-----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, FrZKSBghLgP8T+zuxps8+W/xlfQqGKG/4OffQCuRS6gw90sCTvETLVlGz99FYOoq oMQuQNKkQHcPkz41elraiw== 0000716039-98-000019.txt : 19980515 0000716039-98-000019.hdr.sgml : 19980515 ACCESSION NUMBER: 0000716039-98-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNOCAL CORP CENTRAL INDEX KEY: 0000716039 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 953825062 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08483 FILM NUMBER: 98619251 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 March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- ------------------- Commission file number 1-8483 UNOCAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-3825062 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2141 ROSECRANS AVENUE, SUITE 4000, EL SEGUNDO, CALIFORNIA 90245 (Address of principal executive offices) (Zip Code) (310) 726-7600 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of Common Stock, $1 par value, outstanding as of October 31, 1997: 241,369,372 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNOCAL CORPORATION CONSOLIDATED EARNINGS (Unaudited) For the Three Months Ended March 31 ---------------------- Millions of dollars except per share amounts 1998 1997 - -------------------------------------------------------------------------------- Revenues Sales and operating revenues ................ $ 1,171 $ 1,408 Gain on sales of assets and other revenues .. 36 48 - -------------------------------------------------------------------------------- Total revenues ........................ 1,207 1,456 Costs and Other Deductions Crude oil and product purchases ............. 416 459 Operating expense ........................... 331 288 Selling, administrative and general expense . 20 28 Depreciation, depletion and amortization .... 181 211 Dry hole costs .............................. 50 16 Exploration expense ......................... 47 28 Interest expense ............................ 41 61 Property and other operating taxes .......... 16 20 Distributions on convertible preferred securities of subsidiary trust ........... 8 8 - -------------------------------------------------------------------------------- Total costs and other deductions ...... 1,110 1,119 - -------------------------------------------------------------------------------- Earnings from continuing operations before income taxes ...................... 97 337 Income taxes ................................ 79 149 - -------------------------------------------------------------------------------- Earnings from continuing operations before discontinued operations ........... $ 18 $ 188 Loss from discontinued operations .......... -- (44) - -------------------------------------------------------------------------------- Net earnings applicable to common stock $ 18 $ 144 - -------------------------------------------------------------------------------- Basic earnings per share of common stock (a) Continuing operations .......................... $ 0.07 $0.75 Net earnings ................................... $ 0.07 $0.57 Diluted earnings per share of common stock (b) (c) Continuing operations .......................... $ 0.07 $0.73 Net earnings ................................... $ 0.07 $0.56 Cash dividends declared per share of common stock . $ 0.20 $0.20 - -------------------------------------------------------------------------------- (a) Basic weighted average shares outstanding (in thousands) 241,430 250,510 (b) Diluted weighted average shares outstanding (in thousands) 242,861 264,773 (c) Distributions on preferred securities (net of tax) excluded in numerator. In 1998, $ - $ 6 the effect of assumed conversion of preferred securities on earnings per share is antidilutive. See notes to the consolidated financial statements. 1 CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION March 31 December 31 ---------------------- Millions of dollars 1998 (a) 1997 - -------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents ............................. $ 275 $ 338 Accounts and notes receivable ......................... 848 897 Inventories ........................................... 165 172 Deferred income taxes ................................. 54 71 Other current assets .................................. 31 23 - -------------------------------------------------------------------------------- Total current assets ............................... 1,373 1,501 Investments and long-term receivables .................... 1,128 1,113 Properties (b) ........................................... 4,882 4,816 Deferred income taxes .................................... 14 7 Other assets ............................................. 181 93 - -------------------------------------------------------------------------------- Total assets ....................................... $ 7,578 $ 7,530 - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities Accounts payable ...................................... $ 655 $ 785 Taxes payable ......................................... 112 126 Interest payable ...................................... 34 54 Current portion of environmental liabilities .......... 99 100 Other current liabilities ............................. 82 95 ------------------------------------------------------------------------------- Total current liabilities .......................... 982 1,160 Long-term debt ........................................... 2,427 2,169 Deferred income taxes .................................... 132 137 Accrued abandonment, restoration and environmental liabilities ........................ 640 627 Other deferred credits and liabilities ................... 629 601 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) .............................. 252 252 Capital in excess of par value ........................... 460 452 Foreign currency translation adjustment .................. (17) (18) Unearned portion of restricted stock issued .............. (31) (31) Retained earnings ........................................ 1,992 2,021 Treasury stock - at cost (c) ............................ (410) (362) - -------------------------------------------------------------------------------- Total stockholders' equity ......................... 2,246 2,314 ------------------------------------------------------------------------------- Total liabilities and stockholders' equity ...... $ 7,578 $ 7,530 - -------------------------------------------------------------------------------- (a) Unaudited (b) Net of accumulated depreciation: $ 10,040 $ 9,896 (c) Number of shares (in thousands): 10,595 9,262 See notes to the consolidated financial statements. 2 CONSOLIDATED CASH FLOWS UNOCAL CORPORATION (Unaudited) For the Three Months Ended March 31 --------------------- Millions of dollars 1998 1997 - -------------------------------------------------------------------------------- Cash Flows from Operating Activities Net earnings ............................................. $ 18 $ 144 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 ........... 181 211 Dry hole costs ..................................... 50 16 Deferred income taxes .............................. 13 10 Gain on sales of assets (before-tax) ............... -- (10) Other .............................................. 20 (27) Working capital and other changes related to operations Accounts and notes receivable ................... 69 (87) Inventories ..................................... 7 (33) Accounts payable ................................ (131) 105 Taxes payable ................................... (14) 48 Other ........................................... (119) (114) - -------------------------------------------------------------------------------- Net cash provided by operating activities .... 94 334 Cash Flows from Investing Activities Capital expenditures (includes dry hole costs) ........................... (326) (286) Proceeds from sale of discontinued operations ............................. -- 1,390 Proceeds from sales of assets ......................... 4 16 - -------------------------------------------------------------------------------- Net cash provided by (used in) investing activities ...................... (322) 1,120 Cash Flows from Financing Activities Long-term borrowings .................................. 395 341 Reduction of long-term debt ........................... (133) (166) Dividends paid on common stock ........................ (48) (50) Repurchases of common stock ........................... (48) (46) Other ................................................. (1) (1) - -------------------------------------------------------------------------------- Net cash provided by financing activities ....... 165 78 Increase (decrease) in cash and cash equivalents ......... (63) 1,532 Cash and cash equivalents at beginning of year ........... 338 217 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period ............... $ 275 $ 1,749 - -------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest (net of amount capitalized) $ 60 $ 86 Income taxes (net of refunds) $ 92 $ 62 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 1997 Annual Report on Form 10-K. Results for the three months ended March 31, 1998, are not necessarily indicative of future financial results. Certain items in the prior year financial statements have been reclassified to conform to the 1998 presentation. (2) For the purpose of this report, Unocal Corporation (Unocal) and its consolidated subsidiaries, Union Oil Company of California (Union Oil) and its consolidated subsidiaries and Unocal Capital Trust, will be referred to as the company. (3) Other Financial Information Sales and operating revenues are derived from the sale of crude oil, natural gas, natural gas liquids, geothermal steam, electricity, specialty minerals and nitrogen-based agricultural products produced by the company. During the first quarters of 1998 and 1997, approximately 31 percent and 32 percent, respectively, of total sales and operating revenues were attributed to the resale of purchased crude oil, natural gas and natural gas liquids produced by others, that the company purchased in connection with its trading and marketing activities. Related purchase costs are classified as expense in the crude oil and product purchases category of the consolidated earnings statement. Capitalized interest totaled $8 million and $5 million for the first quarters of 1998 and 1997, respectively. During the first quarter of 1998, the company recorded after-tax foreign exchange losses of approximately $6 million. These losses were primarily due to foreign currency forward contracts which locked in U.S. dollar exchange rates for the Thai baht. (4) Income Taxes Taxes on earnings from continuing operations for the first quarter of 1998 were $79 million compared with $149 million for the first quarter of 1997. The effective tax rates for the first quarters of 1998 and 1997 were 81 percent and 44 percent, respectively. The increase in the effective tax rate for 1998 was primarily due to adjustments totaling $21 million for deferred taxes and $11 million for current taxes related to appreciation of the baht in Thailand. (5) Comprehensive Income Effective March 31, 1998, the company adopted Financial Accounting Standard No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and displaying comprehensive income and its components in a full set of financial statements. The company's comprehensive earnings were as follows: For the Three Months Ended March 31 -------------------------- Millions of dollars 1998 1997 - ------------------------------------------------------------------------------ Net earnings ................................. $ 18 $ 144 Change in equity due to foreign currency translation adjustments ............. 1 (1) - -------------------------------------------------------------------------------- Comprehensive earnings ................. $ 19 $ 143 - -------------------------------------------------------------------------------- 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) (6) Earnings Per Share The following are reconciliations of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for earnings from continuing operations for the first quarters ended March 31, 1998 and 1997:
Earnings Shares Per Share Millions except per share amounts (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------------------------------------------------ Three Months ended March 31, 1998 Earnings from continuing operations ......................................... $ 18 241 Basic EPS ............................................................. $ 0.07 ===== Effect of Dilutive Securities Options .................................................................. -- 1 ------------------------------------- Diluted EPS .............................................................. $ 18 $242 0.07 ===== Distributions on preferred securities (after-tax) ........................ 6 12 ------------------------------------- Antidilutive ............................................................. $ 24 $254 0.09 ===== Three Months ended March 31, 1997 Earnings from continuing operations ......................................... $188 251 Basic EPS ............................................................. $ 0.75 ===== Effect of Dilutive Securities Options .................................................................. -- 1 ------------------------------------- 188 $252 0.75 ===== Distributions on preferred securities (after-tax) ........................ 6 12 ------------------------------------- Diluted EPS ........................................................... $194 $264 0.73 -------------------------------------
Not included in the computation of diluted EPS were options outstanding at March 31, 1998 to purchase approximately 827 thousand shares of common stock. These options were not included in the computation, as the exercise prices were greater than the average market price of the common shares. The exercise prices of these options range from $38.81 to $44.75 per share. The options will expire in 2007. At March 31, 1997, the basic and diluted loss per share for discontinued operations were $.18 and $.17, respectively. (7) Long Term Debt and Credit Agreements Financing activities during the first quarter of 1998 primarily consisted of increased borrowings through the issuance of $395 million in commercial paper, bringing the outstanding balance to $495 million. In addition, the company retired $25 million in medium-term notes and $108 million of the $250 million Thailand revolving credit facility. The balance remaining outstanding under the Thailand revolving credit facility at March 31, 1998 was $52 million. Commercial paper was used to refinance the medium-term notes and the retired portion of the credit facility. (8) Financial Instruments The fair values of the company's financial instruments at March 31, 1998 are described below: 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) The Deutsche Mark currency swap agreement had a notional value of $110 million and an increased value of approximately $25 million based on dealer quotes. The company had four foreign currency forward contracts to purchase 1,505 million baht for $35 million to hedge a series of known United States dollar requirements. Based upon quoted market prices of comparable instruments, at March 31, 1998, the net fair value of the contracts were approximately $32 million. The company had outstanding commodity futures contracts covering 2,360 thousand barrels of crude oil with a notional amount of $39 million and 4 billion cubic feet of natural gas with a notional amount of $10 million. The company also had outstanding contracts for the purchase and sale of 18,900 thousand gallons of heating oil and 10,500 thousand gallons of unleaded gasoline with notional amounts of $9 million and $6 million, respectively, at March 31, 1998. Fair values of the outstanding futures contracts approximated their carrying values at March 31, 1998. The estimated fair value of the company's long-term debt was $2,550 million. The estimated fair value of the mandatorily redeemable convertible preferred securities of the company's subsidiary trust was $581 million. (9) Accrued Abandonment, Restoration and Environmental Liabilities At March 31, 1998, the company had accrued $453 million for the estimated future costs to abandon and remove wells and production facilities. The total costs for abandonments are predominately accrued for on a units-of-production basis and are estimated to be approximately $629 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. The company's reserve for environmental remediation obligations at March 31, 1998 totaled $286 million, of which $99 million was included in current liabilities. (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 will be changes in the estimates of future costs, which could have a material effect on the company's future results of operations and financial condition or liquidity. Environmental matters - The company is subject to loss contingencies pursuant to federal, state and local environmental laws and regulations. These include existing and possible future obligations to investigate the effects of the release or disposal of certain petroleum, chemical and mineral substances at various sites; to remediate or restore these sites; to compensate others for damage to property and natural resources; for remediation and restoration costs and for personal injuries; and to pay civil penalties and, in some cases, criminal penalties and punitive damages. These obligations relate to sites owned by the company or others and are associated with past and present operations, including sites at which the company has been identified as a potentially responsible party (PRP) under the federal Superfund laws and comparable state laws. Liabilities are accrued when it is probable that future costs will be incurred and such costs can be reasonably estimated. However, in many cases, investigations are not yet at a stage where the company is able to determine whether it is liable or, 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 clean-up methods and costs, the unknown timing and extent of the corrective actions that may be required, the uncertainty attendant to the possible award of punitive damages, the recent judicial recognition of new causes of action, the present state of the law, which often imposes joint and several and retroactive liabilities on PRPs, 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 March 31, 1998, the company had accrued $286 million for estimated future environmental assessment and remediation costs at various sites where liabilities for such costs are probable. At those sites where 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 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 $240 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 nearly complete, and it now appears unlikely that any issues raised in the Notice will proceed to either litigation or mediation, and it is expected that all matters will be settled. The settlement will require approval by the Joint Committee on Taxation of the U.S. Congress and such approval should be granted. The total amount of tax and interest that the company would be required to pay if the IRS were ultimately to prevail on the material issues described in the Notice, 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 $508 million as of March 31, 1998. During the first quarter of 1997, the IRS examination team completed its review of a claim for refund filed by the company relating to its 1985 tax liability. The IRS has not formally allowed the claim, however, as a result of the expected settlement described above, the company believes that a portion of the claim will be allowed and that such allowance should entitle it to a small refund for overpayment of tax or interest for all open taxable years preceding 1988. The company believes it has adequately provided in its accounts for items and issues not yet resolved. Other matters - In February 1996, Bridas Corporation filed a petition against the company and others in the District Court of Fort Bend County, Texas, alleging that the defendants conspired to and did tortiously interfere with Bridas' rights under agreements with the government of Turkmenistan to develop the Yashlar Field and to transport gas from that field to Pakistan. The petition also alleges that the defendants interfered with Bridas' exclusive right to lay a gas pipeline in Afghanistan. Bridas seeks actual damages as well as punitive damages, plus interest. Bridas' expert witnesses have stated in pre-trial discovery that Bridas' total actual damages for loss of future profits are approximately $1.7 billion. In the alternative, Bridas is expected to seek an award of approximately $430 million with respect to its total expenditures in Turkmenistan. The company believes the assertions made by Bridas are without merit and is vigorously defending the lawsuit. 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. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) (11) Unocal guarantees certain indebtedness of Union Oil. Summarized below is financial information for Union Oil and its consolidated subsidiaries: For the Three Months Ended March 31 -------------------------- Millions of dollars 1998 1997 - -------------------------------------------------------------------------------- Total revenues ............................ $ 1,207 $ 1,455 Total costs and other deductions (including income taxes) ............... 1,184 1,262 - -------------------------------------------------------------------------------- Earnings from continuing operations ....... 23 193 Discontinued operations Loss on disposal (a) ................... -- (44) - -------------------------------------------------------------------------------- Net earnings .............................. $ 23 $ 149 - -------------------------------------------------------------------------------- (a) Net of tax benefit of: $ - $ (27) At December At March 31 31 (b) -------------------------- Millions of dollars 1998 1997 - -------------------------------------------------------------------------------- Current assets ............................... $1,373 $1,576 Noncurrent assets ............................ 6,231 6,053 Current liabilities .......................... 983 1,124 Noncurrent liabilities ....................... 3,828 3,534 Shareholder's equity ......................... 2,793 2,971 - -------------------------------------------------------------------------------- (b) Audited (12) Subsequent Event On May 6, 1998, Union Oil issued $100 million of 6-1/2% notes due May 1, 2008 and $200 million of 7% debentures due May 1, 2028, in each case guaranteed by Unocal. The proceeds from the sale were used to retire the maturing $110 million Deutsche Mark bonds and to reduce outstanding commercial paper borrowings. 8 OPERATING HIGHLIGHTS UNOCAL CORPORATION (Unaudited) For the Three Months Ended March 31 --------------------- 1998 1997 - -------------------------------------------------------------------------------- NET DAILY PRODUCTION Crude oil and condensate (thousand barrels daily) United States Spirit Energy 76 .............................. 44 48 Alaska ........................................ 30 34 - -------------------------------------------------------------------------------- Total United States ......................... 74 82 International Far East (a) .................................. 89 93 Other ......................................... 31 27 - -------------------------------------------------------------------------------- Total International ......................... 120 120 Worldwide ........................................ 194 202 - -------------------------------------------------------------------------------- Natural gas (million cubic feet daily) United States Spirit Energy 76 .............................. 788 910 Alaska ........................................ 138 156 - -------------------------------------------------------------------------------- Total United States ......................... 926 1,066 International Far East (a) .................................. 826 805 Other ......................................... 52 67 - -------------------------------------------------------------------------------- Total International ......................... 878 872 Worldwide ........................................ 1,804 1,938 - -------------------------------------------------------------------------------- Natural gas liquids (thousand barrels daily) ........ 18 20 Geothermal (million kilowatt-hours daily) ........... 21 16 - -------------------------------------------------------------------------------- (a) Includes host country share in Indonesia of: Crude oil and condensate 18 30 Natural gas 33 33 9 OPERATING HIGHLIGHTS (continued) UNOCAL CORPORATION (Unaudited) For the Three Months Ended March 31 ---------------------- 1998 1997 - -------------------------------------------------------------------------------- AVERAGE SALES PRICES (a) Crude oil and condensate (per barrel) United States Spirit Energy 76 .............................. $13.94 $20.79 Alaska ........................................ 10.84 18.51 Total United States ......................... 12.66 19.85 International Far East ...................................... $13.97 $21.03 Other ......................................... 12.30 20.07 Total International ......................... 13.50 20.75 Worldwide ........................................ $13.15 $20.32 - -------------------------------------------------------------------------------- Natural gas (per thousand cubic feet) United States Spirit Energy 76 .............................. $ 2.14 $ 2.78 Alaska ........................................ 1.47 1.35 Total United States ......................... 2.03 2.57 International Far East ...................................... $ 2.03 $ 2.40 Other ......................................... 2.09 2.22 Total International ......................... 2.04 2.38 Worldwide ........................................ $ 2.04 $ 2.49 - -------------------------------------------------------------------------------- AGRICULTURAL PRODUCTS PRODUCTION VOLUMES (thousand tons) Ammonia ............................................. 374 391 Urea ................................................ 260 275 Other products ...................................... 175 207 AGRICULTURAL PRODUCTS SALES VOLUMES (thousand tons) Ammonia ............................................. 220 156 Urea ................................................ 325 210 Other products ...................................... 174 252 (a) Excludes Global Trade margins 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of Unocal should be read in conjunction with the company's Management, Discussion and Analysis in Item 7 of the 1997 Annual Report on Form 10-K. Unless otherwise specified, the following discussion pertains to the company's continuing operations. CONSOLIDATED RESULTS For the Three Months Ended March 31 ------------------------ Millions of dollars 1998 1997 - ------------------------------------------------------------------------------ After-tax earnings from continuing operations ................ $ 18 $ 188 Special items (net of tax): Environmental and litigation provisions .................. (33) (9) Asset sales .............................................. -- 7 Deferred tax adjustment .................................. (21) -- - -------------------------------------------------------------------------------- Total special items ....................................... (54) (2) ------------------------------------------------------------------------------- Adjusted after-tax earnings from continuing operations .... 72 190 Net loss on disposal of discontinued operations .............. -- (44) Special item: discontinued operations ....................... -- (44) - -------------------------------------------------------------------------------- Adjusted after-tax loss from discontinued operations ...... -- -- - -------------------------------------------------------------------------------- Adjusted after-tax earnings ............................ $ 72 $ 190 - -------------------------------------------------------------------------------- The company's first quarter 1998 adjusted earnings from continuing operations decreased 62 percent over the same period last year. The lower earnings level was primarily due to significantly lower average worldwide sales prices for crude oil and natural gas, lower U.S. natural gas and crude oil production, higher U.S. dry hole costs and higher international exploration expenses. Partially offsetting these negative factors were increased power generation at Salak in Indonesia, higher agricultural products sales volumes and lower interest expense. EXPLORATION AND PRODUCTION Exploration and Production involves the exploration for, and production of crude oil and natural gas. UNITED STATES - Included in the United States category is Spirit Energy 76 and Alaska oil and gas operations. Spirit Energy 76 is responsible for oil and gas operations in the Lower 48 United States with emphasis on the Gulf Coast, deepwater areas in the Gulf of Mexico and the Permian Basis in West Texas. A substantial portion of crude oil and natural gas produced domestically is sold interdivision to the company's Global Trade group. The remainder is contracted to third parties, sold in the spot market or used in the company's agricultural products operations. For the Three Months Ended March 31 ---------------------- Millions of dollars 1998 1997 - -------------------------------------------------------------------------------- After-tax earnings: Spirit Energy 76 .................................. $ 10 $ 95 Alaska ............................................ 12 21 - -------------------------------------------------------------------------------- Total after-tax earnings ....................... 22 116 Special items: Asset sales ..................................... -- 2 - -------------------------------------------------------------------------------- Adjusted after-tax earnings .............. $ 22 $114 - -------------------------------------------------------------------------------- During the first three months of 1998, adjusted after-tax earnings decreased 81 percent compared with the same period a year ago. The decrease was primarily due to substantially lower average sales prices for crude oil and natural gas, decreased crude oil and natural gas production and higher dry hole costs. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Compared with the first quarter of 1997, average sales prices for United States crude oil decreased by $7.19 per barrel, or 36 percent, and average sales prices for United States natural gas decreased by $.54 per thousand cubic feet (mcf) , or 21 percent. The company's United States crude oil and natural gas production decreased by 10 percent and 13 percent, respectively, over the same period a year ago. The decreased production volumes were primarily due to two separate pipeline curtailments and mechanical-related shut-ins. Dry hole expense increased by $20 million (after-tax) compared with the first quarter of 1997 due to increased exploratory drilling activities in the Gulf of Mexico. INTERNATIONAL - The company's international operations pursue oil and gas exploration and exploitation opportunities outside the United States. For the Three Months Ended March 31 ---------------------- Millions of dollars 1998 1997 - -------------------------------------------------------------------------------- After-tax earnings 13 102 Special items: Deferred tax adjustment .................... (21) 1 - -------------------------------------------------------------------------------- Adjusted after-tax earnings ..................... $ 34 $101 - -------------------------------------------------------------------------------- During the first quarter of 1998, international adjusted after-tax earnings decreased compared with 1997 results primarily due to substantially lower average sales prices for crude oil and natural gas, increased exploration expenses and higher current income taxes in Thailand. Compared with the first quarter of 1997, total international crude oil and condensate average sales prices decreased 35 percent to $13.50 per barrel and natural gas average sales prices decreased by 14 percent to $2.04 per mcf. During the first quarter of 1998, crude oil and condensate production remained at the 1997 level of 120 thousand barrels per day and natural gas increased slightly from the 1997 level of 872 million cubic feet (mmcf) per day to 878 mmcf per day. During the first quarter of 1998, exploration expense was higher by $7 million (after-tax), primarily due to increased exploration activities in Indonesia. GLOBAL TRADE The Global Trade group handles the company's worldwide crude oil, condensate and natural gas marketing and trading activities. Global Trade also purchases crude oil, condensate and natural gas from the company's joint venture partners, royalty owners and other unaffiliated oil and gas producers for resale. During the first quarters of 1998 and 1997 Global Trade's after-tax earnings were $6 million. GEOTHERMAL AND POWER OPERATIONS The Geothermal and Power Operations segment explores for, produces and sells geothermal resources, and constructs and operates electric power generation plants and sells the related electricity. First quarter 1998 and 1997 adjusted after-tax earnings were $14 million and $6 million, respectively. Improved 1998 earnings were primarily the result of a 31 percent increase in power generation and related sale of electricity, principally from the Indonesian Salak field Units 3 through 6, which came on line during the fourth quarter of 1997. Partially offsetting these positive factors were higher dry hole provisions. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) DIVERSIFIED BUSINESS GROUP For the Three Months Ended March 31 ----------------------- Millions of dollars 1998 1997 - ------------------------------------------------------------------------------- After-tax earnings Agricultural Products ............................ $ 9 $ 20 Carbon and Minerals .............................. 15 10 Pipelines ........................................ 15 14 Other ............................................ -- 1 - -------------------------------------------------------------------------------- Total ............................................ 39 45 Special items: Carbon and Minerals (Litigation) ................. (1) -- - ------------------------------------------------------------------------------- Adjusted after-tax earnings ......................... $ 40 $ 45 - -------------------------------------------------------------------------------- The Diversified Business group's lower adjusted after-tax earnings for the first quarter of 1998 were primarily due to lower margins on the Agricultural Products' export sales activity. The lower export sales activity was the result of lower sales prices and production volumes at the Kenai, Alaska plant. This negative impact to earnings was partially offset by higher Agricultural Products export sales volumes and sales margins associated with its West Coast operation. The higher adjusted net earnings for the Carbon and Minerals group were primarily due to increased earnings from its Brazilian affiliate. CORPORATE AND UNALLOCATED Corporate and Unallocated expense includes general corporate overhead, the non-exploration and production related activities of the New Ventures group and other unallocated costs. Net interest expense represents interest expense, net of interest income and capitalized interest. For the Three Months Ended March 31 --------------------- Millions of dollars 1998 1997 - -------------------------------------------------------------------------------- After-tax earnings effect Administrative and general expense .......................... $(11) $(13) Net interest expense ........................................ (26) (42) Environmental and litigation expense ........................ (33) (11) New Ventures ................................................ (7) (7) Other ....................................................... 1 (14) - -------------------------------------------------------------------------------- Total ....................................................... (76) (87) Special items: Environmental and litigation provisions ................... (32) (9) Asset sales (Other) ....................................... -- 4 - -------------------------------------------------------------------------------- Total special items ......................................... (32) (5) - -------------------------------------------------------------------------------- Adjusted after-tax earnings effect from continuing operations .. $(44) $(82) - -------------------------------------------------------------------------------- Net interest expense decreased 38 percent from the first quarter of 1997 as a result of a decreased debt level and increased capitalized interest. The Other category decreased $15 million primarily due to dividends from a petroleum industry mutual insurance company. Asset sales for 1997 primarily consisted of the sale of a company airplane. FINANCIAL CONDITION AND CAPITAL EXPENDITURES For the first three months of 1998, cash flow from operating activities, including working capital changes, was $94 million, compared with $334 million in 1997. This decrease was principally due to lower commodity prices, payment to Thailand 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) for 1997 income taxes and extension of payment terms for certain foreign and domestic fertilizer sales. Proceeds from asset sales were $4 million for the first three months of 1998 and primarily consisted of miscellaneous real estate properties. Consolidated working capital at March 31, 1998 was $391 million, an increase of $50 million from the year-end 1997 level of $341 million. Capital expenditures for the first three months of 1998 totaled $326 million, an increase of $40 million from the 1997 level of $286 million, primarily due to increased drilling activities in the U.S. Gulf Coast. The company's total debt including capital leases was $2,428 million at March 31, 1998, an increase of $258 million from the year-end 1997 level of $2,170 million. The debt-to-total capitalization ratio increased to 47 percent from 43 percent at year-end 1997. During the first quarter of 1998, the company repurchased approximately 1.33 million shares of common stock for a total cost of approximately $48 million. ENVIRONMENTAL MATTERS At March 31, 1998, the company's reserves for environmental remediation obligations totaled $286 million, of which $99 million was included in current liabilities. During the first quarter, cash payments of $14 million were applied against the reserve and an additional $32 million in liabilities were recorded to the reserve account. The company also estimates that it could incur additional remediation costs aggregating approximately $240 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: March 31 Millions of dollars 1998 - -------------------------------------------------------------------------------- Superfund and similar sites .................................... $ 21 Former company-operated sites .................................. 26 Company facilities sold with retained liabilities .............. 68 Inactive or closed company facilities .......................... 140 Active company facilities ...................................... 31 - -------------------------------------------------------------------------------- Total reserves .............................................. $286 - -------------------------------------------------------------------------------- The additional $32 million in reserves were for estimated cleanup and associated costs primarily for various company facilities where the company's operations have been closed or shut down, including the Avila Beach and Guadalupe sites. On April 3, 1998, the California Central Coast Regional Water Quality Control Board issued Cleanup and Abatement Orders for both sites. The order for Avila Beach requires excavation of the affected sections of the beach and town. The Guadalupe order requires excavation of 18 locations and bioremediation at other locations of the site in addition to the recovery of contaminants utilizing shallow wells. Estimates for possible additional remediation costs related to these sites are included in the $240 million total possible additional remediation costs disclosed in note 10 to the consolidated financial statements. (See notes 9 and 10 to the consolidated financial statements for related information.) 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. The current economic problems continue to be significant in Indonesia and Thailand. The company remains optimistic about Asia's long-term economic growth and is working closely with host governments and business associates through this difficult period. The company expects energy prices to remain volatile in 1998 due to climate conditions, the production quotas set by OPEC and the ongoing developments between Iraq and the United Nations. As a result of the current crude oil price outlook, the company expects to reduce its capital spending below the original 1998 forecast of $1.5 billion. Estimated expenditures for the full year 1998 are expected to total between $1.3 and $1.4 billion. The company is also reducing its expectations for 1998 oil and gas production levels from the United States Lower 48 by about five percent to 178,000 barrels of oil equivalent (boe) per day compared with an earlier forecast of 188,000 boe per day. However, long-term, high-potential growth projects in Indonesia, Bangladesh, Argentina and the Caspian Sea, as well as the exploration of high-potential prospects in shelf and deepwater areas of the Gulf of Mexico, are expected to proceed as planned. The company is focused on reserve replacement from high-potential prospects, rather than short-term projects to boost production. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk generally represents the risk that losses may occur in the value of financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices. As part of its overall risk management strategies, the company uses derivative financial instruments to manage and reduce risks associated with these factors. The following discussion and analysis focuses on significant changes in the company's position regarding these risk factors since year end 1997. Interest Rate Risk - The company's primary market exposure for changes in interest rates relates to the company's long term debt obligations. During the first quarter of 1998, the company increased its outstanding debt level (excluding capital lease obligations) by $258 million or twelve percent, to $2,426 million from its year end 1997 level of $2,168 million primarily through the additional issuance of commercial paper. The addition was principally due to increased cash requirements for capital expenditures and lower than anticipated first quarter commodity prices. The company expects to have cash available to repay a portion of the commercial paper borrowings in 1998 through a combination of cash generated by operations, sales of assets, new debt offerings and decreases in planned capital spending. However, a continuation of depressed commodity prices may lead to a further increase in the company's debt level at December 31, 1998. The following table provides principal amounts and related weighted average interest rates for the company's outstanding debt obligations at March 31, 1998 by expected maturity dates and constitutes a forward-looking statement. Circumstances could arise which may cause the timing and amount of actual cash flows to differ materially from the projections. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
Debt Obligation Principal Amounts by Expected Maturity Dates at March 31, 1998 (excludes capital leases) Fair Millions of U.S. dollars 1998-2002 There-after Total Value - ------------------------------------------------------------------------------------------------------------------------------------ Fixed rate ................................................... $ -- $1,744 $1,744 $1,868 Average Interest Rates ..................................... 8.18% 8.18% Fixed rate (DM denominated) (a) .............................. -- 135 135 135 Average Interest Rates ..................................... -- 6.125% 6.125% Variable rate ................................................ -- 547 547 547 Average Interest Rates ..................................... -- 5.94% 5.94% - ------------------------------------------------------------------------------------------------------------------------------------ $ -- $2,426 $2,426 $2,550 - ------------------------------------------------------------------------------------------------------------------------------------
(a) The underlying debt obligation is a 6.125 percent Deutsche Mark (DM) 250 million bond which was hedged by a currency swap agreement. Under the terms of the currency swap agreement, the company was to pay $110 million and receive DM 250 million at maturity. On May 6, 1998, the DM bond and the currency swap agreement matured. The company retired the DM bond with DM 250 million received from the currency swap agreement. The company used proceeds received from two new debt issues to pay its $110 million obligation under the currency swap agreement and to retire commercial paper. See note 12 to the consolidated financial statements for information regarding the new debt issues. Foreign exchange rate risk - Due to the recent volatility in foreign currency exchange rates, the company entered into foreign currency forward contracts primarily to lock in exchange rates for funds to be converted to U.S. dollars. At March 31, 1998, the company had four foreign currency forward contract hedges outstanding related to its Thailand oil and gas operations with notional amounts totaling $35 million. Two of the outstanding contracts call for the company to pay 920,100,000 Thai baht in exchange for $20 million (U.S.) at maturity on April 9, 1998. The remaining two contracts call for the company to pay 584,500,000 Thai baht in exchange for $15 million (U.S.) at maturity on May 8, 1998. The contracts had a total value of approximately $32 million (U.S.) based upon the exchange rates in effect on March 31, 1998. The company will continue to monitor its exposure to foreign exchange rate volatility as part of its strategy to mitigate foreign currency risks. Commodity price risk - The company generally uses hydrocarbon commodity based derivative financial instruments, such as options or futures contracts with maturities of 18 months or less, to mitigate its exposure to fluctuations in petroleum commodity prices. The company also trades hydrocarbon-based derivative financial instruments on a limited basis. The company has controls in place and monitors its trading activities to ensure compliance. The company uses a value at risk model to assess the market risk of its commodity price sensitive derivative financial instruments for internal risk management purposes. Value at risk represents the potential loss in fair value the company would experience on its commodity price sensitive derivative financial instruments, using calculated volatilities and correlations over a specified time period with a given confidence level. The company's calculation model is based on historical data and uses a one week time interval and a 95 percent confidence level. The total amount of commodity derivative financial instruments held for trading purposes and purposes other than trading were not material at March 31, 1998. Based upon the company's calculations, the risk of loss in fair value associated with commodity price sensitive derivative financial instruments at March 31, 1998 was immaterial. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There is incorporated by reference the information with respect to certain legal proceedings previously reported in Item 1 of Unocal's Annual Report on Form 10-K for the year ended December 31, 1997 (1997 Form 10-K), the information regarding environmental remediation reserves in note 9 to the consolidated financial statements in Item 1 of Part I hereof, the discussion thereof in the Environmental Matters section of Management's' Discussion and Analysis in Item 2 of Part I, and the information regarding certain legal proceedings and other contingent liabilities in note 10 to the consolidated financial 16 ITEM 1. LEGAL PROCEEDINGS (CONTINUED) statements. (1) In Citizens for a Better Environment, et al. v. Union Oil Company of California, described in Paragraph (3) of Item 3 of the 1997 Form 10-K, the trial has been postponed to September 1998 while the parties continue with mediation in an attempt to settle the case. (2) With reference to the matters involving the Guadalupe oil field, described in Paragraph (4) of Item 3 of the 1997 Form 10-K, a letter of intent (LOI) to settle the civil proceeding brought by the California Attorney General was executed by the parties in April 1998; however, final documentation and court approval are still necessary. The County of San Luis Obispo certified the Environmental Impact Report (EIR) in late March 1998, and on April 3, 1998, the Regional Water Quality Control Board (RWQCB) issued a Cleanup and Abatement Order substantially reflecting the agreement reached in the LOI. (3) With reference to the matters involving the town of Avila Beach, California, described in Paragraph (5) of Item 3 of the 1997 Form 10-K, on April 3, 1998, the RWQCB certified the EIR and issued a Cleanup and Abatement Order. (4) With reference to the preliminary determinations of underpaid royalties described in Paragraph (10) of Item 3 of the 1997 Form 10-K, the company has now received notices from the U.S. Department of Interior, Minerals Management Service, alleging underpaid royalties totaling approximately $48 million, as well as undetermined late payment charges. (5) With reference to the matters involving the Mountain Pass, California, lanthanide facility of the company's Molycorp, Inc. (Molycorp), subsidiary, described in Paragraph (14) of Item 3 of the 1997 Form 10-K, on March 5, 1998, Molycorp was served by the Lahontan Regional Water Quality Control Board (LRWQCB) with a Notice of Proposed Administrative Civil Liability which seeks civil penalties in the amount of approximately $550,000 for alleged failures to submit self-monitoring reports and discharge reports in a timely manner. Molycorp has the opportunity to contest the proposed civil penalties at a hearing scheduled in July 1998. In addition, the LRWQCB issued three Cleanup and Abatement Orders on March 25, 1998, relating to the present wastewater evaporation pond, a former and now-closed wastewater evaporation pond, and the mine and mill site, all located at the Mountain Pass facility. These three orders do not carry civil penalties, but may require significant expenditures for environmental investigation and remediation. (6) With reference to the matter involving the company's former refinery in Rodeo, California, described in Paragraph (18) of Item 3 of the 1997 Form 10-K, in April 1998 the company settled the claims of the Bay Area Air Quality Management District for aggregate civil penalties of $285,000, which was paid in May. ITEM 2. CHANGES IN SECURITIES During the first quarter of 1998, the company awarded 4,496 restricted stock units to 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) 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 (2) 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 first quarter of 1998, Unocal issued 46 shares of its common stock upon the conversion of 40 of the 6-1/4% 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The Exhibit Index on page 20 of this report lists the exhibits that are filed as part of this report. (b) Reports on Form 8-K: 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) Filed during the first quarter of 1998: 1. Current Report on Form 8-K dated and filed January 28, 1998, for the purpose of reporting, under Item 5, the company's fourth quarter and full year 1997 earnings and related information. 2. Current Report on Form 8-K dated February 13, 1998 and filed February 17, 1998, for the purpose of reporting, under Item 5, the company's Unocal Canada Limited subsidiary's agreement to exchange certain of its Canadian oil and gas properties with Tarragon Oil and Gas Limited for Tarragon common stock and debentures. 3. Current Report on Form 8-K dated February 25, 1998 and filed March 3, 1998, for the purpose of reporting, under Item 5, the company's crude oil and natural gas reserve data. Filed during the second quarter of 1998 to the date hereof: 1. Current Report on Form 8-K dated April 15, 1998 and filed April 21, 1998, for the purpose of reporting, under Item 5, the completion of Unocal Canada Limited subsidiary's exchange of certain of its Canadian oil and gas properties with Tarragon Oil and Gas for Tarragon common stock and debentures. 2. Current Report on Form 8-K dated April 28, 1998 and filed April 29, 1998, for the purpose of reporting, under Item 5, Unocal's first quarter 1998 earnings and related information. 18 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: May 13, 1998 By: /s/ Joe D. Cecil ---------------- Joe D. Cecil Vice President and Comptroller (Duly Authorized Officer and Principal Accounting Officer) 19 EXHIBIT INDEX 3 Bylaws of Unocal, as amended to be effective June 1, 1998. 10 Amendments to 1985 and 1991 Incentive Plan Awards. 12.1 Statement regarding computation of ratio of earnings to fixed charges of Unocal for three months ended March 31, 1998 and 1997. 12.2 Statement regarding computation of ratio of earnings to fixed charges of Union Oil Company of California for the three months ended March 31, 1998 and 1997. 27 Financial data schedule for the period ended March 31, 1998 (included only in the copy of this report filed electronically with the Commission). 20 EX-3 2 AMENDMENT TO BYLAWS EXHIBIT 3 BYLAWS OF UNOCAL CORPORATION a Delaware corporation (As Amended to be Effective June 1, 1998) ARTICLE I FISCAL YEAR Section 1. The fiscal year of Unocal Corporation (hereinafter called the "Corporation") shall end on the thirty-first (31st) day of December of each year. ARTICLE II OFFICES Section 1. Principal Office. The principal office for the transaction of business of the Corporation is hereby fixed and located at 2141 Rosecrans Avenue, Suite 4000, in the City of El Segundo, County of Los Angeles, State of California. The Board of Directors (hereinafter sometimes called the "Board") is hereby granted full power and authority to change said principal office from one location to another. ARTICLE III STOCKHOLDERS Section 1. Annual Meetings. The annual meetings of the stockholders shall be held at 10:00 o'clock A.M. on the fourth (4th) Monday in May of each year if not a legal holiday, for the purpose of electing directors, consideration of reports of the affairs of the Corporation, and for the transaction of any other business which is within the powers of the stockholders and properly brought before the meeting. If the fourth (4th) Monday in May is a legal holiday, the annual meeting of the stockholders shall be held at 10:00 o'clock A.M. on the preceding or subsequent Monday as fixed by resolution of the Board. Section 2. Notice of Meetings. Written notice of each annual or special meeting of stockholders shall be given to each stockholder entitled to vote thereat not less than ten (10) nor more than sixty (60) days before the meeting. Section 3. Place of Meetings. All meetings of stockholders, whether annual or special, shall be held at the principal office of the Corporation or at such other place, within or without the State of Delaware, as the Board may from time to time designate pursuant to authority hereinafter granted it. In the absence of any such designation stockholders' meetings shall be held at the principal office of the Corporation. Section 4. Voting Rights. Stockholders entitled to vote at stockholder meetings shall be entitled to one (1) vote for each full share. A fraction of a share or a fractional interest in a share shall not be entitled to any voting rights whatsoever. Section 5. Conduct of Meetings. The decisions of the Chairman of the Board or officer presiding at all stockholders' meetings shall govern in all matters relating to the conduct of the meeting. Section 6. Voting. Directors shall be divided into three (3) classes with each director serving a three (3)-year term. At each annual meeting, all directors of one (1) class shall be elected in accordance with the provisions of ARTICLE SEVENTH of the Corporation's Certificate of Incorporation by the holders of shares entitled to vote in the election. A nomination shall be accepted, and votes cast for a proposed nominee shall be counted by the inspectors of election, only if the Secretary of the Corporation has received at least sixty (60) days prior to the meeting a statement over the signature of the proposed nominee that such person consents to being a nominee and, if elected, intends to serve as a director. Such statement shall also contain the Unocal stock ownership of the proposed nominee, occupations and business history for the previous five (5) years, other directorships, names of business entities in which the proposed nominee owns a ten (10) percent or more equity interest, listing of any criminal convictions, including federal or state securities violations, and all other information as would be required to be disclosed in solicitations of proxies for the election of such nominee as director pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. Section 7. Notice of Stockholder Business. At any meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder or a beneficial owner of the Corporation's stock ("Proponent"). For business to be properly brought before the meeting by a Proponent, such business must be a proper matter for stockholder action under the general corporation law of the state of Delaware, and the Secretary must have received at least sixty (60) days prior to the meeting written notice by the Proponent containing (a) a brief description of each matter desired to be brought before the meeting, (b) the Proponent's name and address, as they appear on the Corporation's books, (c) the class and the number of shares of the Corporation which are beneficially owned by the Proponent and, if the Proponent is a beneficial owner, proof of beneficial ownership, (d) any material interest of the Proponent in such business, (e) an indication as to whether the Proponent intends to solicit or participate in the solicitation of proxies in favor of such business, and (f) as to each person whom the Proponent proposes to nominate for election or reelection as a director, all information relating to such person as would be required to be disclosed in solicitations of proxies for the election of such person as a director pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth herein. Section 8. Quorum. The holders of one-third (1/3) of all of the outstanding shares of the stock of the Corporation entitled to vote at a meeting of stockholders, present in person or by 2 proxy, shall constitute a quorum for the transaction of any business at such meeting. ARTICLE IV BOARD OF DIRECTORS Section 1. Powers. Subject to the limitations of the Certificate of Incorporation of the Corporation and of the Delaware General Corporation Law as to action which shall be authorized or approved by the stockholders, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed by, the Board of Directors. Section 2. Number. The exact number of directors of the Corporation shall be nine (9) until changed in the manner provided by law. Section 3. Chairman and Vice Chairman of the Board. The Board shall appoint a Chairman, who shall preside at all meetings of the Board of Directors and shall have such other powers and duties as may from time to time be assigned by the Board of Directors or prescribed by the Bylaws. The Board may also appoint a Vice Chairman, who shall preside at all meetings of the Board of Directors in the absence of the Chairman and shall have such other powers and duties as may from time to time be assigned by the Board of Directors or prescribed by the Bylaws. Section 4. Annual Meetings. Immediately following each annual meeting of stockholders, the Board shall hold its annual meeting for the purpose of organization, election of officers and the transaction of any other business. Section 5. Regular Meetings. Regular meetings of the Board shall be held at the times and on the dates fixed by resolution of the Board. Section 6. Special Meetings. Special meetings of the Board for any purpose or purposes whatsoever may be called by the Chairman of the Board or the Chief Executive Officer or, in the absence or inability of either of them, by the President, the Chief Financial Officer, or by at least two (2) of the directors at the time in office. Section 7. Notice of Meetings. Notice of annual meetings and of regular meetings of the Board is hereby dispensed with. Notice of special meetings must be given at least two (2) days in advance if given by mail, or at least twenty-four (24) hours in advance if delivered personally or given by telephone or telegram. Section 8. Place of Meetings. All meetings of the Board, whether annual, regular or special meetings, shall be held at any place within or without the State of Delaware which has been designated from time to time by resolution of the Board or in the notice of the meeting. In the absence of such designation all directors' meetings shall be held at the principal office of the Corporation. Section 9. Quorum. A majority of the exact number of directors specified in Section 2 of ARTICLE IV of the Bylaws shall constitute a quorum of the Board of Directors for the transaction of business; provided, however, that vacancies on the Board may be filled by a majority of the 3 remaining directors, though less than a quorum, or by a sole remaining director, each such director to hold office until a successor is elected at an annual or special meeting of the stockholders. Section 10. Compensation of Directors. Directors and members of committees appointed by the Board shall receive such compensation, if any, for their services, and such reimbursement for their expenses, as may be fixed or determined by resolution of the Board. The Board may, however, in any such resolution provide that directors who are also employees of the Corporation or any of its subsidiaries shall not receive additional compensation for services as a director or member of a committee appointed by the Board. Section 11. Indemnification of Directors, Officers, Employees and Other Agents. (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or involved in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative ("Proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, trustee, or fiduciary, or in a similar capacity (collectively, "Agent") of another foreign or domestic corporation, limited liability company, partnership, joint venture, trust, or any other enterprise or entity whatsoever, including without limitation employee benefit plans (collectively, "Affiliate"), whether the basis of such Proceeding is alleged action in an official capacity, or in any other capacity while serving as a director or officer of the Corporation or as an Agent of an Affiliate, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability, and loss, including without limitation, attorneys' fees, judgments, fines, ERISA excise taxes, penalties, amounts paid or to be paid in settlement, and any other amounts actually incurred or suffered by such person in connection with any Proceeding; and such indemnification shall continue as to a person who has ceased to be a director or officer of the Corporation or Agent of an Affiliate and shall inure to the benefit of his or her heirs, executors, and administrators; provided, however, that, except as provided in paragraph (b) hereof with respect to Proceedings seeking to enforce rights to indemnification, the Corporation shall indemnify any such person seeking indemnification in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the board of directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including without limitation, service to an employee benefit plan) in advance of the final disposition of a Proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may, to the 4 extent authorized from time to time by its board of directors, either on a general basis or as to specific employees or agents, provide indemnification to employees and agents of the Corporation with similar scope and effect as the foregoing indemnification of directors and officers. (b) Right to Bring Suit. If a claim under paragraph (a) of this Section is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for expenses incurred in a Proceeding in advance of its final disposition in which case the applicable period shall be twenty (20) days, the person seeking indemnification (the "Party to be Indemnified") may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Party to be Indemnified shall be entitled to be paid also the expense of prosecuting or defending such claim. The Corporation's sole defense to an action seeking indemnification (other than an action brought to enforce a claim for expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) shall be that the Party to be Indemnified has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the Party to be Indemnified for the amount claimed, and the burden of providing such defense shall be on the Corporation. Neither the failure of the Corporation (including its board of directors, its independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the Party to be Indemnified is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its board of directors, its independent legal counsel, or its stockholders) that the Party to be Indemnified has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Party to be Indemnified has not met the applicable standard of conduct. (c) Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. (d) Insurance. The Corporation shall maintain in full force and effect, at its own expense, director and officer liability insurance ("Insurance") coverage for each director and officer in amounts and scope at least as favorable as that maintained by the Corporation on September 30, 1996, or, to the extent more favorable, any Insurance policy entered into or renewed by the Corporation following such date. Notwithstanding the foregoing, if the Corporation, after using its best efforts, cannot obtain and purchase such coverage for an amount no more than what it paid for the most recent expiring Insurance policy plus a reasonable additional amount, the Corporation shall only be required to purchase such Insurance coverage for any act or omission occurring at or prior to the time of such date. (e) Enforceability; Amendment. The rights provided to any person by this bylaw shall 5 be enforceable against the Corporation by such person, who shall be presumed to have relied upon it in serving or continuing to serve as an Agent, as provided above. No amendment of this bylaw shall impair the rights of any person arising at any time with respect to events occurring prior to such amendment, including, without limitation, any right of a director or officer to Insurance for any act or omission occurring at or prior to the time of such amendment. Section 12. Authority to Designate Place of Stockholders' Meetings. The Board is hereby granted full power and authority to designate from time to time any place within or without the State of Delaware for the holding of any stockholders' meeting. Section 13. Committees. The Board may, by resolution, appoint one (1) or more committees, in addition to an Executive Committee and a Board Management Committee, to consist of two (2) or more of the directors of the Corporation, and prescribe their duties and powers. A majority of the members of any such committee may determine its action and fix the time and place of its meetings unless the Board shall otherwise provide. The Board shall have the power at any time to fill vacancies in, to change the membership of, or to dissolve any such committee. Section 14. Action by Written Consent. Any action required or permitted to be taken by the Board or any committee thereof may be taken without a meeting, if all members of the Board or such committee, as the case may be, shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Section 15. Conference Calls. Members of the Board or any committee thereof may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. ARTICLE V EXECUTIVE COMMITTEE Section 1. Number and Composition. The Board of Directors shall appoint from its membership, annually, an Executive Committee of three (3) or more directors. Included on the Executive Committee shall be the Chief Executive Officer of the Corporation. Each member of the Executive Committee shall hold membership at the pleasure of the Board, which shall have the exclusive power to fill vacancies thereon as they may occur. The Chairman of the Executive Committee shall be the Chief Executive Officer of the Corporation. Section 2. Powers. The Executive Committee, during the intervals between meetings of the Board, shall have and there is hereby granted to it all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, except that the Executive Committee shall not be permitted to fill vacancies on the Board or on any committee, approve any action for which stockholder approval is also required by the Delaware General Corporation Law, amend or repeal any resolution of the Board which by its express terms is not so amendable or repealable, or appoint other committees of the Board or the members thereof and shall not have any powers restricted by Section 141(c) of the Delaware General Corporation Law unless the Board shall have specifically delegated authority to the Executive Committee to take 6 action with respect to a matter listed in such Section as permitted to be so delegated. Section 3. Procedure. Two (2) members of the Executive Committee shall constitute a quorum of the Executive Committee for the transaction of business. The Executive Committee, by vote of a majority of its members, shall fix its own times and places of meetings and shall prescribe its own rules of procedure; no change in which shall be made save by a majority vote of its members. Section 4. Records and Reports. The Executive Committee shall keep regular minutes of all business transacted at its meetings, and all action of the Executive Committee shall be reported to the Board at its next ensuing meeting. Section 5. Compensation. Members of the Executive Committee may receive such compensation, if any, for their services, and such reimbursement for their expenses, as may be fixed or determined by the Board. ARTICLE VI BOARD MANAGEMENT COMMITTEE Section 1. Number and Composition. The Board of Directors shall appoint from its membership, annually, a Board Management Committee composed of the directors who are salaried officers of the Corporation. The Chairman of the Board Management Committee shall be the Chief Executive Officer of the Corporation. Section 2. Powers. The Board Management Committee, during the intervals between meetings of the Board, shall have and there is hereby granted to it all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, subject to approval limits established by resolution of the Board of Directors as deemed appropriate from time to time, but the Board Management Committee shall not be permitted to fill vacancies on the Board or on any committee, appoint officers, approve any action for which stockholder approval is also required by the Delaware General Corporation Law, amend or repeal any resolution of the Board or of the Executive Committee, which by its express terms is not so amendable or repealable, or appoint other committees of the Board or the members thereof and shall not have any powers restricted by Section 141(c) of the Delaware General Corporation Law unless the Board shall have specifically delegated authority to the Board Management Committee to take action with respect to a matter listed in such Section as permitted to be so delegated. Section 3. Procedure. Two (2) members of the Board Management Committee shall constitute a quorum of the Board Management Committee for the transaction of business. The Board Management Committee, by vote of a majority of its members, shall fix its own times and places of meetings, and shall prescribe its own rules of procedure; no change in which shall be made save by a majority vote of its members. Section 4. Records. The Board Management Committee shall keep regular minutes of all business transacted at its meetings. 7 ARTICLE VII OFFICERS Section 1. Officers. The officers of the Corporation shall be a Chief Executive Officer, a President, a Chief Financial Officer, a Vice President, a Secretary, a Comptroller, a Treasurer, and a Chief Legal Officer. The Corporation may also have, at the discretion of the Board, one (1) or more additional Vice Presidents, one (1) or more Assistant Secretaries, one (1) or more Assistant Treasurers, and one (1) or more Assistant Comptrollers, and the Board may appoint such other officers as it may deem necessary or advisable, who shall have such authority and perform such duties as from time to time may be prescribed by the Board, the Chairman of the Board, or the Chief Executive Officer. Any two (2) or more offices may be held by the same person. Section 2. Election and Removal. The officers of the Corporation shall be chosen annually by the Board at its annual meeting and each shall hold office until the corresponding annual meeting of the Board in the next year and until a successor shall be elected and qualified unless such officer shall theretofore resign or shall be removed or otherwise disqualified to serve. The Board may remove any officer either with or without cause or under such other terms or conditions as it may prescribe. Vacancies may be filled by the Board as they may occur. Section 3. Powers and Duties. (a) Chief Executive Officer. The Chief Executive Officer shall be the officer, reporting directly to the Board, responsible for overall management of the Corporation and shall have general supervision, direction and control over the business and affairs of the Corporation and its officers. The Chief Executive Officer shall be a member of the Executive Committee and of the Board Management Committee and in general shall perform all duties incident to the office of Chief Executive Officer and shall have such powers and duties as may from time to time be assigned by the Board of Directors or prescribed by the Bylaws. (b) President. The President in general shall perform all duties incident to the office of President, and shall have such powers and duties as may from time to time be assigned by the Board of Directors, the Chief Executive Officer or prescribed by the Bylaws. (c) Chief Financial Officer and Vice Presidents. The Chief Financial Officer and each Vice President shall have such authority and shall perform such duties as shall from time to time be assigned by the Board, the Chief Executive Officer or prescribed by the Bylaws. (d) Secretary. The Secretary shall keep, or cause to be kept, a book of minutes, at the principal office and/or such other place or places as the Board may order, of all meetings of directors and stockholders, with the time and place of holding, whether regular or special, and if special how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The Secretary shall keep or cause to be kept at the principal office, or at the office of the Corporation's transfer agent, a stock register, which may be an electronic database, showing the 8 names of the stockholders of record and their addresses, the number and classes of shares held by each, the numbers and dates of the certificates issued for those shares, and the numbers and dates of cancellation of every certificate surrendered for cancellation. The Secretary shall give or cause to be given notice of all meetings of the stockholders and the Board required to be given by the Bylaws or by law. The Secretary shall have charge of and be custodian of the seal of the Corporation and the minute books and documents relating to the existence and governance of the Corporation. The Secretary shall have such other powers and perform such other duties as may from time to time be prescribed by the Board, the Chairman of the Board, the Chief Executive Officer or the Bylaws, and shall in general, subject to control of the Board, the Chairman of the Board and the Chief Executive Officer, perform all the duties usually incident to the office of secretary of a corporation. (e) Assistant Secretaries. Each Assistant Secretary shall assist the Secretary and, in the absence or disability of the Secretary, may perform the duties of the Secretary unless and until the contrary is expressed by the Board, and may perform such other duties as may be prescribed by the Board or the Secretary. (f) Treasurer. The Treasurer shall have custody of and be responsible for all the monies and funds of the Corporation. The Treasurer shall deposit or cause to be deposited all Corporation monies, funds and other valuables in the name and to the credit of the Corporation in such bank or banks as shall be judged proper or as shall be directed by the Board, the Chief Executive Officer, or the Chief Financial Officer, and shall disburse the funds of the Corporation which have been duly approved for disbursement. The Treasurer shall enter or cause to be entered regularly in the books of the Corporation full and accurate accounts of all monies received and paid out on account of the Corporation. The Treasurer shall have such other powers and perform such other duties as may from time to time be prescribed by the Board, the Chief Executive Officer, the Chief Financial Officer or the Bylaws, and shall in general, subject to control of the Board, the Chief Executive Officer, and the Chief Financial Officer, perform all the duties usually incident to the office of treasurer of a corporation. (g) Assistant Treasurers. Each Assistant Treasurer shall assist the Treasurer and, in the absence or disability of the Treasurer, may perform the duties of the Treasurer unless and until the contrary is expressed by the Board, and shall perform such other duties as may be prescribed by the Board or the Treasurer. (h) Comptroller. The Comptroller shall be the principal officer in charge of the general accounting books, accounting records and forms of the Corporation and shall see that all monies and obligations due the Corporation and all properties and assets are properly accounted for. The Comptroller shall prepare the Corporation's balance sheets, income accounts and other financial statements and reports, and render to the Board, the Chief Executive Officer, and the Chief Financial Officer, such periodic reports covering the results of operations of the Corporation as may be required by them or any of them. 9 The Comptroller shall have such other powers and perform such other duties as may from time to time be prescribed by the Board, the Chief Executive Officer, the Chief Financial Officer or the Bylaws and shall in general, subject to control of the Board, the Chief Executive Officer, and the Chief Financial Officer, perform all the duties usually incident to the office of comptroller of a corporation. (I) Assistant Comptrollers. Each Assistant Comptroller shall assist the Comptroller and, in the absence or disability of the Comptroller, may perform the duties of the Comptroller unless and until the contrary is expressed by the Board, and shall perform such other duties as may be prescribed by the Board or the Comptroller. (j) Chief Legal Officer. The Chief Legal Officer shall be in charge of the Corporation's legal affairs. The Chief Legal Officer shall advise the Board, the Chairman of the Board and/or the officers of the Corporation on such legal matters and prepare such reports as may be required by them or any of them. ARTICLE VIII MISCELLANEOUS Section 1. Execution of Documents. Unless otherwise authorized or prescribed by the Board of Directors, all contracts, leases, deeds, deeds of trust, mortgages, bonds, indentures, endorsements, assignments, powers of attorney, and other documents and instruments of whatsoever kind shall be executed for and on behalf of the Corporation by the Chief Executive Officer, the President, the Chief Financial Officer, a Vice President, the Treasurer, the Comptroller, or by any such officer and shall be attested by the Secretary or an Assistant Secretary, who shall have authority to affix the corporate seal to the same. The Board also may authorize, and delegate to any one (1) or more of the Chief Executive Officer, the President and the Chief Financial Officer the power to so authorize, any other officer or officers, employee or employees, or agent or agents, to execute any contract, document or instrument of whatever kind for and on behalf of the Corporation and such authority may be general or be confined to specific instances. Section 2. Undertakings and Commitments. No undertaking, commitment, contract, instrument or document shall be binding upon the Corporation unless previously authorized or subsequently ratified by the Board or executed by an officer or officers, an employee or employees or an agent or agents of the Corporation acting under powers conferred by the Board or by these Bylaws. Section 3. Checks, Drafts, etc. All checks, notes and other obligations for collection, deposit or transfer, and all checks and drafts for disbursement from Corporation funds, and all bills of exchange and promissory notes, and all acceptances, obligations and other instruments for the payment of money, shall be endorsed or signed by such officer or officers, employee or employees or agent or agents as shall be thereunto authorized from time to time by the Board of Directors, which may delegate the power to so authorize to any one (1) or more of the Chief Executive Officer, the President and the Chief Financial Officer. 10 Section 4. Representation of Shares of Other Corporations. Shares standing in the name of the Corporation may be voted or represented and all rights incident thereto may be exercised on behalf of the Corporation by the Chief Executive Officer, the President, the Chief Financial Officer, a Vice President, the Secretary, the Treasurer or the Comptroller, or by such other officers upon whom the Board of Directors may from time to time confer like powers. ARTICLE IX AMENDMENTS TO BYLAWS Section 1. Power of Stockholders. New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote of seventy-five (75) percent of the outstanding stock of the Corporation entitled to vote thereon. Section 2. Power of Directors. Subject to the right of stockholders as provided in Section 1 of this ARTICLE IX to adopt, amend or repeal Bylaws, Bylaws may be adopted, amended or repealed by the Board of Directors as provided or permitted by law; however, any Bylaw amendment adopted by the Board of Directors increasing or reducing the authorized number of directors or amending this Section shall require a resolution adopted by the affirmative vote of not less than seventy-five (75) percent of the directors. ARTICLE X EMERGENCY Section 1. "Emergency" as used in this Article means disorder, disturbance or damage caused by war, enemy attack, other warlike acts or by catastrophe, disaster or other similar emergency condition, which prevents the conduct and management of the affairs and business of the Corporation by the Board of Directors and officers in the manner provided for in other Articles of these Bylaws. The powers and duties conferred and imposed by this Article, and any resolutions adopted pursuant hereto, shall be effective only during an emergency. This Article may be implemented from time to time by resolutions adopted by the Board of Directors before or during an emergency, or during an emergency by the emergency Board of Directors constituted and then acting pursuant hereto. An emergency, once commenced, shall be deemed to continue until terminated by resolutions adopted for that purpose by the Board of Directors. Section 2. If, during an emergency, a majority of the Board of Directors cannot be found or is unable to act, one-third (1/3) of the exact number of the Board of Directors shall constitute a quorum thereof. Section 3. During any emergency, the officers and employees of the Corporation shall continue, so far as possible, to conduct the Corporation's affairs and business under the guidance of the Board of Directors acting pursuant to this Article and in accordance with known orders of governmental authorities. Section 4. If, during any emergency, a quorum of the Board of Directors, as provided in Section 3 of this Article, cannot be found or is unable to act, any three (3) available members of the Executive Committee, including the Chief Executive Officer, shall be and constitute the Board 11 of Directors, with two (2) thereof constituting a quorum, and as such shall have and exercise the fullest power of the Board of Directors for the conduct and management of the affairs and business of the Corporation, permitted by law, without the limitations set forth in Section 2 of ARTICLE V of these Bylaws, provided that such emergency Board of Directors as so constituted shall comply to the extent practicable under the circumstances with the provisions of ARTICLE III of these Bylaws relating to annual and special meetings of stockholders. If three (3) members of the Executive Committee, including the Chief Executive Officer, are not able to serve, any three (3) available directors shall be and constitute such emergency Board of Directors, with two (2) thereof constituting a quorum, for the exercise of the powers conferred and performance of the duties imposed by this Section 4. Section 5. If, during any emergency, neither a quorum of the Board of Directors, as provided in Section 3 of this Article, nor a quorum of the emergency Board of Directors, as provided for in Section 4 of this Article is available to serve, then the powers conferred and duties imposed by Section 4 shall vest in and devolve upon any three (3) of (in the following order of priority) available directors, including any one (1) or more of the Chief Executive Officer, the President and the Chief Financial Officer, and as many Vice Presidents (or, in case of their inability, any other officers), in order of seniority, as may be necessary from time to time to constitute a total of three (3) emergency directors. The Chief Executive Officer and any other one (1) emergency director shall constitute a quorum of such emergency Board of Directors for exercise of the powers conferred and performance of the duties imposed hereunder, but if the Chief Executive Officer is not available, any two (2) of such emergency directors shall constitute a quorum. 12 EX-10 3 AMENDMENT EXHIBIT 10 AMENDMENTS TO 1985 AND 1991 INCENTIVE PLAN AWARDS The Compensation Committee of the Board of Directors amended outstanding agreements and agreements to be used in future covering awards of non-qualified Stock Options, Performance Share Units, and Restricted Stock under the Management Incentive Plan of 1991 and the Long-Term Incentive Plan of 1985. The amendments are effective March 30, 1998 and provide for the acceleration of vesting, the lapse of restrictions and the acceleration of performance cycles upon the occurrence of certain Change in Control Events. Generally, the amendments provide that upon the occurrence of a Change in Control Event, the following shall occur: 1. Each previously granted Stock Option and related Stock Appreciation Right (SAR) will become immediately exercisable in full (and the securities received upon the exercise thereof shall be free from any restriction period which would otherwise be applicable) and the "restriction period" of any Restricted Stock previously issued upon any earlier exercise of the Stock Option will immediately terminate. 2. All restrictions on Restricted Stock shall lapse and the holder shall be entitled to the delivery of all such shares. 3. Each previously granted Stock Option and related Stock Appreciation Right (SAR) will become immediately exercisable (and the securities received upon the exercise thereof shall be free from any restriction period which would otherwise be applicable) and the "restriction period" of any Restricted Stock previously issued upon any earlier exercise of the Option will immediately terminate. 4. Each Performance Share Unit will become payable by the Company, solely in cash, as if the applicable award period (performance cycle) ended as of the occurrence of such Change in Control Event. The Committee may estimate performance measures for any period for which annual reports are not yet available. As used in these amendments, a "Change in Control Event" means any of the following: 1. Approval by the stockholders of the Company of the dissolution or liquidation of the Company. 2. Approval by the stockholders of the Company of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities that are not subsidiaries or other controlled affiliates, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity immediately after the reorganization are, or will be, owned, directly or indirectly, by stockholders of the Company immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of the Company's securities from the record date for such approval until such reorganization and that such record owners hold no securities of the other parties to such reorganization, but including in such determination any securities of the other parties to such reorganization held by subsidiaries or other controlled affiliates of the Company). 3. Approval by the stockholders of the Company of the sale of substantially all of the Company's business and/or assets to a person or entity that is not a subsidiary or other controlled affiliate. 4. Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), but excluding any person described in and satisfying the conditions of Rule 13d-1(b)(1) thereunder), other than a subsidiary or other controlled affiliate and other than an employee benefit plan sponsored by the Company or any of its subsidiaries or controlled affiliates, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act, and except pursuant to customary forms of revocable proxies used in connection with annual meetings of stockholders), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding securities entitled to then vote generally in the election of directors of the Company. For purposes of this clause (4), a person shall be deemed to have the right to acquire outstanding securities (and thus shall become the beneficial owner) not later than immediately prior to the actual acquisition of the securities if they are acquired pursuant to a tender or exchange offer subject to Section 14(d) of the Exchange Act, so as to accord the Optionee the opportunity to exercise the Stock Option and tender the underlying securities in the applicable tender or exchange offer. 5. During any period not longer than two consecutive years, individuals who at the beginning of such period constituted the Board cease to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's stockholders, of each new Board member was approved by a vote of at least three-fourths of the Board members then still in office who were Board members at the beginning of such period (including for these purposes, new members whose election or nomination was so approved). 2 EX-12.1 4 UNOCAL CORPORATION EXHIBIT 12.1 UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES For the Three Months Ended March 31 ------------------- Millions of dollars 1998 1997 - -------------------------------------------------------------------------------- Earnings from continuing operations ........................ $ 18 $188 Provision for income taxes ................................. $ 79 $149 - -------------------------------------------------------------------------------- Earnings subtotal ................................. 97 337 Fixed charges included in earnings: Interest expense ........................................ $ 41 $ 61 Distribution on convertible preferred securities ........ 8 8 Interest portion of rentals ............................. 6 7 - -------------------------------------------------------------------------------- Fixed charges subtotal ............................ 55 76 Earnings from continuing operations available before fixed charges .......................... $152 $413 - -------------------------------------------------------------------------------- Fixed charges: Fixed charges included in earnings ...................... $ 55 $ 76 Capitalized interest .................................... 8 5 - -------------------------------------------------------------------------------- Total fixed charges ............................... $ 63 $ 81 - -------------------------------------------------------------------------------- Ratio of earnings from continuing operations to fixed charges ........................................ 2.4 5.1 - -------------------------------------------------------------------------------- EX-12.2 5 UNION OIL COMPANY EXHIBIT 12.2 UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES For the Three Months Ended March 31 ------------------------ Millions of dollars 1998 1997 - -------------------------------------------------------------------------------- Earnings from continuing operations ...................... $ 23 $193 Provision for income taxes ............................... 83 152 ------------------------------------------------------------------------------- Earnings subtotal .................................. 106 345 Fixed charges included in earnings: Interest expense ...................................... 41 61 Interest portion of rentals ........................... 6 7 - -------------------------------------------------------------------------------- Fixed charges subtotal ............................. 47 68 Earnings from continuing operations available before fixed charges ........................ 153 413 - -------------------------------------------------------------------------------- Fixed charges: Fixed charges included in earnings .................... 47 68 Capitalized interest .................................. 8 5 - -------------------------------------------------------------------------------- Total fixed charges ................................ $ 55 $ 73 - -------------------------------------------------------------------------------- Ratio of earnings from continuing operations to fixed charges ..................................... 2.8 5.7 - -------------------------------------------------------------------------------- EX-27 6 ART. 5 FIRST QUARTER 1998
5 Unocal Corporation FDS 1,000,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 275 0 881 (33) 165 1,373 14,992 (10,040) 7,578 982 2,427 0 0 252 2,452 7,578 1,171 1,207 747 1,110 97 0 41 97 79 18 0 0 0 18 .07 .07
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