1.34 $ 1.20 --------------------------------------------- Earnings (loss) from discontinued operations Per Share Assuming Full Dilution Earnings (loss) applicable to common stock ............................ $ -- $ 49,257 $(44,243) $ 42,501 Weighted average common stock outstanding ............................. 249,583 248,294 250,047 247,983 Dilutive common stock equivalents ..................................... 2,911 1,933 2,668 1,794 Conversion of preferred stock ......................................... -- 16,667 -- 16,667 Conversion of preferred securities (a) ................................ 12,263 -- 12,263 -- --------------------------------------------- Weighted average common stock and stock equivalents outstanding ..................................... 264,757 266,894 264,978 266,444 --------------------------------------------- Earnings (loss) from discontinued operations per common share ............................................ $ -- 0.18 $ (0.17) $ 0.16 --------------------------------------------- Loss from extraordinary item Per Share Assuming Full Dilution Early extinguishment of debt ....................................... $ (37,820) $ -- $(37,820) $ -- Weighted average common stock outstanding ............................. 249,583 -- 250,047 -- Dilutive common stock equivalents ..................................... 2,911 -- 2,668 -- Conversion of preferred stock ......................................... -- -- -- -- Conversion of preferred securities (a)................................. 12,263 -- 12,263 -- --------------------------------------------- Weighted average common stock and stock equivalents outstanding ..................................... 264,757 -- 264,978 -- --------------------------------------------- Loss from extraordinary item per common share .............................................. $ (0.14) $ -- $ (0.14) $ -- --------------------------------------------- Net earnings per common share assuming no full dilution .................................. $ 0.47 $ 0.89 $ 1.03 $ 1.36 --------------------------------------------- (a) The effect of assumed conversion of preferred stock is antidilutive for the three and six months ended June 30, 1997.
EX-12.1 4 STATEMENT RE: COMPUTATION OF RATIOS EXHIBIT 12.1 UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For Six Months Ended June 30 ------------------------- Millions of dollars 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations ...................................................... $344 $319 Provision for income taxes ............................................................... 242 226 ------------------------- Earnings subtotal ............................................................... 586 545 Fixed charges included in earnings: Interest expense ...................................................................... 110 147 Distribution on convertible preferred securities ...................................... 16 -- Interest portion of rentals ........................................................... 14 21 ------------------------- Fixed charges subtotal .......................................................... 140 168 Earnings from continuing operations available before fixed charges ........................................................ $726 $713 ------------------------- Fixed charges: Fixed charges included in earnings .................................................... $140 $168 Capitalized interest .................................................................. 16 6 ------------------------- Total fixed charges ............................................................. $156 $174 ------------------------- Ratio of earnings from continuing operations to fixed charges ...................................................................... 4.7 4.1
EX-12.2 5 STATEMENT RE: COMPUTATION OF RATIOS EXHIBIT 12.2 UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
For Six Months Ended June 30 ------------------------ Millions of dollars 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations ........................................................ $344 $319 Provision for income taxes ................................................................. 242 226 ------------------------ Earnings subtotal ................................................................. 586 545 Fixed charges included in earnings: Interest expense ........................................................................ 110 147 Distribution on convertible preferred securities ........................................ 16 -- Interest portion of rentals ............................................................. 14 21 ------------------------ Fixed charges subtotal ............................................................ 140 168 Earnings from continuing operations available before fixed charges and preferred stock dividends ............................................. $726 $713 ------------------------ Fixed charges: Fixed charges included in earnings ...................................................... $140 $168 Capitalized interest .................................................................... 16 6 Preferred stock dividends (before-tax basis) ............................................... -- 29 ------------------------ Total fixed charges and preferred stock dividends ................................. $156 $203 ------------------------ Ratio of earnings from continuing operations to combined fixed charges and preferred stock dividends ............................................. 4.7 3.5
EX-12.3 6 STATEMENT RE: COMPUTATION OF RATIOS EXHIBIT 12.3 UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For Six Months Ended June 30 --------------------------- Millions of dollars 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations .................................................. $362 $320 Provision for income taxes ........................................................... 242 226 --------------------------- Earnings subtotal .............................................................. 604 546 Fixed charges included in earnings: Interest expense .................................................................. 110 147 Interest portion of rentals ....................................................... 14 21 --------------------------- Fixed charges subtotal ......................................................... 124 168 Earnings from continuing operations available before fixed charges .................................................... $728 $714 --------------------------- Fixed charges: Fixed charges included in earnings ................................................ $124 $168 Capitalized interest .............................................................. 16 6 --------------------------- Total fixed charges ............................................................ $140 $174 --------------------------- Ratio of earnings from continuing operations to fixed charges ................................................................. 5.2 4.1
EX-27 7 ART. 5 FDC FOR 2ND QUARTER 10-Q
5 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 884 0 831 0 138 1,938 14,354 9,642 7,821 980 2,320 0 0 251 2,238 7,821 2,902 3,110 1,745 2,524 0 0 110 586 242 344 (44) (38) 0 262 1.05 0
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