-----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, OqveZaWBFKboDmHhdxG7cn+Jf7a75HrOgfgAeCE78OXQ82xRQsezYBXGMImYbFao zjrV7rePrWNf2gwK9V0QbQ== 0000716039-99-000020.txt : 19990514 0000716039-99-000020.hdr.sgml : 19990514 ACCESSION NUMBER: 0000716039-99-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: 99620125 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, 1999 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 April 30, 1999: 242,168,308 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED EARNINGS UNOCAL CORPORATION (UNAUDITED) For the Three Months Ended March 31 ------------------------ Millions of dollars except per share amounts 1999 1998 - -------------------------------------------------------------------------------------------- Revenues ................................................................ Sales and operating revenues ....................................... $ 1,189 $ 1,171 Interest, dividends and miscellaneous income ....................... 28 11 Equity in earnings of affiliated companies ......................... 27 25 Gain/(loss) on sales of assets ..................................... (13) -- - -------------------------------------------------------------------------------------------- Total revenues ............................................... 1,231 1,207 Costs and other deductions Crude oil, natural gas and product purchases ....................... 616 416 Operating expense .................................................. 235 324 Selling, administrative and general expense ........................ 32 24 Depreciation, depletion and amortization ........................... 200 181 Dry hole costs ..................................................... 27 50 Exploration expense ................................................ 38 47 Interest expense ................................................... 45 41 Property and other operating taxes ................................. 13 16 Distributions on convertible preferred securities of subsidiary trust .................................. 8 8 Minority interest .................................................. -- 3 - -------------------------------------------------------------------------------------------- Total costs and other deductions ............................. 1,214 1,110 - -------------------------------------------------------------------------------------------- Earnings (loss) from operations before income taxes ................ 17 97 Income taxes ....................................................... 10 79 - ------------------------------------------------------------------------------------------- Net earnings (loss) applicable to common stock ............... $ 7 $ 18 - -------------------------------------------------------------------------------------------- Basic earnings (loss) per share of common stock (a)................. $ 0.03 $ 0.07 Diluted earnings (loss) per share of common stock (b) .............. $ 0.03 $ 0.07 Cash dividends declared per share of common stock .................. $ 0.20 $ 0.20 - -------------------------------------------------------------------------------------------- (a) Basic weighted average shares outstanding (in thousands) ..... 241,426 241,430 (b) Diluted weighted average shares outstanding (in thousands) .... 242,153 242,861 See notes to the consolidated financial statements
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION March 31 December 31 ------------------------ Millions of dollars 1999(a) 1998 - -------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents ....................................... $ 182 $ 238 Accounts and notes receivable ................................... 739 807 Inventories ..................................................... 195 179 Deferred income taxes ........................................... 119 142 Other current assets ............................................ 24 22 - -------------------------------------------------------------------------------------------- Total current assets........................................... 1,259 1,388 Investments and long-term receivables .............................. 1,177 1,143 Properties (b) ..................................................... 5,172 5,276 Deferred income taxes .............................................. 68 23 Other assets ....................................................... 133 122 - -------------------------------------------------------------------------------------------- Total assets .................................................. $ 7,809 $ 7,952 - -------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities Accounts payable ................................................ $ 586 $ 709 Taxes payable ................................................... 217 260 Interest payable ................................................ 39 52 Current portion of environmental liabilities .................... 155 142 Other current liabilities ....................................... 178 213 - -------------------------------------------------------------------------------------------- Total current liabilities ..................................... 1,175 1,376 Long-term debt ..................................................... 2,568 2,558 Deferred income taxes .............................................. 122 132 Accrued abandonment, restoration and environmental liabilities ..... 597 622 Other deferred credits and liabilities ............................. 630 514 Minority interest .................................................. 26 26 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely parent debentures .. 522 522 Common stock ($1 par value) ........................................ 252 252 Capital in excess of par value ..................................... 469 460 Unearned portion of restricted stock issued ........................ (25) (24) Retained earnings .................................................. 1,918 1,959 Accumulated other comprehensive income (loss) ...................... (34) (34) Treasury stock - at cost (c) ...................................... (411) (411) - -------------------------------------------------------------------------------------------- Total stockholders' equity ................................... 2,169 2,202 - -------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity ................ $ 7,809 $ 7,952 - -------------------------------------------------------------------------------------------- (a) Unaudited (b) Net of accumulated depreciation ............................... $ 10,161 $ 10,193 (c) Number of shares (in thousands) ............................... 10,623 10,623 See notes to the consolidated financial statements
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CONSOLIDATED CASH FLOWS UNOCAL CORPORATION (UNAUDITED) For the Three Months Ended March 31 ------------------------ Millions of dollars 1999 1998 - -------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net earnings (loss) ................................................ $ 7 $ 18 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation, depletion and amortization ..................... 200 181 Dry hole costs ............................................... 27 50 Deferred income taxes ........................................ (32) 13 (Gain) loss on sales of assets (before-tax) .................. 13 -- Other ........................................................ (13) 20 Working capital and other changes related to operations Accounts and notes receivable ............................. 56 69 Inventories ............................................... (17) 7 Accounts payable .......................................... (115) (131) Taxes payable ............................................. (43) (14) Other ..................................................... 16 (119) - -------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities .... 99 94 Cash Flows from Investing Activities Capital expenditures (includes dry hole costs) .................. (225) (326) Proceeds from sales of assets ................................... 106 4 - -------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities .... (119) (322) Cash Flows from Financing Activities Long-term borrowings ............................................ 435 395 Reduction of long-term debt ..................................... (425) (133) Dividends paid on common stock .................................. (48) (48) Repurchases of common stock ..................................... -- (48) Other ........................................................... 2 (1) - -------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities ....... (36) 165 Increase (Decrease) in cash and cash equivalents ................... (56) (63) Cash and cash equivalents at beginning of year ..................... 238 338 - -------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period ......................... $ 182 $ 275 - -------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest (net of amount capitalized) ......................... $ 65 $ 60 Income taxes (net of refunds) ................................ $ 87 $ 92 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 1998 Form 10-K. Results for the three months ended March 31, 1999, are not necessarily indicative of future financial results. Certain items in the prior year financial statements have been reclassified to conform to the 1999 presentation. (2) For the purpose of this report, Unocal Corporation (Unocal) and its consolidated subsidiaries, including Union Oil Company of California (Union Oil), are referred to as the company. (3) Other Financial Information Sales and operating revenues are derived principally from the sale of crude oil, natural gas, natural gas liquids, geothermal steam, nitrogen-based agricultural products and specialty minerals produced by the company. During the first quarter of 1999 and 1998, approximately 45 percent and 31 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, natural gas and product purchases category on the consolidated earnings statement. Capitalized interest totaled $5 million and $8 million for the first quarters of 1999 and 1998, respectively. (4) Income Taxes Income taxes on earnings from operations for the first quarter of 1999 were $10 million compared with $79 million for the comparable period in 1998. The effective income tax rate for the first quarter of 1999 decreased to 59 percent from 81 percent in the first quarter of 1998. The tax rate for the first quarter of 1999 is higher than normal due to a loss from domestic operations. The tax rate for the comparable period in 1998 was adversely impacted by tax adjustments related to the appreciation of the Thai baht totaling $21 million for deferred taxes and $11 million for current taxes. (5) Comprehensive Income The company's comprehensive earnings were as follows:
For the Three Months Ended March 31 ------------------------ Millions of dollars 1999 1998 - -------------------------------------------------------------------------------------------- Net earnings (loss) ................................................ $ 7 $ 18 Change in foreign currency translation adjustments (net of tax) .... -- 1 - -------------------------------------------------------------------------------------------- Comprehensive earnings (loss) ................................ $ 7 $ 19 - -------------------------------------------------------------------------------------------- 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 operations for the first quarters ended March 31, 1999 and 1998:
Earnings Shares Per Share Millions except per share amounts (Numerator) (Denominator) Amount - --------------------------------------------------------------------------------------------------------------- Three Months ended March 31, 1999 Earnings from operations .............................................. $ 7 241 Basic EPS .......................................................... $ 0.03 ========= Effect of Dilutive Securities Options/common stock equivalents ................................... 1 ------------------ Diluted EPS ........................................................ 7 242 $ 0.03 ========= Distributions on subsidiary trust preferred securities (after-tax).. 6 12 ------------------ Antidilutive ....................................................... $13 254 $ 0.05 Three Months ended March 31, 1998 Earnings from operations .............................................. $18 241 Basic EPS .......................................................... $ 0.07 ========= Effect of Dilutive Securities Options/common stock equivalents ................................... 1 ------------------ Diluted EPS ........................................................ 18 242 $ 0.07 ========= Distributions on subsidiary trust preferred securities (after-tax).. 6 12 ------------------ Antidilutive ....................................................... $24 254 $ 0.09 - ---------------------------------------------------------------------------------------------------------------
Not included in the computation of diluted EPS were options outstanding at March 31, 1999 to purchase approximately 8.5 million shares of common stock. These options were not included in the computation as the exercise prices were greater than the year-to-date average market price of $31.11 for the common shares. The exercise prices of these options range from $32.16 to $51.01 per share and they expire in 2006 through 2009. (7) Long Term Debt and Credit Agreements On February 18, 1999, the company issued $350 million of 30 year, 7 1/2 percent debentures under its $1.439 billion universal shelf registration statement. After issuance of the debentures, the total amount available for future issuance of medium term notes, other debt and/or equity securities under the company's universal shelf registration statement was approximately $1.089 billion. The company also increased its commercial paper borrowings by $93 million from year-end 1998 to an outstanding balance of $153 million at March 31, 1999. Proceeds from the debt issuance referred to above and commercial paper borrowings were used to retire $74 million of maturing medium-term notes and to reduce the amount outstanding under the company's $1 billion bank credit agreement from $550 million to $200 million. The company also terminated its $250 million revolving credit agreement in February 1999. There were no amounts outstanding under the revolving credit agreement during 1999. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (8) Financial Instruments The fair values of the company's financial instruments at March 31, 1999 are described below: In February 1999, the company paid $53 million to its counterparty to close out its three remaining Canadian foreign exchange contracts. Proceeds of $82 million Canadian were received from the counterparty and used by the company's Canadian subsidiary to make a scheduled income tax payment to Canada's taxing authority. No gain or loss was recognized as changes in the exchange contracts offset changes in the company's consolidated Canadian dollar denominated tax obligation. At March 31, 1999, the company had forward exchange contracts outstanding designed to hedge the company's exposure for estimated income tax payments and other foreign currency denominated obligations and receivables expected to be settled in 1999. Ten of the contracts require the company to purchase 3,946 million Thai baht in exchange for $101 million. Eight of the contracts require the company to sell 3,010 million Thai baht in exchange for $80 million. The fair value of the purchase contracts at March 31, 1999 was approximately $105 million. The fair value of the sale contracts at March 31, 1999 approximated the notional amount. Fair values were determined by comparing the contract rates to the forward rates in effect at March 31, 1999. At March 31, 1999, the company had $84 million of futures contracts outstanding to purchase 6,025 thousand barrels of crude oil. Approximately 70 percent of the crude oil futures contracts were associated with the company's non-trading activities. The contracts primarily offset the fixed price risk associated with the company's delivery obligations under a pre-paid forward crude oil sale entered into in December 1998. The fair value of the company's crude oil futures contracts based on quoted market prices at March 31, 1999 was approximately $100 million. The company's natural gas futures contracts outstanding at March 31, 1999 were immaterial. At March 31, 1999, the company had various hydrocarbon commodity option contracts (options) outstanding with several counterparties designed to hedge the prices to be received for the sale of its future crude oil and natural gas production, principally in 1999. These options are generally accounted for as hedges with gains and losses deferred and recognized as additional oil and gas revenues upon the sale of the underlying production. At March 31, 1999, the company had approximately $9 million of options outstanding. The fair value of the options was approximately $(18) million. Fair value was determined based on dealer quotes where available, or on financial modeling using underlying commodity prices. Options associated with the company's trading activities at March 31, 1999 were immaterial. The company recorded approximately $4 million in pre-tax trading gains during the first three months of 1999. At March 31, 1999, the company had pre-tax deferred losses of approximately $20 million related to its non-trading hydrocarbon derivative instrument activities. This amount principally consists of options, as noted above. The estimated fair value of the company's long-term debt was $2,612 million. The fair values of debt instruments were based on the discounted amount of future cash outflows using the rates offered to the company for debt with similar remaining maturities. The estimated fair value of the mandatorily redeemable convertible preferred securities of the company's subsidiary trust was $565 million. The fair value of the preferred securities was based on the trading prices of the preferred securities on March 31, 1999. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (9) Accrued Abandonment, Restoration and Environmental Liabilities At March 31, 1999, the company had accrued $459 million for the estimated future costs to abandon and remove wells and production facilities. The total costs for abandonments are predominantly accrued for on a unit-of-production basis and are estimated to be approximately $655 million. This estimate was derived in large part from abandonment cost studies performed by outside firms and is used to calculate the amount to be amortized. The company's reserve for environmental remediation obligations at March 31, 1999 totaled $293 million, of which $155 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, even if liability is determined to be probable, to quantify the liability or estimate a range of possible exposure. In such cases, the amounts of the company's liabilities are indeterminate due to the potentially large number of claimants for any given site or exposure, the unknown magnitude of possible contamination, the imprecise and conflicting engineering evaluations and estimates of proper clean-up methods and costs, the unknown timing and extent of the corrective actions that may be required, the uncertainty attendant to the possible award of punitive damages, the recent judicial recognition of new causes of action, the present state of the law, which often imposes joint and several and retroactive liabilities on PRPs, the fact that the company is usually just one of a number of companies identified as a PRP, or other reasons. As disclosed in note 9, at March 31, 1999, the company had accrued $293 million for estimated future environmental assessment and remediation costs at various sites where liabilities for such costs are probable. At those sites where investigations or feasibility studies have advanced to the stage of analyzing feasible alternative remedies and/or ranges of costs, the company estimates that it could incur possible additional remediation costs aggregating approximately $195 million. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Tax matters - The company believes it has adequately provided in its accounts for tax 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 alleged that the defendants interfered with Bridas' exclusive right to lay a gas pipeline in Afghanistan. Bridas sought actual damages, as well as punitive damages, plus interest. Bridas' expert witnesses stated in pre-trial discovery that Bridas' total actual damages for loss of future profits were approximately $1.7 billion. In the alternative, Bridas was expected to seek an award of approximately $430 million with respect to its total expenditures in Turkmenistan. In October 1998, the court granted the defendants' motion for summary judgement and dismissed the action. In March 1999, Bridas filed a notice of appeal of the dismissal. The company also has certain other contingent liabilities with respect to litigation, claims and contractual agreements arising in the ordinary course of business. Although these contingencies could result in expenses or judgments that could be material to the company's results of operations for a given reporting period, on the basis of management's best assessment of the ultimate amount and timing of these events, such expenses or judgments are not expected to have a material adverse effect on the company's consolidated financial condition or liquidity. (11) Unocal guarantees certain indebtedness of Union Oil. Summarized below is financial information for Union Oil and its consolidated subsidiaries:
Summarized Financial Data of Union Oil For the Three Months Ended March 31 ------------------- Millions of dollars 1999 1998 - --------------------------------------------------------------------------------------- Total revenues ..................................................... $1,231 $1,207 Total costs and other deductions (including income taxes) ........................................ 1,218 1,184 - --------------------------------------------------------------------------------------- Earnings from operations ........................................... 13 23 - --------------------------------------------------------------------------------------- Net earnings ....................................................... $ 13 $ 23 - --------------------------------------------------------------------------------------- At March 31 At December 31 (a) ------------------ ------------------- Millions of dollars 1999 1998 ------------------ ------------------- Current assets ................................ $1,259 $1,388 Noncurrent assets ............................... 6,570 6,583 Current liabilities ............................. 1,209 1,406 Noncurrent liabilities ...........................3,943 3,852 Shareholder's equity .............................2,677 2,713 - --------------------------------------------------------------------------------------- (a) Audited
(12) Disposition of Assets On January 26, 1999, Unocal entered into an agreement with Calpine Corporation for the sale of the company`s interests in a geothermal steam production operation, The Geysers, in Northern California. On March 23, 1999, the sale closed and the company received proceeds of $101 million. The company recorded an after-tax loss of approximately $10 million on the sale. The proceeds will be used to partially fund the company's exploration and production capital projects. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (13) Restructuring Costs The company adopted a restructuring plan during the fourth quarter of 1998 that resulted in the accrual of a $27 million pre-tax restructuring charge. This amount included the costs of terminating approximately 475 employees. The charge was included in selling, administrative and general expense on the consolidated earnings statement. The plan involves the suspension of mining and manufacturing operations at the Mountain Pass, California lanthanide facility, a change in mining operations at the Questa, New Mexico molybdenum facility, the withdrawal from non-strategic activities in Central Asia and a reduction in activities of various business units. Approximately 240 of the affected employees are from the company's mining operations, 95 are from various exploration and production business units and 140 are support personnel at various locations. The restructuring charge included approximately $23 million for termination costs to be paid to the employees over time, about $2 million in benefit plan curtailment costs and about $2 million related to outplacement and other costs. At April 14, 1999, 358 employees had been terminated or had received termination notices as the result of the plan with additional terminations scheduled during the remainder of 1999. The amount of unpaid benefits remaining on the consolidated balance sheet at March 31, 1999 was $21 million. No adjustments to the restructuring accrual have been made to date. (14) Segment Information The company's reportable segments are as follows: Exploration and Production, Global Trade, Geothermal & Power Operations and Diversified Businesses. Unallocated corporate and administrative general expenses and other miscellaneous operations are included under the Corporate and Unallocated heading. Effective January 1, 1999, the Pipelines business unit was transferred from the Diversified Business segment to the Global Trade segment. For an expanded description on the activities conducted by the company's business segments, see pages 74 and 75 of the company's 1998 Form 10-K.
-------------------------------------------------------------------------------- Segment Information Exploration & Production Geothermal For the Three Months United States International Global Trade & Power ended March 31, 1999 Spirit Far Operations Millions of dollars Energy 76 Alaska East Other Global Trade Pipelines -------------------------------------------------------------------------------- ......................................... External sales & operating revenues ......... $ 35 $ 23 $ 155 $ 44 $ 768 $ 10 $ 45 Other revenue (loss) ........................ 2 -- 1 5 -- 15 (12) Inter-segment revenues ...................... 184 17 42 -- 1 2 -- - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues ............................. 221 40 198 49 769 27 33 Net earnings (loss) ......................... 2 1 48 (15) 2 17 1 - ----------------------------------------------------------------------------------------------------------------------------- Assets (at March 31, 1999) .................. 2,024 315 1,929 683 322 253 495 - -----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------- Diversified Corporate & Unallocated Totals Business Ag Carbon & Admn & Net Int Env & New Products Minerals General Exp Litigation Ventures Other (a) - ----------------------------------------------------------------------------------------------------------------------------- External sales & operating revenues.......... $ 63 $ 43 $ -- $ -- $ -- $ -- $ 3 $ 1,189 Other revenue (loss) ........................ -- 9 -- 6 -- -- 16 42 Inter-segment revenues ...................... -- -- -- -- -- -- (246) -- - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues ............................. 63 52 -- 6 -- -- (227) 1,231 Net earnings (loss) ......................... 3 9 (21) (31) (5) (1) (3) 7 - ----------------------------------------------------------------------------------------------------------------------------- Assets (at March 31, 1999) .................. 334 378 -- -- -- -- 1,076 7,809 - ----------------------------------------------------------------------------------------------------------------------------- (a) Includes eliminations and consolidation adjustments
9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED)
-------------------------------------------------------------------------------- Segment Information Exploration & Production Geothermal For the Three Months United States International Global Trade & Power ended March 31, 1998 Spirit Far Operations Millions of dollars Energy 76 Alaska East Other Global Trade Pipelines -------------------------------------------------------------------------------- ......................................... External sales & operating revenues ......... $ 24 $ 32 $ 162 $ 46 $ 685 $ 10 $ 41 Other revenue (loss) ........................ - -- (11) 5 -- 14 1 Inter-segment revenues ...................... 232 19 70 5 -- 2 -- - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues ............................. 256 51 221 56 685 26 42 Net earnings (loss) ......................... 9 12 21 ( 8) 6 15 14 - ----------------------------------------------------------------------------------------------------------------------------- Assets (at March 31, 1998) .................. 1,896 370 1,613 726 261 263 556 - -----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------- Diversified Corporate & Unallocated Totals Business Ag Carbon & Admn & Net Int Env & New Products Minerals General Exp Litigation Ventures Other (a) - ----------------------------------------------------------------------------------------------------------------------------- External sales & operating revenues.......... $ 95 $ 62 $ -- $ -- $ -- $ -- $ 14 $ 1,171 Other revenue (loss) ........................ -- 9 -- 8 -- -- 10 36 Inter-segment revenues ...................... -- -- -- -- -- -- (328) -- - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues ............................. 95 71 -- 8 -- -- (304) 1,207 Net earnings (loss) ......................... 9 13 (18) (26) (33) (7) 11 18 - ----------------------------------------------------------------------------------------------------------------------------- Assets (at March 31, 1998) .................. 346 385 -- -- -- -- 1,162 7,578 - ----------------------------------------------------------------------------------------------------------------------------- (a) Includes eliminations and consolidation adjustments
(15) Subsequent Events In April 1999, the company contributed fixed-price overriding royalty interests from its working interest shares in certain oil and gas producing properties in the Gulf of Mexico to Spirit Energy 76 Development, L.P. (Spirit LP), a limited partnership formed under the laws of Delaware. The fixed-price overrides are subject to economic limitations of production from the affected fields. In exchange for its overriding royalty contributions, valued at $304 million, the company received an initial general partnership interest of approximately 55 percent in Spirit LP. Concord Investors LLC (Concord) contributed $250 million in cash to the partnership in exchange for an initial partnership interest of approximately 45 percent. Concord is entitled to receive a priority allocation of profits and cash distributions in an amount equal to a spread above a floating rate of return on its capital contribution, cumulative and compounded quarterly to the extent not distributed. The partnership has a maximum term of twenty years, but may terminate after six years subject to certain conditions. On April 15, 1999, the company's Unocal Canada Resources subsidiary (UCR) signed a definitive agreement to invest up to C$265 million (US$175 million) to acquire up to 46 percent of Calgary-based Northrock Resources Ltd. (Northrock). Under the agreement, UCR proposes to make a partial tender offer to Northrock's shareholders which, if successful would result in UCR acquiring approximately 10 million shares of Northrock common stock at C$14 per share, representing approximately 32 percent of all outstanding shares. UCR would then acquire approximately 7.6 million additional shares of Northrock common stock for C$16 per share under a private placement, increasing UCR's interest in Northrock to as much as 46 percent. UCR's obligations under the agreement are subject to regulatory approvals and certain other conditions. If the tender offer for the acquisition of Northrock's common shares is successful, the company expects the transaction to be completed by mid-year. 10
OPERATING HIGHLIGHTS UNOCAL CORPORATION (UNAUDITED) For the Three Months Ended March 31 --------------------- 1999 1998 - ----------------------------------------------------------------------------------------- NET DAILY PRODUCTION Crude oil and condensate (thousand barrels daily) United States ........................................................... Spirit Energy 76 ..................................... 39 44 Alaska ............................................... 27 30 --------------------- Total United States ................................ 66 74 International (a) Far East ............................................. 70 89 Other ................................................ 31 31 --------------------- Total International ................................ 101 120 Worldwide ............................................... 167 194 --------------------- Natural gas (million cubic feet daily) United States Spirit Energy 76 ..................................... 775 788 Alaska ............................................... 153 138 --------------------- Total United States ................................ 928 926 International (a) Far East ............................................. 848 861 Other ................................................ 39 52 --------------------- Total International ................................ 887 913 Worldwide ............................................... 1,815 1,839 --------------------- Natural gas liquids (thousand barrels daily) ............... 18 18 Geothermal (million kilowatt-hours daily) .................. 22 21 - ----------------------------------------------------------------------------------------- (a) Includes host countries' shares of: Crude oil and condensate ................................ 12 19 Natural gas ............................................. 73 50
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OPERATING HIGHLIGHTS (CONTINUED) UNOCAL CORPORATION (UNAUDITED) For the Three Months Ended March 31 --------------------- 1999 1998 - ----------------------------------------------------------------------------------------- AVERAGE SALES PRICES (a) Crude oil and condensate (per barrel) United States .......................................................... Spirit Energy 76 .................................... $ 11.85 $ 13.94 Alaska .............................................. 7.86 10.84 Total United States ............................... 10.12 12.66 International Far East ............................................ $ 10.65 $ 13.97 Other ............................................... 10.22 12.30 Total International ............................... 10.51 13.50 Worldwide .............................................. $ 10.34 $ 13.15 - ----------------------------------------------------------------------------------------- Natural gas (per thousand cubic feet) United States Spirit Energy 76 .................................... $ 1.92 $ 2.14 Alaska .............................................. 1.20 1.47 Total United States ............................... 1.80 2.03 International Far East ............................................ $ 1.88 $ 2.03 Other ............................................... 1.76 2.09 Total International ............................... 1.87 2.04 Worldwide .............................................. $ 1.83 $ 2.04 - ----------------------------------------------------------------------------------------- AGRICULTURAL PRODUCTS PRODUCTION VOLUMES (thousand tons) Ammonia ................................................... 381 374 Urea ...................................................... 244 260 AGRICULTURAL PRODUCTS SALES VOLUMES (thousand tons) Ammonia ................................................... 137 220 Urea ...................................................... 264 326 (a) Excludes Global Trade margins
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the consolidated financial condition and results of operations of Unocal should be read in conjunction with Management's Discussion and Analysis in Item 7 of the company's 1998 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 1999 1998 - ----------------------------------------------------------------------------------------------------------------- After-tax earnings (loss) from operations ....................................................... $ 7 $ 18 Less: special items (net of tax) Environmental and litigation provisions ..................................................... (3) (33) Asset sales (a) ............................................................................. (10) -- Deferred tax adjustments .................................................................... -- (21) - ----------------------------------------------------------------------------------------------------------------- Total special items ......................................................................... (13) (54) - ----------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (loss) from operations ............................................. $ 20 $ 72 - ----------------------------------------------------------------------------------------------------------------- (a) Represents the sale of The Geysers, a geothermal production operation in Northern California
Adjusted after-tax earnings from operations decreased $52 million from the same period last year. Lower worldwide commodity prices for crude oil, natural gas and agricultural products were the primary contributors to the depressed earnings. Compared to 1998, average worldwide sales prices for crude oil and natural gas declined 21 percent and 10 percent, respectively. These negative factors were partially offset by lower dry hole and exploration expense resulting primarily from lower domestic exploration activity. EXPLORATION AND PRODUCTION The company's primary activities are oil and gas exploration, development, and production. United States - Included in the United States category are Spirit Energy 76 and Alaska oil and gas operations. The Spirit Energy 76 business unit is responsible for oil and gas operations in the Lower 48 United States with emphasis on the shelf and deepwater areas in the Gulf of Mexico and the Permian Basin in West Texas. A substantial portion of crude oil and natural gas produced in the United States is sold to the company's Global Trade segment. The remainder is sold to third parties, or in the case of Alaska natural gas production used in the company's agricultural products operations.
For the Three Months Ended March 31 -------------------- Millions of dollars 1999 1998 - ----------------------------------------------------------------------------------------------------------------- After-tax earnings (loss) Spirit Energy 76 ............................................................................. $ 2 $ 9 Alaska ....................................................................................... 1 12 - ----------------------------------------------------------------------------------------------------------------- Total ........................................................................................ 3 21 Less: special items (net of tax) ................................................................ -- -- - ----------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (loss) .............................................................. $ 3 $21 - -----------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings decreased $18 million compared to the same period in the prior year primarily due to lower average United States crude oil and natural gas sales prices. Crude oil prices fell 20 percent, or $2.54 per barrel, while natural gas prices fell 11 percent, or $0.23 per thousand cubic feet. Depreciation, depletion and amortization expense increased in the first quarter of 1999 primarily due to production from higher rate fields and increased exploratory land amortization. These negative factors were partially offset by lower dry hole costs. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) International - Includes the company's international exploration and production activities and the business development activities performed by the company's New Ventures group. The company is currently engaged in oil and gas production activities in nine foreign countries: Thailand, Indonesia, Canada, The Netherlands, Azerbaijan, Yemen, Myanmar, the Democratic Republic of Congo and Bangladesh.
For the Three Months Ended March 31 -------------------- Millions of dollars 1999 1998 - ----------------------------------------------------------------------------------------------------------------- After-tax earnings (loss) Far East ................................................................................... $ 48 $ 21 Other ...................................................................................... (15) (8) - ----------------------------------------------------------------------------------------------------------------- Total ...................................................................................... 33 13 Less: special items (net of tax) Deferred tax adjustment (Far East) ......................................................... -- (21) - ----------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (loss) .............................................................. $ 33 $ 34 - -----------------------------------------------------------------------------------------------------------------
During the first quarter of 1999, international adjusted after-tax earnings decreased slightly compared with the same period in the prior year. Crude oil prices fell 22 percent, or $2.99 per barrel, while natural gas prices fell 8 percent, or $0.17 per thousand cubic feet. Crude oil production volumes decreased by 16 percent primarily in Indonesia and Canada. The decrease in Canadian crude oil production reflects the disposition of the company's Alberta, Canada, exploration and production assets in the Tarragon transaction in the third quarter of 1998. These negative factors were largely offset by lower exploration expense, decreased foreign exchange losses and decreased foreign taxes. GLOBAL TRADE The Global Trade segment conducts most of the company's worldwide crude oil, condensate and natural gas trading and marketing activities and is responsible for the company's commodity-specific risk management activities. Global Trade also purchases crude oil, condensate and natural gas from certain of the company's royalty owners, joint venture partners and other unaffiliated oil and gas producers for resale. Global Trade also manages the company's Pipelines business unit which holds the company's equity interests in affiliated pipeline companies.
For the Three Months Ended March 31 -------------------- Millions of dollars 1999 1998 - ----------------------------------------------------------------------------------------------------------------- After-tax earnings (loss) Global Trade ................................................................................. $ 2 $ 6 Pipelines .................................................................................... 17 15 - ----------------------------------------------------------------------------------------------------------------- Total ......................................................................................... 19 21 Less: special items (net of tax) ................................................................ -- -- - ----------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (loss) .............................................................. $19 $21 - -----------------------------------------------------------------------------------------------------------------
Global Trade's combined adjusted after-tax earnings during the first quarter of 1999 decreased $2 million from the same period last year. The decrease was primarily due to lower margins on domestic crude oil trading. This earnings decrease was partially offset by higher Pipeline affiliate earnings due to increased volumes. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) GEOTHERMAL AND POWER OPERATIONS The Geothermal and Power Operations segment supplies geothermal steam for power generation, with operations in the Philippines and Indonesia. The segment's current activities also include operating power plants in Indonesia and an interest in the construction of a gas-fired power plant in Thailand.
For the Three Months Ended March 31 -------------------- Millions of dollars 1999 1998 - ----------------------------------------------------------------------------------------------------------------- After-tax earnings (loss) ....................................................................... $ 1 $ 14 Less: special items (net of tax) Asset sales (a) ............................................................................. (10) -- - ----------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings ..................................................................... $ 11 $ 14 - ----------------------------------------------------------------------------------------------------------------- (a) Represents the sale of The Geysers, a geothermal production operation in Northern California
Adjusted after-tax earnings for the first quarter of 1999 decreased by $3 million compared to the same period a year ago due to accounts receivable provisions in Indonesia which were partially offset by lower dry hole expense and decreased foreign exchange losses. DIVERSIFIED BUSINESS GROUP The Agricultural Products business unit manufactures, transports and markets nitrogen-based products for agricultural and industrial uses. The Carbon and Minerals business unit manufactures and markets petroleum coke, graphites and specialty minerals.
For the Three Months Ended March 31 -------------------- Millions of dollars 1999 1998 - ----------------------------------------------------------------------------------------------------------------- After-tax earnings (loss) Agricultural Products ........................................................................ $ 3 $ 9 Carbon and Minerals .......................................................................... 9 13 - ----------------------------------------------------------------------------------------------------------------- Total ........................................................................................ 12 22 Less: special items (net of tax) Environmental and litigation provisions (Carbon and Minerals) ................................ -- (1) - ----------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (loss) .............................................................. $ 12 $ 23 - -----------------------------------------------------------------------------------------------------------------
During the first quarter 1999, adjusted after-tax earnings decreased by $11 million from the same period last year. Agricultural Products commodity prices were 21 percent lower than the same period last year and sales volumes were lower due to severe icing conditions in Alaska's Cook Inlet, preventing ships from loading product. Carbon and Minerals lower earnings were primarily due to decreased sales prices and lower volumes of the Needle Coker Company. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CORPORATE AND UNALLOCATED Corporate and Unallocated includes all unallocated corporate administrative and general items, miscellaneous operations including real estate, and non-exploration and production activities of the New Ventures group, such as the new project development of common carrier pipelines, liquefied petroleum gas plants and electrical power generating plants. Net interest expense represents interest expense, net of interest income and capitalized interest.
For the Three Months Ended March 31 -------------------- Millions of dollars 1999 1998 - ----------------------------------------------------------------------------------------------------------------- After-tax earnings (loss) Administrative and general expense ........................................................... $(21) $(18) Net interest expense ......................................................................... (31) (26) Environmental and litigation expense ......................................................... (5) (33) New Ventures (non-exploration and production) ................................................ (1) (7) Other ........................................................................................ (3) 11 - ----------------------------------------------------------------------------------------------------------------- Total ........................................................................................ (61) (73) Less: special items (net of tax) Environmental and litigation provisions ..................................................... (3) (32) - ----------------------------------------------------------------------------------------------------------------- Adjusted after-tax earnings (loss) .............................................................. $(58) $ (41) - -----------------------------------------------------------------------------------------------------------------
The adjusted after-tax loss increased by $17 million as compared to the same period last year. The negative earnings factors include higher interest expense due to lower capitalized interest and increased debt levels, lower pension income and higher employee benefit related accruals. Those factors were partially offset by lower New Ventures non-exploration and production expenditures in the first quarter of 1999. FINANCIAL CONDITION AND CAPITAL EXPENDITURES For the first three months of 1999, net cash flow provided by operating activities was $99 million compared with $94 million for the same period a year ago. The increase reflects the receipt of $120 million from the Public Energy Authority of Kentucky Trust (PEAK) for a natural gas forward sale. The PEAK transaction receipt was substantially offset by the effects of lower worldwide commodity prices, increased foreign income tax payments and a decrease in liabilities related to 1999 crude oil and natural gas deliveries that pertain to the 1998 and 1999 commodity forward sales. Proceeds from asset sales for the first three months of 1999 were $106 million consisting primarily of The Geysers sale for $101 million completed in March 1999. Capital expenditures for the first quarter of 1999 totaled $225 million compared to $326 million in the same period a year ago. The decrease was primarily due to lower drilling activities and lease acquisitions in the Gulf of Mexico and internationally. Total capital expenditures are expected to be approximately $1 billion for 1999. The company will continue to focus on high-potential deepwater exploration programs in Indonesia and the Gulf of Mexico. The company may adjust its capital spending estimate later depending on the timing of acquisitions and changes in commodity prices. The company's long-term debt was $2,568 million at March 31, 1999, an increase of $10 million from the year-end 1998 level of $2,558 million. The debt-to-total capitalization ratio increased to 49 percent from 48 percent at year-end 1998. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ENVIRONMENTAL MATTERS At March 31, 1999, the company's reserves for environmental remediation obligations totaled $293 million, of which $155 million was included in current liabilities. During the first quarter of 1999, cash payments of $19 million were applied against the reserve. The company also estimates that it possibly could incur additional remediation costs aggregating approximately $195 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:
Reseve Summary March 31, Millions of dollars 1999 - -------------------------------------------------------------------------------- Superfund and similar sites ..................................... $ 13 Former company-operated sites ................................... 15 Company facilities sold with retained liabilities ............... 60 Inactive or closed company facilities ........................... 157 Active company facilities ....................................... 48 - -------------------------------------------------------------------------------- Total reserves ................................................ $293 - --------------------------------------------------------------------------------
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 foward-looking statements. See pages 40 and 41 of Management's Discussion and Analysis in Item 7 of the company's 1998 Annual Report on Form 10-K for a discussion of certain of such conditions and events. Even though energy commodity prices increased late in the first quarter of 1999 as compared to recent prior periods, the company expects prices to remain volatile for the remainder of 1999. The economic situation in Asia, where much of the company's international activity is centered, remained largely unchanged from year-end 1998. The company believes that the governments in the region are committed to undertaking the reforms and restructuring necessary to enable their nations to recover from the current downturn. Following the discoveries on the Mad Dog prospect on Green Canyon 826 and the Mirage prospect on Mississippi Canyon 941, in April 1999, the company commenced drilling the first of four deepwater wells in the Gulf of Mexico expected to be drilled over the next several months. Pending transactions for Spirit Energy 76 include the sale of substantially all of its oil and gas assets in Michigan to Quicksilver Resources, Inc. for $27 million in cash plus approximately $3 million of common stock of Quicksilver and the trade of most of its Rocky Mountain oil and gas assets for 5.8 million shares of common stock of Tom Brown, Inc. and $5 million in cash. Both transactions are expected to close in the second quarter of 1999. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In Myanmar, the company's subsidiaries and partners are awaiting completion of the Ratchaburi power plant in Thailand for commercial production from the Yadana field to begin. The gas sales agreement with the Petroleum Authority of Thailand (PTT) includes a "Take or Pay" provision, which requires PTT to purchase a contract quantity of natural gas. Due to the delay in the completion of the plant, PTT could not meet their contract minimum obligation for 1998. Therefore, PTT was billed for the 1998 "Take or Pay" obligation with the company's share of the billing being approximately $13 million. Payment, which was due on March 1, 1999, is currently outstanding. The project participants are in discussions with PTT to resolve the "Take or Pay" issue. As of March 31, 1999, the company's geothermal operations in Indonesia had a gross receivable balance of approximately $123 million, most of which was for steam sales from the Salak field. Approximately $46 million is due by June 7, 1999, of which $31 million represents a shortfall in payments for March 1998 through December 1998 steam deliveries to the Gunung Salak electric generating Units 1, 2 and 3. Partial payments have been received on a timely basis. Agreements allow for payments over the next several years. Provisions covering a portion of these receivables were recorded in 1998 and 1999. The company is vigorously pursuing collection of the outstanding receivables. In Azerbaijan, the company has an approximately 26 percent interest in the North Absheron Operating Company (NAOC) which was exploring for oil on blocks in the Caspian Sea. Because of unsuccessful drilling results, the NAOC has decided to cease operations and has closed its office in Baku. The company adopted a restructuring plan during the fourth quarter of 1998 that resulted in the accrual of a $17 million after-tax charge. The amount included the costs of terminating approximately 475 employees. The company expects execution of the plan to reduce future annualized salaries and benefits by an estimated $21 million after-tax and there have been no changes to that expectation to date. The company is currently evaluating additional initiatives to improve the efficiency and alignment of support services and reduce costs, which could result in another restructuring plan in 1999. YEAR 2000 The company is actively addressing the Year 2000 (Y2K) issue. Many existing computer programs were designed and developed to use only two digits to identify a year in the date field. If not addressed, these programs could result in system failures with possible material adverse effects on the company's operations at the beginning of the year 2000. The company's Y2K efforts can be divided into three general categories: information technology (IT) systems and applications, non-IT embedded systems in process controls, and its relationships with critical business partners. The company has appointed a program manager and has assembled various teams of professionals, principally at the business unit level, which have developed plans to implement these efforts. The plans establish a methodology and schedule to identify, assess, correct and test the company's IT systems, applications, non-IT embedded systems (such as microcontrollers and other devices used for process control), system interfaces with vendors, suppliers, customers and other outside parties, as well as to assess the Y2K readiness of such third parties. The company has contracted with systems consulting firms to assist with the assessment, correction and testing of the company's internal systems and their interfaces with third parties. To ensure independent review and validation of the implementation of the company's Y2K plans, internal auditors, assisted by contract auditors, are auditing the Y2K projects of key business units within the company and reporting their findings to senior management. A company-wide initial awareness campaign was completed in June 1998. The identification, assessment, and corrections-planning phases of the internal systems portion of the project have been completed. The company is in the process of preparing business contingency and recovery plans for its "mission critical" systems, applications and processes and remediating and renovating its systems. These systems, applications and processes, if not operable, could materially adversely impact cash flow, operations, safety or the environment. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The company's Y2K project work includes the writing and updating of existing contingency plans to address material Y2K issues. The company has existing processes for managing emergency situations and intends to have its Crisis Management Center operating at the time of the century rollover to assist with implementing any contingency plans if required. The company has completed the inventory and assessment of its IT and embedded systems and detailed planning to correct or work around the anticipated problems in these systems. The repair and testing of its IT and embedded systems was approximately 70 percent complete as of March 31, 1999. The following schedule sets forth the company's estimated timetable for achieving Y2K readiness of its IT and embedded systems: Project Target Completion Dates - -------- ----------------------- Phases Worldwide inventory of systems Completed Worldwide assessment Completed Initial plan for corrections/work arounds Completed Remediation/renovation Second quarter 1999 Contingency planning Third quarter 1999 Validation/testing Third quarter 1999 Implementation Third quarter 1999 Continuous system review Ongoing-through first quarter 2000 The company has identified approximately 400 "critical business partners" and contacted 87 percent of these companies regarding their Y2K readiness. As of March 31, 1999, the company had received responses from about 240 of the critical business partners. Work in this area will continue and contingency plans will incorporate the possibility of performance failures by multiple critical business partners. The company estimates the total expenditures on its Y2K project will be approximately $30 million. These expenditures are recorded at the business unit and corporate levels and are funded from cash provided by operating activities. Expenditures as of March 31, 1999, were approximately $16 million. Most of the remaining expenditures are expected to be incurred in the remainder of 1999. The company is not aware of any IT projects that have been delayed due to the Y2K project. The Y2K problem is real and there is a risk of Y2K related failures. These failures could result in an interruption in, or a failure of, certain business activities or functions. Such failures could materially and adversely affect the company's results of operations, liquidity or financial condition. Due to the uncertainty surrounding the Y2K problem, including the uncertainty of the Y2K readiness of the company's customers, suppliers, and partners, the company is unable at this time to determine the true impact of the Y2K problem to Unocal. The principal areas of risk are thought to be oil and gas production control systems, other embedded operations control systems and third party Y2K readiness. The company's Y2K project is expected to reduce this uncertainty. The company believes that with the completion of the project as planned, the possibility of significant interruptions of normal operations should be reduced. There can be no assurance, however, that there will not be a delay in, or increased costs associated with the implementation of such changes or that such changes will prove 100 percent effective in resolving all Y2K related issues. Furthermore, there can be no assurance that critical business partners will not experience failures, irrespective of the Y2K readiness representations they may have made. A likely worst case scenario is that despite the company's efforts, there could be failures of control systems, which might cause some processes to be shut down. Such failures could have a material adverse impact on the company's operations. The company is particularly concerned about the status of key critical business partners' Y2K readiness in Indonesia, Thailand, and the Gulf of Mexico. Their failure due to a Year 2000 problem could prevent Unocal from delivering product and cause a material adverse impact to the company's cash flows. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk generally represents the risk that losses may occur in the values of financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices. As part of its overall risk management strategies, the company uses derivative financial instruments to manage and reduce risks associated with these factors. The company also pursues outright pricing positions in certain hydrocarbon derivative financial instruments, such as futures contracts. Interest Rate Risk - From time to time the company temporarily invests its excess cash in interest-bearing securities issued by high-quality issuers. Company policies limit the amount of investment to any one financial institution. Due to the short time the investments are outstanding and their general liquidity, these instruments are classified as cash equivalents in the consolidated balance sheet and do not represent a material interest rate risk to the company. The company's primary market risk exposure for changes in interest rates relates to the company's long-term debt obligations. The company manages its exposure to changing interest rates principally through the use of a combination of fixed and floating rate debt. Interest rate sensitive derivative financial instruments, such as swaps, options, floors, caps, and collars may also be used depending upon market conditions. The company evaluated the potential effect that near term changes in interest rates would have had on the fair value of its interest rate risk sensitive financial instruments at March 31, 1999. Assuming a ten percent decrease in the company's weighted average borrowing costs at March 31, 1999, the potential increase in the fair value of the company's debt obligations and associated derivative instruments would have been approximately $102 million. Foreign Exchange Rate Risk - The company conducts business in various parts of the world and in various foreign currencies. To limit the company's foreign currency exchange rate risk related to operating income, foreign sales agreements generally contain price provisions designed to insulate the company's sales revenues against adverse foreign exchange rates. In most countries, energy products are valued and sold in U.S. dollars and foreign currency operating cost exposures have not been significant. In other countries, the company is paid for product deliveries in local currencies but at prices indexed to the U.S. dollar. These funds, less amounts retained for operating costs, are converted to U.S. dollars as soon as practicable. The company's Canadian subsidiary is paid in Canadian dollars for its crude oil and natural gas sales. Excess Canadian funds generally have been invested in other Unocal foreign operations. From time to time the company may purchase foreign currency options or enter into foreign currency exchange contracts to limit the exposure related to its foreign currency obligations. At March 31, 1999, the company had several foreign currency forward exchange contracts outstanding to hedge scheduled tax payments, other commitments and receivables to be settled in Thai baht during 1999. At March 31, 1999, the company evaluated the effect that near term changes in foreign exchange rates would have had on the fair value of the company's foreign currency position related to its outstanding foreign currency forward exchange contracts. Assuming an adverse change of ten percent in foreign exchange rates at March 31, 1999, the potential decrease in fair value of the company's foreign currency forward exchanges contracts would have been approximately $2 million. Commodity Price Risk - The company is a producer, purchaser, marketer and trader of certain hydrocarbon commodities such as crude oil and condensate, natural gas and petroleum-based products and is subject to the associated price risks. The company generally uses hydrocarbon derivative financial instruments, such as futures contracts, swaps and options with maturities of 24 months or less, to mitigate its exposure to fluctuations in hydrocarbon commodity prices. Certain of these instruments are used to hedge contractual delivery commitments and future crude oil and natural gas production against price exposure. In certain cases, the company enters into longer-term derivative instruments, such as swap contracts, to hedge its exposure to long-term fixed price commitments. The company also takes pricing positions in hydrocarbon derivative financial instruments (primarily futures and options contracts). The company uses a variance-covariance value at risk model to assess the market risk of its hydrocarbon-price-sensitive derivative instruments. Value at risk represents the potential loss in fair value the company would experience on its hydrocarbon price sensitive derivative instruments, using calculated volatilities and correlations over a specified time period with a given confidence level. The company's model is based upon historical data and uses a three-day time interval with a 95 percent confidence level. The model includes offsetting physical positions for hydrocarbon price sensitive derivative instruments related to the company's contracted crude oil and natural gas forward sales. Based upon the company's model, the value at risk related to hydrocarbon-price-sensitive derivative financial instruments held for purposes other than trading was approximately $9 million at March 31, 1999. The value at risk related to hydrocarbon-price-sensitive derivative financial instruments held for trading purposes was approximately $3 million at March 31, 1999. 20 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 3 of Unocal's Annual Report on Form 10-K for the year ended December 31, 1998 (1998 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 of such reserves in the Environmental Matters section of Management's Discussion and Analysis in Item 2 of Part I, and the information regarding certain legal proceedings and other contingent liabilities in note 10 to the consolidated financial statements. Information with respect to certain recent developments and additional legal proceedings is set forth below: General 1. In the lawsuit captioned Talbert Fuel Systems Patents Company v. Unocal Corp., et al., described in Paragraph 1 of Item 3 of the 1998 Form 10-K, in April 1999, the court granted the company's motion for summary judgment as to the remaining infringement claim. 2. In the lawsuit captioned The McMahon Foundation, et al. v. Amerada Hess Corporation, et al., described in Paragraph 2 of Item 3 of the 1998 Form 10-K, in April 1999, the settlement agreement was given final approval by the court. Less than 2.5 percent of the class members who received royalty and working interest payments from the company exercised opt-out rights. 3. In the lawsuit captioned United States, ex rel. Jack Grynberg v. Unocal, described in Paragraph 5 of Item 3 of the 1998 Form 10-K, in April 1999, the U.S. Department of Justice notified the court that it has elected not to intervene in this action. 4. In connection with the notices of Preliminary Determination of Underpaid Royalties received from the U.S. Department of the Interior Minerals Management Service (MMS), described in Paragraph 6 of Item 3 of the 1998 Form 10-K, the company has entered into negotiations with the MMS to settle the claims. 5. In the lawsuit captioned People of the State of California v. Molycorp, Inc., described in Paragraph 8 of Item 3 of the 1998 Form 10-K, in January 1999, the District Attorney filed an amended complaint adding alleged violations of the California Business & Professions Code, Water Code and Fish & Game Code. Additional Environmental Matter Involving Possible Civil Penalties 6. In recent years the District Attorney of Yolo County, California, has expressed concern with releases of chemicals from the company's West Sacramento agricultural products plant. In March 1999, the District Attorney sent the company a pre-filing letter allowing for discussion regarding three past releases of which the company had notified the appropriate environmental agencies. In the aggregate, civil penalties concerning these matters could exceed $100,000. 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The Exhibit Index on page 24 of this report lists the exhibits that are filed as part of this report. (b) Reports on Form 8-K: Filed during the first quarter of 1999: 1. Current Report on Form 8-K dated January 26, 1999, and filed January 27, 1999, for the purpose of reporting, under Item 5, the company's sale of its Northern California Geothermal assets to Calpine Corporation. 2. Current Report on Form 8-K dated January 27, 1999, and filed January 29, 1999, for the purpose of reporting, under Item 5, the company's fourth quarter and full year 1998 earnings and related information. 3. Current Report on Form 8-K dated February 8, 1999, and filed February 10, 1999, for the purpose of reporting, under Item 5, the company's crude oil and natural gas reserve data. 4. Current Report on Form 8-K dated and filed March 3, 1999, for the purpose of reporting, under Item 5, certain key executive appointments. Filed during the second quarter of 1999 to the date hereof: 1. Current Report on Form 8-K dated April 12, 1999, and filed April 14, 1999, for the purpose of reporting, under Item 5, the company's deepwater discoveries in the Gulf of Mexico. 2. Current Report on Form 8-K dated April 15, 1999, and filed April 16, 1999, for the purpose of reporting, under Item 5, the company's Unocal Canada Resources subsidiary's definitive agreement to acquire an interest in Calgary-based Northrock Resources Ltd. 3. Current Report on Form 8-K dated April 28, 1999, and filed April 30,1999, for the purpose of reporting, under Item 5, the company's first quarter 1999 earnings and related information. 22 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, 1999 By:/s/ JOE D. CECIL ------------------------------- Joe D. Cecil Vice President and Comptroller (Duly Authorized Officer Principal Accounting Officer) 23 EXHIBIT INDEX 10. Termination Agreement and General Release, dated March 31, 1999, between John W. Schanck and Union Oil Company of California (Union Oil). 12.1 Statement regarding computation of ratio of earnings to fixed charges of Unocal for the three months ended March 31,1999 and 1998. 12.2 Statement regarding computation of ratio of earnings to fixed charges of Union Oil for the three months ended March 31, 1999 and 1998. 27. Financial data schedule for the period ended March 31, 1999 (included only in the copy of this report filed electronically with the Commission) 99.1 Related and Amended Articles of Incorporation of Union Oil, as amended through April 1, 1999, and currently in effect. 99.2 Bylaws of Union Oil, as amended through April 1, 1999, and currently in effect. 24 EX-10 2 TERMINATION AGREEMENT AND GENERAL RELEASE EXHIBIT 10 TERMINATION AGREEMENT AND GENERAL RELEASE This Termination Agreement and General Release, executed this 31st day of March, 1999 by and between John W. Schanck (hereinafter referred to as "Employee"), and Union Oil Company of California (hereinafter referred to as "Company"). WHEREAS, Employee has most recently been employed at the Company's offices located in Sugar Land, Texas; WHEREAS, the Company has made certain changes which have resulted in the elimination of Employee's assignment and WHEREAS, Employee is covered under an Employment Agreement dated as of July 28, 1998 a copy of which is attached hereto as Exhibit A. NOW, THEREFORE, in consideration of the mutual promises contained in this Termination Agreement and General Release, the sufficiency of which are hereby acknowledged, Company and Employee agree as follows: 1. Employee shall continue on the payroll of the Company through August 31, 1999 as a "Consulting Employee". During such period Employee will be paid his current base salary and continue to be eligible for the Company's benefit plans and policies generally applicable to its employees in his employment category. Employee's participation and coverage shall be subject to the rules and procedures generally applicable to employees under said plans. During this period, Employee shall assist the Company with legal or administrative disputes and with transition issues - all during normal business hours. These above duties shall be limited in time and scope so as not to interfere with Employee's search for other employment. 2. Employee shall be eligible for one year of outplacement services under the Center of Executive Options to be paid by Company, plus up to an additional year with another outplacement firm, if necessary to secure employment. Such additional year's outplacement shall not exceed $35,000. 3. The payment of $893,808 (Eight Hundred and Ninety Three Thousand, Eight-Hundred and Eight Dollars) due under the aforesaid Employment Agreement shall be made within 30 days of the termination of his employment hereunder. 4. Employee shall be eligible for Unocal's executive financial consulting program through August 31, 2000 in accordance with the terms of said program. 5. Company shall continue to provide the continued "coaching" services of Tom Curen at an approximate cost of $1200 per month through August 31, 1999. 6. Employee acknowledges that he acquired certain confidential information concerning the operation of the Company during his employment with the Company and in connection with the Employee's work hereunder. Employee agrees that he will not at any time, whether during or after his employment hereunder, (1) knowingly use for improper personal benefit any confidential information that he may learn or has learned by reason of his employment with the Company, or (2) disclose any such confidential information to any person except (a) in the performance of his obligations to the Company hereunder, (b) as required by applicable law, (c) in connection with the enforcement of his rights under this Agreement, (d) in connection with any disagreement, dispute or litigation (pending or threatened) between Employee and the Company, or (e) with the prior written consent of the Company. "Confidential Information" includes information with respect to the Company's products, facilities and methods, research and development and trade secrets and other intellectual properties, systems, patents and patent applications, procedures, manuals, confidential reports, business plans, prospects or opportunities; provided, however, that such terms shall not include any information that (X) is or becomes generally known or available other than as a result of disclosure by Employee or (Y) is or becomes known or available to Employee on a non-confidential basis from a source which to Employee's knowledge is not prohibited from disclosing such information to Employee by a legal, contractual, fiduciary or other obligation to the Company. If Employee is unclear as to the requirements of the foregoing, he may ask for clarification as to a specific situation by contacting the Company's Chief Legal Officer in writing. Employee's obligations under this paragraph shall survive termination of this Agreement. 1 7. Unocal shall pay Employee his accrued vacation "bank balance" within two weeks of his termination of employment. 8. Employee's termination of employment hereunder shall be treated as "at the convenience of the Company" pursuant to the Long Term Incentive Plans of 1991 and 1998 and under the Revised Incentive Compensation Plan. Therefore, Employee shall be entitled to the delivery of shares of Restricted Stock, payment of Performance Shares and the extended period to exercise vested stock options applicable under the terms of said Plans upon a termination of employment at the convenience of the Company. 9. Employee shall not be entitled to any other termination-type benefits except as specifically noted above. Employee hereby waives any benefits or payments under the Unocal Termination Allowance Plan and Employee Redeployment Program. Employee shall not be eligible for any future grants or awards under the Management Incentive Plan of 1998. 10. All payments hereunder to Employee shall be reduced for any applicable withholding. 11. General Release In consideration for this Agreement, Employee hereby releases and forever discharges Company and Unocal Corporation and their respective predecessors, successors, partners, assigns, employees, shareholders, owners, officers, directors, agents, attorneys, subsidiaries, divisions, and affiliates, (jointly referred to as "Released Parties") from any and all claims, demands, causes of action, obligations, damages, attorneys' fees, costs and liabilities of any nature whatsoever, whether or not now known, suspected or asserted, which Employee may have or claim to have against the Released Parties relating in any manner to Employee's employment with the Company and/or the termination of such employment, and hereby covenants not to assert such claims through a lawsuit, an administrative proceeding or otherwise. This General Release includes, but is not limited to, claims arising under federal, state or local laws prohibiting employment discrimination or claims arising out of any legal restrictions on the Company's rights to terminate its employees, including without limitation of the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of 1964, and the Civil Rights Act of 1991. This Agreement shall not apply to Employee's rights to any indemnification insurance, defense or hold harmless protection that would otherwise apply in the absence of this Release. Except as specifically provided herein, nothing in this Agreement shall affect in any way, apply to, increase, or diminish, any rights which Employee has with respect to retirement benefits or with respect to any previously established policy or plans of the Company outside of this Agreement. 12. Waiver Employee waives all rights under Section 1542 of the Civil Code of California. That section reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." Notwithstanding the provisions of Section 1542 or any similar law of any other state, and to provide a full and complete release of Released Parties, Employee expressly acknowledges that this Termination Agreement and General Release is intended to include, without limitation, all claims which Employee does not know or suspect to exist in his favor at the time of execution of this document, and that the settlement agreed upon completely extinguishes all such claims. 13. Employee shall not disclose the existence or terms of this Agreement to current or former employees of the Company. However, Employee may disclose this Agreement to his spouse, tax advisor, financial advisor or potential employer, or when required by legal or administrative proceedings. In the event of a disclosure other than that authorized in the preceding sentence, Company may immediately terminate Agreement and its remaining obligations thereunder. At the time of execution of this Agreement, Company agrees that it has no knowledge of any disclosure by Employee as such disclosure is referred to in this paragraph. 2 14. This Termination Agreement and General Release is a full and complete expression of the intent of the parties with respect to the subject matter of this Agreement. No other agreement or representation, express or implied, has been made by either party with respect to the subject matter of this Agreement. 15. This Termination Agreement and General Release may not be modified except by a written agreement signed by both Employee and by a Vice President of Union Oil Company of California. 16. This Termination Agreement and General Release shall be interpreted to be valid to the full extent possible under the laws of the State of Texas. 17. Employee warrants and represents that he has not assigned or in any way transferred any claim related to the subject matter of this Termination Agreement and General Release and that he will not allow or assist in such transfer or assignment in the future. 18. This Termination Agreement and General Release shall not constitute an admission by any Released Party of any wrongful action or inaction whatsoever. 19. Employee agrees that this Termination Agreement and General Release is understood by Employee and is voluntarily entered into by the Employee. 20. Employee may file a written beneficiary designation for any payments in the event of his death prior to receipt of the amounts due under paragraphs 2, 3, 4 and 9 in the form of Attachment A. The last such designation received by Company prior to his death shall control any such payments. 21. Employee's Right to Review Agreement. Employee has twenty-two (22) days from the date of Employee's receipt of this Termination Agreement and General Release to consider whether or not to sign this Termination Agreement and General Release. 22. This Termination Agreement and General Release shall not be effective until eight (8) days from the date of execution of this Termination Agreement and General Release by Employee. During such period, Employee may notify Company in writing of his revocation of this Termination Agreement and General Release. 23. Employee's Right to Consult Counsel. Employee is advised to consult with Employee's attorney before deciding whether or not to sign this Termination Agreement and General Release. IN WITNESS WHEREOF, this Termination Agreement and General Release has been executed in duplicate originals. UNION OIL COMPANY OF CALIFORNIA EMPLOYEE By: _____________________________ __________________________ Signature Carl D. McAulay John W. Schanck - ----------------- ----------------- Print Name Print Name 4/26/99 4/2/99 Date Date 3 ATTACHMENT A TO TERMINATION AGREEMENT AND GENERAL RELEASE BENEFICIARY DESIGNATION I, Jack Schanck, (Employee) hereby designate the following person(s) as Beneficiary for any payments due at the time of my death under my Termination Agreement and General Release with Union Oil Company of California, dba Unocal. Name: Judi A. Schanck --------------------- Address: 3802 Hogan Ct. --------------------- Sugar Land, TX 77479 --------------------- Relationship: Wife --------------------- Interest (%): 100% --------------------- Name: ______________________________ Address: ______________________________ Relationship: ______________________________ Interest (%): ______________________________ 4 EX-12.1 3 STATEMENT RE: COMPUTATION OF RATIOS
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 1999 1998 - -------------------------------------------------------------------------------- ........................................................ Earnings (loss) from operations ............................ $ 7 $ 18 Provision for income taxes ................................. 10 79 - -------------------------------------------------------------------------------- Earnings (loss) subtotal .......................... 17 97 Fixed charges included in earnings: Interest expense ........................................ $ 45 $ 41 Distribution on convertible preferred securities ........ 8 8 Interest portion of rentals ............................. 5 6 - -------------------------------------------------------------------------------- Fixed charges subtotal ............................ 58 55 Earnings from operations available before fixed charges .......................... $ 75 $152 - -------------------------------------------------------------------------------- Fixed charges: Fixed charges included in earnings ...................... $ 58 $ 55 Capitalized interest .................................... 5 8 - -------------------------------------------------------------------------------- Total fixed charges ............................... $ 63 $ 63 - -------------------------------------------------------------------------------- Ratio of earnings from operations to fixed charges ........................................ 1.2 2.4 - --------------------------------------------------------------------------------
EX-12.2 4 STATEMENT RE: COMPUTATION OF RATIOS
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 1999 1998 - -------------------------------------------------------------------------------- .................................................. Earnings (loss) from operations ...................... $ 13 $ 23 Provision for income taxes ........................... 12 83 - -------------------------------------------------------------------------------- Earnings subtotal .............................. 25 106 Fixed charges included in earnings: Interest expense .................................. 45 41 Interest portion of rentals ....................... 5 6 - -------------------------------------------------------------------------------- Fixed charges subtotal ......................... 50 47 Earnings (loss) from operations available before fixed charges .................... 75 153 - -------------------------------------------------------------------------------- Fixed charges: Fixed charges included in earnings ................ 50 47 Capitalized interest .............................. 5 8 - -------------------------------------------------------------------------------- Total fixed charges ............................ $ 55 $ 55 - -------------------------------------------------------------------------------- Ratio of earnings from operations to fixed charges ................................. 1.4 2.8 - --------------------------------------------------------------------------------
EX-27 5 ARTICLE 5 FC FOR 1ST Q 10-Q
5 Unocal Corporation FDS 1,000,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 182 0 795 (56) 195 1,259 15,333 (10,161) 7,809 1,175 2,568 0 0 252 2,387 7,809 1,189 1,231 851 1,214 65 0 45 17 10 7 0 0 0 7 0.03 0.03
EX-99.1 6 ARTICLES OF INCORPORATION EXHIBIT 99.1 RESTATED AND AMENDED ARTICLES OF INCORPORATION OF UNION OIL COMPANY OF CALIFORNIA a California Corporation (Endorsed filed April 1, 1999, in the office of the Secretary of State of the State of California) Dennis P.R. Codon and Brigitte M. Dewez hereby certify that: 1. They are a duly elected and acting Vice President and the duly elected and acting Secretary, respectively, of Union Oil Company of California, a California corporation (the "Corporation"). 2. The Articles of Incorporation of the Corporation are amended and restated to read in full as follows: "ARTICLES OF INCORPORATION" OF UNION OIL COMPANY OF CALIFORNIA a California Corporation One: The name of the Corporation is: UNION OIL COMPANY OF CALIFORNIA. Two: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. Three: The Corporation shall have the power to offer, issue and to sell pro rata to the holders of its Common Shares, shares of its capital stock other than shares of stock issued and sold under and pursuant to the provisions of (1) and (2) of the second paragraph of this Article Three, and to sell to others any shares of stock so offered to the holders of the Common Shares and not taken by them for such price or consideration as the Board of Directors may determine. Notwithstanding the foregoing provisions of this Article Three, (1) the Corporation may issue shares of its capital stock, and of any future increase thereof, in such amounts as may be determined by the affirmative vote of two-thirds of the entire Board of Directors, in exchange for or in payment for property to be acquired by the Corporation for carrying out any of the foregoing purposes, without first offering such stock to its stockholders; also, upon affirmative vote of two-thirds of the entire Board of Directors of this Corporation, and without any prior offering to stockholders of this Corporation, the Corporation may grant to the purchasers or the holders of any bonds or debentures or evidences of indebtedness of this Corporation, optional rights to convert any of such securities, in whole or in part, into shares of the capital stock of this Corporation, and of any future increase thereof, and also of any subsequent offering thereof, or the optional rights to purchase any such shares, all on such terms and conditions and at such price or prices, and in such manner, at such times and in such amounts as may be determined by such vote of directors, and on any such optional rights being exercised by the holder thereof, may issue the capital stock called for by the exercise of such rights; and (2) the Corporation may offer, issue and sell, and grant options to purchase Common Shares to such employees of the Corporation and its subsidiaries, in such amounts, upon such terms and conditions and for such consideration as the Board of Directors may from time to time determine, but not to exceed in the aggregate 500,000 Common Shares; provided however, that such maximum amount shall be subject to adjustment (in the same manner as the Corporation's outstanding Common Shares) in the event a dividend is declared upon the Common Shares of the Corporation payable in Common shares or in the event the outstanding Common Shares of the Corporation shall be changed into or exchanged for a different number or class of shares of stock or other securities of the Corporation or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger or consolidation, and that the provisions of this section shall be applicable to the number or class of shares of stock or other securities, which in accordance herewith, may be substituted for such 500,000 Common Shares; and provided further that in the case of any sale of such shares the price shall not be less than the fair market value thereof at the time of sale as determined by the Board of Directors, and that in the case of any option to purchase such shares, the price shall not be less than the fair market value thereof at the time of granting such option, as so determined. For the purposes and within the aggregate limit above mentioned, such Common Shares (subject to adjustment as above provided) may be issued without any prior offering to stockholders of this Corporation. 1 Four: The Corporation is authorized to issue one class of shares of capital stock to be designated Common Shares. The aggregate par value of all shares that are to have a par value is $541,666,666.66-2/3. The number of shares that are to have a par value is 260,000,000, all of which shall be Common Shares, and the par value of each of such shares is $2-1/12. Five: The Corporation elects to be governed by all of the provisions of the General Corporation Law of California (as enacted by Chapter 682 of the 1975 California Statutes and as subsequently amended) not otherwise applicable to it under Chapter 23 thereof. Six: The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissable under California law. If the California General Corporation Law is amended after approval by the stockholders of this article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the California General Corporation Law, as so amended. Any repeal or modification by the stockholders of the foregoing paragraph shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. Seven: The Corporation is authorized to provide indemnification of its agents (as such term is defined in Section 317 of the California Corporations Code), whether by bylaw, agreement, vote of stockholders or disinterested directors, or otherwise, to the fullest extent permissible under California law. Any repeal or modification by the stockholders of the foregoing paragraph shall not adversely affect any right or protection of any such agent of the Corporation existing at the time of such repeal or modification." 3. The foregoing amendment and restatement of the Articles of Incorporation has been approved by the Board of Directors of the Corporation. 4. The foregoing amendment has been approved by the required vote of the stockholders of the Corporation in accordance with Section 902 of the California Corporations Code; the total number of outstanding shares of common stock, the only class outstanding, entitled to vote with respect to the foregoing amendment was 1,000. The number of shares voting in favor of the foregoing amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. The undersigned, Dennis P.R. Codon and Brigitte M. Dewez, further declare under penalty of perjury under the laws of the State of California that the matters set out in this Certificate are true and correct of our knowledge. Dated: March 31, 1999 /s/ Dennis Codon /s/ B. Dewez - --------------------------------- ---------------------------- Dennis P.R. Codon, Vice President Brigitte M. Dewez, Secretary 2 EX-99.2 7 BY-LAWS EXIHIBIT 99.2 BYLAWS OF UNION OIL COMPANY OF CALIFORNIA a California Corporation (Effective April 1, 1999) ARTICLE I FISCAL YEAR Section 1. The fiscal year of Union Oil Company of California (hereinafter called the "Company") shall end on the thirty-first day of December of each year. ARTICLE II OFFICES Section 1. Principal Office. The principal office for the transaction of business of the Company 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 in said county. ARTICLE III SHAREHOLDERS Section 1. Annual Meetings. The annual meetings of the shareholders shall be held at a time to be fixed by resolution of the Board on the fourth Monday in May of each year if not a legal holiday, for the purpose of electing directors and for the transaction of any other business which is within the powers of the shareholders. If the fourth Monday in May is a legal holiday, the annual meeting of the shareholders shall be held on the preceding or subsequent Monday as fixed by resolution of the Board. The mailing of an annual report to the shareholders not later than 120 days after the close of the fiscal year is waived. Section 2. Special Meetings. Special meetings of the shareholders for any purpose whatsoever may be called at any time by the Chairman of the Board, the Chief Executive Officer, the Board, or by one or more shareholders holding not less than ten percent of the voting power of the Company upon request in writing to the Chairman of the Board, the Chief Executive Officer, the Vice Chairman, a Vice President or the Secretary. The business transacted at special meetings shall be confined to the purpose or purposes stated in the notice of such meetings. Section 3. Notice of Meetings. Written notice of each annual or special meeting of shareholders shall be given to each shareholder entitled to vote thereat not less than ten nor more than sixty days before the meeting. Section 4. Place of Meetings. All meetings of shareholders, whether annual or special, shall be held at the principal office of the Company or at such other place, within or without the State of California, as the Board may from time to time designate pursuant to authority hereinafter granted it. In the absence of any such designation, shareholders' meetings shall be held at the principal office of the Company. Section 5. Voting Rights. Shareholders entitled to vote at shareholder meetings shall be entitled to one 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 6. Conduct of Meetings. The decisions of the Chairman of the Board or officer presiding at all shareholders'meetings shall govern in all matters relating to the conduct of the meeting. Section 7. Voting. Directors shall be elected in accordance with the provisions of the California Corporations Code by holders of shares entitled to vote in the election. 1 Section 8. Action Without a Meeting. Any action which may be taken at any annual or special meeting may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of the outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. ARTICLE IV BOARD OF DIRECTORS Section 1. Powers. Subject to the limitations of the Restated Articles of Incorporation of the Company and of the California General Corporation Law as to action required or authorized to be approved by the shareholders, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed by, the Board of Directors. Section 2. Number. The number of directors of the Company shall not be less than four (4) nor more than seven (7). The exact number of directors of the Company shall be fixed by resolution of the Board of Directors. 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 shareholders, 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 and Chief Executive Officer or, in his absence or inability by the Vice Chairman, 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 days in advance if given by mail, or at least one hour in advance if delivered personally or given by telephone or other electronic means. Section 8. Place of Meetings. All meetings of the Board, whether annual, regular or special meetings, shall be held at any place within or without the State of California 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 Company. Section 9. Quorum. The higher of two (2) or one-third (1/3) of the number of directors fixed by resolution adopted pursuant to Section 2 of this Article of the Bylaws shall constitute a quorum of the Board of Directors for the transaction of business; provided, however, that vacancies on the Board may be filled by a majority of the remaining directors 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 shareholders. 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 Company or any of its subsidiaries shall not receive additional compensation for services as a director or member of a committee appointed by the Board. 2 Section 11. Indemnification of Directors, Officers, Employees and Other Agents. (a) The Company shall, to the maximum extent permitted by the General Corporation Law of California, indemnify each of its directors and officers 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 in connection with any proceeding arising by reason of the fact any such person is or was a director or officer of the Company and shall advance to such director or officer expenses incurred in defending any such proceeding to the maximum extent permitted by such law. For purposes of this section, a "director" or "officer" of the Company includes any person who is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, trustee, or fiduciary, or in a similar capacity, of another foreign or domestic corporation, limited liability company, partnership, joint venture, trust, or any other enterprise or entity whatsoever, including without limitation service with respect to employee benefit plans. (b) The Board of Directors may in its discretion provide by resolution, either on a general basis or as to specific employees or agents, for similar indemnification of, or advance of expenses to, other employees or agents of the Company, and likewise may refuse to provide for such indemnification or advance of expenses except to the extent such indemnification is mandatory under the California General Corporation Law. (c) The Company 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 Company following such date. Notwithstanding the foregoing, if the Company, 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 Company shall only be required to purchase such Insurance coverage for any act or omission occurring at or prior to the time of such date. (d) The rights provided to any person by this bylaw shall be enforceable against the Company by such person, who shall be presumed to have relied upon it in serving or continuing to serve as a director or officer, 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 Shareholders' Meetings. The Board is hereby granted full power and authority to designate from time to time any place within or without the State of California for the holding of any shareholders' meeting, whether annual or special. Section 13. Committees. A majority of the Board may, by resolution, appoint one or more committees to consist of two or more of the directors of the Company, and prescribe their duties and powers. Two 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 as permitted by the California General Corporation Law. 3 ARTICLE V OFFICERS Section 1. Officers. The officers of the Company shall be a Chairman, a Chief Executive Officer, a Chief Financial Officer, a Vice President, a Secretary, a Comptroller, a Treasurer, and a Chief Legal Officer. The Company may also have, at the discretion of the Board, one (1) Vice Chairman, one (1) or more Vice Presidents, who may be designated as Executive Vice Presidents, Group Vice Presidents, Senior Vice Presidents or Vice Presidents, one (1) or more Assistant Chief Financial Officers, one (1) or more Assistant Secretaries, one (1) or more Assistant Treasurers, and one (1) or more Assistant Comptrollers, and the Board may appoint such other officers as it may deem necessary or advisable, who shall have such authority and perform such duties as from time to time may be prescribed by the Board, the Chairman of 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 Company 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 Company and shall have general supervision, direction and control over the business and affairs of the Company and its officers. The Chief Executive Officer 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) Executive Vice Presidents. The Executive Vice Presidents in general shall perform all duties incident to the office of Executive Vice 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) Other Vice Presidents. Other Vice Presidents, who may be designated as Group Vice Presidents, Senior Vice Presidents or Vice Presidents, shall have such authority and shall perform such duties as shall from time to time be assigned by the Board of Directors, the Chief Executive Officer, the Executive Vice Presidents or prescribed by the Bylaws. (d) Chief Financial Officer. The Chief Financial Officer shall have such authority and shall perform such duties as shall from time to time be assigned by the Board, the Chief Executive Officer or prescribed by the Bylaws. (e) Assistant Chief Financial Officer. Each Assistant Chief Financial Officer shall assist the Chief Financial Officer and shall perform such duties as shall from time to time be assigned by the Board, the Chief Executive Officer or the Chief Financial Officer. (f) Secretary. The Secretary shall keep, or cause to be kept, at the Company's offices, a book of minutes of all meetings of directors and shareholders. The Secretary shall keep or cause to be kept at the principal office, or at the office of the Company's transfer agent, a share register, which may be an electronic database, showing the names of the shareholders 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 shareholders 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 Company and the minute books and documents relating to the existence and governance of the Company. 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. (g) Assistant Secretaries. Each Assistant Secretary shall assist the Secretary and, in the absence or disability of the Secretary, may perform the duties of the Secretary unless and until the contrary is expressed by the Board, and shall perform such other duties as may be prescribed by the Board or the Secretary. 4 (h) Treasurer. The Treasurer shall have custody of and be responsible for all the monies and funds of the Company. The Treasurer shall deposit or cause to be deposited all Company monies, funds and other valuables in the name and to the credit of the Company in such bank or banks as shall be 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 Company which have been duly approved for disbursement. The Treasurer shall enter or cause to be entered regularly in the books of the Company full and accurate accounts of all monies received and paid out on account of the Company. 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. (i) Assistant Treasurers. Each Assistant Treasurer shall assist the Treasurer and, in the absence or disability of the Treasurer, may perform the duties of 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. (j) Comptroller. The Comptroller shall be the principal officer in charge of the general accounting books, accounting records and forms of the Company and shall see that all monies and obligations due the Company and all properties and assets are properly accounted for. The Comptroller shall prepare the Company'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 Company as may be required by them or any of them. The Comptroller shall have such other powers and perform such other duties as may from time to time be prescribed by the Board, the 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. (k) Assistant Comptrollers. Each Assistant Comptroller shall assist the Comptroller and, in the absence or disability of the Comptroller, may perform the duties of the Comptroller unless and until the contrary is expressed by the Board, and shall perform such other duties as may be prescribed by the Board or the Comptroller. (l) Chief Legal Officer. The Chief Legal Officer shall be in charge of the Company's legal affairs. The Chief Legal Officer shall advise the Board, the Chairman of the Board and/or the officers of the Company on such legal matters and prepare such reports as may be required by them or any of them. ARTICLE VI MISCELLANEOUS Section 1. Execution of Documents. Unless otherwise authorized by or pursuant to a resolution of the Board of Directors, all contracts, leases, deeds, deeds of trust, mortgages, bonds, indentures, endorsements, assignments, powers of attorney to transfer stock or for other purposes, and other documents and instruments of whatsoever kind shall be executed for and on behalf of the Company by the Chairman and Chief Executive Officer, the Vice Chairman, 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. Section 2. Undertakings and Commitments. No undertaking, commitment, contract, instrument or document shall be binding upon the Company 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 Company 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 Company funds, and all bills of exchange and promissory notes, and all acceptances, obligations and other instruments for the payment of money, shall be endorsed or signed by such officer or officers, employee or employees or agent or agents as shall be authorized from time to time to do so by or pursuant to a resolution of the Board of Directors. Section 4. Representation of Shares of Other Corporations. Shares standing in the name of the Company may be voted or represented and all rights incident thereto may be exercised on behalf of the Company by the Chairman and Chief Executive Officer, the Vice Chairman, 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. 5 ARTICLE IX AMENDMENTS Section 1. Power of Shareholders. New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written assent of shareholders entitled to exercise a majority of the voting power of the Company. Section 2. Power of Directors. Subject to the right of shareholders as provided in Section 1 of this Article to adopt, amend or repeal Bylaws, Bylaws may be adopted, amended or repealed by the Board of Directors as provided or permitted by law. 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 Company 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 any emergency, a quorum of the Board of Directors is not available to serve, then, in the following order of priority, any available director and as many other Vice Presidents (or, in case of their inability, any other officers), in order of seniority, as may be necessary from time to time to constitute a total of two emergency directors, shall be and constitute the Board of Directors, 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 Company permitted by law, 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 shareholders. Any two of such emergency directors shall constitute a quorum. Section 3. During any emergency, the officers and employees of the Company shall continue, so far as possible, to conduct the Company'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. 6 -----END PRIVACY-ENHANCED MESSAGE-----