-----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, FBBZhkH7fKBgiskDgVAHMh+EkvZSIu4Fm8S6/07GkAWVQywHvOi0I6LFrP7/jEYz Kehca6VJwOczmXniV01mTg== 0000716039-99-000037.txt : 19991117 0000716039-99-000037.hdr.sgml : 19991117 ACCESSION NUMBER: 0000716039-99-000037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99751782 BUSINESS ADDRESS: STREET 1: 2141 ROSECRANS AVE STREET 2: STE 4000 CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107267600 10-Q 1 3rd Quarter 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 September 30, 1999: 242,417,532 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED EARNINGS UNOCAL CORPORATION (UNAUDITED) For the Three Months For the Nine Months Ended September 30 Ended September 30 ----------------------- ----------------------- Millions of dollars except per share amounts 1999 1998 1999 1998 - ------------------------------------------------------------------------ ----------------------- ----------------------- Revenues .................................................................... Sales and operating revenues ........................................... $ 1,546 $ 1,286 $ 4,230 $ 3,683 Interest, dividends and miscellaneous income ........................... 16 12 72 74 Equity in earnings of affiliated companies ............................. 24 23 72 75 Gain/(loss) on sales of assets ......................................... 2 73 -- 166 ----------------------- ----------------------- Total revenues ................................................... 1,588 1,394 4,374 3,998 Costs and other deductions Crude oil, natural gas and product purchases ........................... 891 604 2,329 1,535 Operating expense ...................................................... 270 313 807 993 Selling, administrative and general expense ............................ 34 34 118 73 Depreciation, depletion and amortization ............................... 205 186 588 566 Dry hole costs ......................................................... 33 58 107 150 Exploration expense .................................................... 44 53 117 139 Interest expense ....................................................... 52 48 145 131 Property and other operating taxes ..................................... 13 13 40 44 Distributions on convertible preferred securities of subsidiary trust ...................................... 8 8 24 24 Minority interests ..................................................... 4 2 8 7 ----------------------- ----------------------- Total costs and other deductions ................................. 1,554 1,319 4,283 3,662 ----------------------- ----------------------- Earnings (loss) from operations before income taxes .................... 34 75 91 336 Income taxes ........................................................... 10 39 51 177 ----------------------- ----------------------- Net earnings (loss) .............................................. $ 24 $ 36 $ 40 $ 159 ======================= ======================= Basic earnings (loss) per share of common stock (a) .................... $ 0.10 $ 0.15 $ 0.17 $ 0.66 Diluted earnings (loss) per share of common stock (b) .................. $ 0.10 $ 0.15 $ 0.17 $ 0.66 Cash dividends declared per share of common stock ...................... $ 0.20 $ 0.20 $ 0.60 $ 0.60 (a) Basic weighted average shares outstanding (in thousands) ......... 242,404 241,362 241,905 241,621 (b) Diluted weighted average shares outstanding (in thousands) ........ 244,022 242,535 243,050 242,916 See notes to the consolidated financial statements.
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION September 30 December 31 --------------- --------------- Millions of dollars 1999(a) 1998 - ------------------------------------------------------------------------ --------------- --------------- Assets Current assets .................................................................... Cash and cash equivalents ........................................... $ 209 $ 238 Accounts and notes receivable ....................................... 798 807 Inventories ......................................................... 197 179 Deferred income taxes ............................................... 130 142 Other current assets ................................................ 26 22 --------------- --------------- Total current assets ............................................. 1,360 1,388 Investments and long-term receivables .................................. 1,269 1,143 Properties (b) ......................................................... 5,868 5,276 Deferred income taxes .................................................. 71 23 Other assets ........................................................... 120 122 --------------- --------------- Total assets ..................................................... $ 8,688 $ 7,952 =============== =============== Liabilities and Stockholders' Equity Current liabilities Accounts payable .................................................... $ 899 $ 709 Taxes payable ....................................................... 128 260 Interest payable .................................................... 46 52 Current portion of environmental liabilities ........................ 145 142 Other current liabilities ........................................... 128 213 --------------- --------------- Total current liabilities ........................................ 1,346 1,376 Long-term debt ......................................................... 2,834 2,558 Deferred income taxes .................................................. 268 132 Accrued abandonment, restoration and environmental liabilities ......... 566 622 Other deferred credits and liabilities ................................. 599 514 Minority interests ..................................................... 421 26 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely parent debentures ... 522 522 Common stock ($1 par value) ............................................ 253 252 Shares authorized: 750,000,000 (c) Capital in excess of par value ......................................... 492 460 Unearned portion of restricted stock issued ............................ (22) (24) Retained earnings ...................................................... 1,854 1,959 Accumulated other comprehensive income (loss) .......................... (34) (34) Treasury stock - at cost (d) .......................................... (411) (411) --------------- --------------- Total stockholders' equity ....................................... 2,132 2,202 --------------- --------------- Total liabilities and stockholders' equity .................... $ 8,688 $ 7,952 =============== =============== (a) Unaudited (b) Net of accumulated depreciation ................................... $ 10,395 $ 10,193 (c) Number of shares outstanding (in thousands) ....................... 242,419 241,378 (d) Number of shares (in thousands) ................................... 10,623 10,623 See notes to the consolidated financial statements.
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CONSOLIDATED CASH FLOWS UNOCAL CORPORATION (UNAUDITED) For the Nine Months Ended September 30 ------------------------------------- Millions of dollars 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities .................................................................... Net earnings (loss) .................................................... $ 40 $ 159 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation, depletion and amortization ......................... 588 566 Dry hole costs ................................................... 107 150 Deferred income taxes ............................................ (54) (34) (Gain) loss on sales of assets (before-tax) ...................... -- (166) Other ............................................................ (54) 18 Working capital and other changes related to operations Accounts and notes receivable ................................. 12 96 Inventories ................................................... (18) 18 Accounts payable .............................................. 92 (10) Taxes payable ................................................. (132) 50 Other ......................................................... (64) (136) ------------------------------------- Net cash provided by (used in) operating activities ........ 517 711 Cash Flows from Investing Activities Capital expenditures (includes dry hole costs) ...................... (761) (1,248) Acquisition of Northrock Resources Ltd. ............................. (184) -- Proceeds from sales of assets ....................................... 163 299 ------------------------------------- Net cash provided by (used in) investing activities ........ (782) (949) Cash Flows from Financing Activities Long-term borrowings ................................................ 833 666 Reduction of long-term debt ......................................... (708) (381) Dividends paid on common stock ...................................... (145) (145) Repurchases of common stock ......................................... -- (48) Minority interests .................................................. 234 (9) Other ............................................................... 22 -- ------------------------------------- Net cash provided by (used in) financing activities ........... 236 83 Increase (decrease) in cash and cash equivalents ....................... (29) (155) Cash and cash equivalents at beginning of year ......................... 238 338 ------------------------------------- Cash and cash equivalents at end of period ............................. $ 209 $ 183 ===================================== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest (net of amount capitalized).............................. $ 159 $ 148 Income taxes (net of refunds)..................................... $ 218 $ 166 See notes to the consolidated financial statements.
3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) The consolidated financial statements included herein are unaudited and, in the opinion of management, include all adjustments necessary for a fair presentation of financial position and results of operations. All adjustments are of a normal recurring nature. Such financial statements are presented in accordance with the Securities and Exchange Commission's (Commission) disclosure requirements for Form 10-Q. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the Notes thereto filed with the Commission in Unocal Corporation's 1998 Annual Report on Form 10-K. Results for the nine months ended September 30, 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. The consolidated financial statements of the company include the accounts of subsidiaries in which a controlling interest is held. Investments in affiliates without a controlling interest are accounted for by the equity method. Under the equity method, the investments are stated at cost plus the company's equity in undistributed earnings and losses after acquisition. Income taxes estimated to be payable when earnings are distributed are included in deferred taxes. (3) Other Financial Information During the third quarters of 1999 and 1998, approximately 51 percent and 40 percent, respectively, of total sales and operating revenues were attributed to the resale of crude oil, natural gas and natural gas liquids purchased from others in connection with the company's trading and marketing activities. For the nine months ended September 30, 1999 and 1998, approximately 48 percent and 34 percent, respectively, of total sales and operating revenues were attributed to the resale of crude oil, natural gas and natural gas liquids purchased from others. 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 $4 million and $5 million for the third quarters of 1999 and 1998, respectively. Capitalized interest totaled $13 million and $22 million for the first nine months of 1999 and 1998, respectively. (4) Income Taxes Income taxes on earnings from operations for the third quarter and first nine months of 1999 were $10 million and $51 million, respectively, compared with $39 million and $177 million for the comparable periods of 1998. The effective income tax rate for the third quarter of 1999 was 29 percent compared with 52 percent for the third quarter of 1998. The lower tax rate for the third quarter of 1999 was primarily due to currency-related tax adjustments in Thailand partially offset by the mix effect of domestic losses versus foreign earnings. The effective income tax rate for the first nine months of 1999 was 56 percent compared with 53 percent for the first nine months of 1998. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (5) Comprehensive Income The company's comprehensive earnings were as follows:
For the Three Months For the Nine Months Ended September 30 Ended September 30 ---------------------------------------------------- Millions of dollars 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) ........................................................... $ 24 $ 36 $ 40 $159 Change in foreign currency translation adjustments (net of tax) ............... (1) (5) -- (5) ---------------------------------------------------- Comprehensive earnings (loss) ........................................... $ 23 $ 31 $ 40 $154 ====================================================
(6) Earnings Per Share The following are reconciliations of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for net earnings for the third quarters and the nine months ended September 30, 1999 and 1998: Earnings Shares Per Share Millions except per share amounts (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended September 30, 1999 Net Earnings ............................................................ $ 24 242.4 Basic EPS ............................................................ $0.10 ===== Effect of Dilutive Securities Options/common stock equivalents ..................................... 1.6 ----------------------------- Diluted EPS .......................................................... 24 244.0 $0.10 ===== Distributions on subsidiary trust preferred securities (after-tax) ... 6 12.3 ----------------------------- Antidilutive ......................................................... $ 30 256.3 $0.12 Three Months Ended September 30, 1998 Net Earnings ........................................................... $ 36 241.4 Basic EPS ........................................................... $0.15 ===== Effect of Dilutive Securities Options/common stock equivalents .................................... 1.1 ----------------------------- Diluted EPS ......................................................... 36 242.5 $0.15 ===== Distributions on subsidiary trust preferred securities (after-tax) .. 6 12.3 ----------------------------- Antidilutive ........................................................ $ 42 254.8 $0.16 Nine Months Ended September 30, 1999 Net Earnings ........................................................... $ 40 241.9 Basic EPS ........................................................... $0.17 ===== Effect of Dilutive Securities Options/common stock equivalents .................................... 1.1 ----------------------------- Diluted EPS ......................................................... 40 243.0 $0.17 ===== Distributions on subsidiary trust preferred securities (after-tax) .. 19 12.3 ----------------------------- Antidilutive ........................................................ $ 59 255.3 $0.23 Nine Months Ended September 30, 1998 Net Earnings ........................................................... $ 159 241.6 Basic EPS ........................................................... $0.66 ===== Effect of Dilutive Securities Options/common stock equivalents .................................... 1.3 ----------------------------- Diluted EPS ......................................................... 159 242.9 $0.66 ===== Distributions on subsidiary trust preferred securities (after-tax) .. 18 12.3 ----------------------------- Antidilutive ........................................................ $ 177 255.2 $0.69 - ------------------------------------------------------------------------------------------------------------------------------------
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Not included in the computation of diluted EPS were options outstanding at September 30, 1999 to purchase approximately 2.2 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 $37.51 for the common shares. The exercise prices of these options range from $37.69 to $51.01 per share and they expire in 2007 through 2009. (7) Sale of Accounts Receivable In the second quarter of 1999, the company, through a non-consolidated subsidiary Unocal Receivables Corp. ("URC"), entered into a sales agreement with an outside party under which it will sell up to a $204 million undivided interest in domestic crude oil and natural gas trade receivables. The company continues to manage the collection and administrative responsibilities for accounts receivable including the sold interest. The effect to the company of the interests sold in its domestic trade receivables under this agreement is $95 million as of September 30, 1999. The amount sold is reflected as a reduction of accounts receivable in the consolidated balance sheet and in net cash provided by operating activities in the consolidated statement of cash flows. (8) Long Term Debt and Credit Agreements During the third quarter, the company increased its commercial paper borrowings by $85 million to a total outstanding balance of $125 million at September 30, 1999. In addition, the company also increased its borrowings under its limited recourse project financing for its Azerbaijan activities by $11 million to an outstanding balance of $55 million at September 30, 1999. Proceeds from the issuance of commercial paper were used for general corporate purposes including the refinancing of existing debt. The company retired $22 million in maturing medium-term notes and reduced its borrowings under its $1 billion bank credit agreement by $40 million to an outstanding balance of $60 million at September 30, 1999. (9) Financial Instruments The estimated fair value of the company's long-term debt was $2,869 million on September 30, 1999. The fair values of the debt instruments were based on the discounted amounts of future cash outflows using rates offered to the company for debt with similar maturities. The estimated fair value of the mandatorily redeemable convertible preferred securities of the company's subsidiary trust was $566 million. The fair value of the preferred securities was based on the trading prices of the preferred securities on September 30, 1999. The company's financial instruments at September 30, 1999 are described below: Foreign exchange contracts - The company and its subsidiaries have assorted currency swap agreements outstanding that are designed to hedge the impacts of foreign-currency exchange-rate fluctuations on US dollar- denominated debt. In the third quarter of 1999, the company received income tax refunds in Canada equivalent to approximately US$49 million as a result of the company's reinvestment of the proceeds from the 1998 sale of its investment in the stock of Tarragon Oil and Gas Limited into the stock of Northrock Resources Ltd. The refund was used to retire approximately US$40 million of the US$100 million debt outstanding of one of the company's Canadian subsidiaries. As a result of the debt retirement, the subsidiary reduced its related currency swap agreement from US$100 million to US$60 million. The agreement now requires the subsidiary to pay approximately C$88 million at maturity in exchange for US$60 million. The parent company also reduced its corresponding currency swap agreement from US$100 million to US$ 60 million. This agreement, which effectively offsets the subsidiary's agreement, now requires the parent company to pay US$60 million in exchange for C$88 million at maturity. The combined fair values of the swap agreements outstanding at the end of the period were approximately zero. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Other outstanding currency swap agreements require the company's Northrock subsidiary to pay approximately C$115 million at maturity in exchange for US$75 million. The fair values of these agreements were US$72 million and were determined by comparing the swap rates to the forward rates in effect at September 30, 1999. The company's share of the estimated pre-tax deferred losses related to the US$75 million currency swap agreements was US$1 million at September 30, 1999 (net of minority interests). The US$75 million to be received by Northrock will be used to retire US dollar-denominated debt at maturity. Northrock also has US dollar forward contracts outstanding that are designed to mitigate its exposure to the US dollar-indexed prices it receives for the sale of its crude oil. These contracts are subject, in some cases, to extensions at the counterparty's option and require Northrock to sell approximately US$200 million in exchange for approximately C$285 million at maturity. At September 30, 1999, contracts of US$8 million were scheduled to mature in 1999 with the remaining contracts scheduled to mature periodically through the year 2005. The fair values of the contracts were approximately US$194 million. The fair values were determined by comparing the contract rates to the forward rates in effect at September 30, 1999. The company's share of estimated pre-tax unrealized losses relating to these US dollar forward contracts was approximately US$3 million at September 30, 1999 (net of minority interests). During the quarter, the company entered into two forward contracts to purchase Thai baht. The contracts are designed to hedge the company's foreign-currency exchange-rate exposure related to expected income tax payments to be paid to Thailand in 2000. The contracts require the company to purchase 802 million baht at maturity in exchange for US$20 million. The fair value of the contracts at September 30, 1999 approximated the notional amounts. Other commodity-based contracts - Northrock had various fixed-price and fixed-price differential sales contracts outstanding at September 30, 1999, related to the future sale of its natural gas production. The contracts cover production, which averages 40 million cubic feet per day (mmcfpd) for the remainder of 1999, 54 mmcfpd in 2000, 52 mmcfpd in 2001 and 52 mmcfpd in 2002. Northrock also has various fixed-price and fixed-price differential natural gas purchase contracts outstanding at September 30, 1999, which require the purchase of 63 mmcfpd for the remainder of 1999 and 23 mmcfpd in 2000. The company's pre-tax share of estimated unrealized losses for these contracts was approximately $13 million at September 30, 1999, (net of minority interests) and primarily relate to contracts with delivery dates scheduled for the years 2001 through 2002. At September 30, 1999, the company had futures contracts outstanding with several couterparties to purchase and sell approximately 19 million and 15 million barrels of crude oil, respectively. The fair values of these contracts, based on quoted market prices, were approximately $104 million. The company also had futures contracts outstanding at September 30, 1999 to purchase and sell approximately 19 million and 18 million thousand cubic feet (mcf) of natural gas, respectively. The fair values of these contracts, based on quoted market prices, were approximately $3 million. These contracts which were purchased as part of the company's overall risk management strategy were marked to market. Approximately 2 percent of the company's outstanding crude oil and natural gas futures contracts were related to the company's non-trading activities. At September 30, 1999, the company's share of pre-tax unrealized gains related to its non-trading futures contract activity was approximately $2 million. The company had various hydrocarbon option contracts (options) outstanding with several counterparties at September 30, 1999. Generally, options have been used to limit the company's exposure to adverse commodity price fluctuations. In some cases, the instruments may also limit the company's ability to participate fully in future gains from favorable price movements. These options are generally accounted for as hedges, with gains and losses deferred and recognized as a component of crude oil and natural gas revenues upon the sale of the underlying production. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) At September 30, 1999, the company had outstanding purchased natural gas options covering approximately 31 million mcf and sold natural gas options covering approximately 73 million mcf. The options consisted of put and call contracts that related to the company's remaining 1999 US lower 48 production, to the future production of the company's Northrock subsidiary for the remainder of 1999 through the year 2004, and to the company's overall risk management activities. At September 30, 1999, the fair value of these options were approximately $(6) million. The fair values of the options were determined by dealer quotes, where available, or by financial modeling using underlying commodity prices. Net premiums paid for the options totaled $1 million. Approximately 90 percent of the options were related to the company's non-trading activities. At September 30, 1999, the company's share (net of minority interests) of pre-tax unrealized losses related to its non-trading natural gas option activity was approximately $14 million. Approximately $6 million of the $14 million relates to the company's interest in Northrock. The company had purchased crude oil options covering approximately 43 million barrels and sold crude oil options covering approximately 73 million barrels outstanding at September 30, 1999. The options consisted of put and call contracts that related to the company's remaining 1999 and early 2000 production, to the production of the company's Northrock subsidiary for the remainder of 1999 through the year 2002 and to the company's overall risk management activities. At September 30, 1999, these options had fair values of approximately $(18) million. The fair values of the options were determined by dealer quotes where available, or by financial modeling using underlying commodity prices. Net premiums paid for the options totaled $2 million. Approximately 70 percent of the options were related to the company's non-trading activities. At September 30, 1999, the company's share (net of minority interests) of pre-tax unrealized losses related to its non-trading crude oil option activity was approximately $21 million. Approximately $3 million of the $21 million relates to the company's interest in Northrock. At September 30, 1999, the company had a ten-year natural gas price swap agreement outstanding. The agreement effectively refloats the fixed price the company received in January 1999 for a ten-year natural gas pre-paid forward sale. As the counterparty to the swap agreement remits a current-index-price payment amount to the company based upon volumes in the swap agreement, the company remits a fixed-price payment amount to the counterparty. The pre-tax deferred gain related to the swap agreement at September 30, 1999, was approximately $16 million. This gain is offset by a corresponding loss on the fixed price physical sales contract. The company's Global Trade segment recorded pre-tax losses of approximately $10 million and $5 million on its trading activities for the third quarter and first nine months of 1999, respectively. (10) Accrued Abandonment, Restoration and Environmental Liabilities At September 30, 1999, the company had accrued $464 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 September 30, 1999 totaled $247 million, of which $145 million was included in current liabilities. (11) 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 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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 andare 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 10, at September 30, 1999, the company had accrued $247 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. 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. In May 1999, a Canadian subsidiary of the company acquired an approximately 46 percent controlling interest in Northrock Resources Ltd. (Northrock) (see note 13). Northrock has the right, until December 31, 1999, to require that the company purchase additional Northrock common shares from treasury shares at a price of C$15 per share, up to a maximum ownership level of 49.9 percent. In 1998, the company signed a letter agreement regarding the Transocean Discoverer Spirit deepwater drill ship with a minimum daily rate of $210 thousand for five years. The drill ship is scheduled for delivery in the Gulf of Mexico in 2000. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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. (12) Unocal guarantees certain indebtedness of Union Oil. Summarized below is financial information for Union Oil and its consolidated subsidiaries:
Summarized Financial Data of Union Oil For the Three Months For the Nine Months Ended September 30 Ended September 30 ---------------------------------------------------- Millions of dollars 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues ............................................................... $1,589 $1,394 $4,375 $3,998 Total costs and other deductions (including income taxes) .................................................. 1,558 1,349 4,314 3,819 ---------------------------------------------------- Net Earnings.................................................................. $ 31 $ 45 $ 61 $ 179 ==================================================== At September 30 At December 31 (a) ---------------------------------------------------- Millions of dollars 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Current assets ............................................................... $1,360 $1,388 Noncurrent assets ............................................................ 7,344 6,583 Current liabilities .......................................................... 1,345 1,406 Noncurrent liabilities ....................................................... 4,688 3,852 Shareholder's equity ......................................................... 2,671 2,713 (a) Audited
(13) Acquisition of Assets In May 1999, a Canadian subsidiary of the company acquired an approximate 46-percent controlling interest in Northrock Resources Ltd. (Northrock), a Canadian oil and gas exploration and production company, for approximately $184 million. The acquisition was accounted for as a purchase. The investment was effected by the acquisition of 10 million shares of Northrock common stock at C$14 per share pursuant to a partial tender offer to Northrock's shareholders and 7.64 million shares of Northrock common stock at C$16 per share pursuant to a private placement. The acquisition is part of the company's overall North American natural gas strategy. Northrock is fully consolidated in the company's financial results as of the acquisition date. (14) Minority Interests 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. 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. An unaffiliated investor contributed $250 million in cash to the partnership in exchange for an initial limited partnership interest of approximately 45 percent. Minority interests increased by approximately $244 million at the close of this transaction. The fixed-price overrides are subject to economic limitations of production from the affected fields. The limited partner is entitled to receive a priority allocation of profits and cash distributions. The partnership has a maximum term of 20 years, but may terminate after six years, subject to certain conditions. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) As discussed in note 13, in May 1999, a Canadian subsidiary of the company acquired an approximate 46-percent of Northrock. The net result of this transaction was to increase minority interests by approximately $145 million as of the acquisition date. (15) Restructuring Costs The company adopted a restructuring plan during the second quarter of 1999 that resulted in the accrual of a $18 million pre-tax restructuring charge. This amount included the costs of terminating approximately 250 employees. The charge was included in selling, administrative and general expense on the consolidated earnings statement. The plan involves the blending of several International and Geothermal organizations, a manpower optimization program in Thailand, cost cutting and efficiency initiatives in the company's Diversified Business and Exploration and Production Technology groups and a company-wide shared resources initiative. Approximately 100 of the affected employees were from the company's International operations, 95 were from the Diversified Business group and 55 were from other organizations, including corporate staff. The restructuring charge included approximately $16 million for termination costs to be paid to the employees over time and about $2 million related to outplacement and other costs. At October 26, 1999, 207 employees had been terminated or had received termination notices as the result of the plan with additional terminations scheduled during the remainder of 1999 and early 2000. In the fourth quarter of 1998, the company adopted a restructuring plan 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 were from the company's mining operations, 95 were from various exploration and production business units and 140 were 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 October 26, 1999, 414 employees had been terminated or had received termination notices as a result of the plan, with additional terminations scheduled during the remainder of 1999 and early 2000. The amount of unpaid benefits remaining on the consolidated balance sheet at September 30, 1999 was $20 million for the two plans combined. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (16) Segment Information The company's reportable segments are: Exploration and Production, Global Trade, Geothermal & Power Operations and Diversified Businesses. Unallocated corporate administrative and 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 of the activities conducted by the company's business segments, see pages 74 and 75 of the company's 1998 Annual Report on Form 10-K.
-------------------------------------------------------------------------------- Segment Information Exploration & Production Geothermal For the Three Months United States International Global Trade & Power ended September 30, 1999 Spirit Far Operations Millions of dollars Energy 76 Alaska East Other Global Trade Pipelines -------------------------------------------------------------------------------- External sales & operating revenues ......... $ 1 $ 33 $ 188 $ 69 $ 1,097 $ 9 $ 36 Other revenue (loss) ........................ -- -- (3) 5 4 12 3 Inter-segment revenues ...................... 277 13 40 26 2 3 -- -------------------------------------------------------------------------------- Total revenues ............................. 278 46 225 100 1,103 24 39 Operating profit (loss) before income taxes and minority interest in earnings ......... 32 10 107 (8) (11) 15 11 Income taxes (benefit) .................. 11 4 29 (2) (6) 2 5 Minority interest in earnings ........... 4 -- -- 1 -- -- -- -------------------------------------------------------------------------------- Net earnings (loss) ......................... 17 6 78 (7) (5) 13 6 Assets (at September 30, 1999) .............. 2,106 304 1,875 1,530 396 249 511
- ----------------------------------------------------------------------------------------------------------------------------- Diversified Corporate & Unallocated Totals Business Ag Carbon & Admn & Net Int Env & New Products Minerals General Exp Litigation Ventures Other(a) - ----------------------------------------------------------------------------------------------------------------------------- External sales & operating revenue........... $ 69 $ 42 $ -- $ -- $ -- $ -- $ 2 $ 1,546 Other revenue (loss) ........................ -- 6 -- 6 -- -- 9 42 Inter-segment revenues ...................... -- -- -- -- -- -- (361) -- -------------------------------------------------------------------------------- Total revenues ............................. 69 48 -- 6 -- -- (350) 1,588 Operating profit (loss) before income taxes and minority interest in earnings ......... (14) 7 (33) (45) (21) (5) (7) 38 Income taxes (benefit) .................. (6) -- (10) (7) (9) (1) -- 10 Minority interest in earnings ........... -- 1 -- (2) -- -- -- 4 -------------------------------------------------------------------------------- Net earnings (loss) ......................... (8) 6 (23) (36) (12) (4) (7) 24 Assets (at September 30, 1999) .............. 276 272 -- -- -- 3 1,166 8,688 (a) Includes eliminations and consolidation adjustments.
12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
-------------------------------------------------------------------------------- Segment Information Exploration & Production Geothermal For the Three Months United States International Global Trade & Power ended September 30, 1998 Spirit Far Operations Millions of dollars Energy 76 Alaska East Other Global Trade Pipelines -------------------------------------------------------------------------------- External sales & operating revenues ......... $ 26 $ 25 $ 181 $ 36 $ 815 $ 10 $ 44 Other revenue (loss) ........................ 1 -- (6) 77 -- 11 13 Inter-segment revenues ...................... 219 17 63 4 -- 3 -- -------------------------------------------------------------------------------- Total revenues ............................. 246 42 238 117 815 24 57 Operating profit (loss) before income taxes and minority interest in earnings ......... (14) 3 108 38 5 16 22 Income taxes (benefit) .................. (6) 1 68 11 2 2 6 Minority interest in earnings ........... 1 -- -- -- -- -- -- -------------------------------------------------------------------------------- Net earnings (loss) ......................... (9) 2 40 27 3 14 16 Assets (at December 31, 1998) ............... 2,094 329 1,848 641 317 298 598
- ----------------------------------------------------------------------------------------------------------------------------- Diversified Corporate & Unallocated Totals Business Ag Carbon & Admn & Net Int Env & New Products Minerals General Exp Litigation Ventures Other(a) - ----------------------------------------------------------------------------------------------------------------------------- External sales & operating revenue........... $ 84 $ 52 $ -- $ -- $ -- $ -- $ 13 $ 1,286 Other revenue (loss) ........................ -- 5 -- 7 -- (5) 5 108 Inter-segment revenues ...................... -- -- -- -- -- -- (306) -- -------------------------------------------------------------------------------- Total revenues ............................. 84 57 -- 7 -- (5) (288) 1,394 Operating profit (loss) before income taxes and minority interest in earnings ......... 9 (1) (37) (40) (19) (7) (6) 77 Income taxes (benefit) .................. (3) (1) (13) (7) (7) (3) (11) 39 Minority interest in earnings ........... -- 1 -- -- -- -- -- 2 -------------------------------------------------------------------------------- Net earnings (loss) ......................... 12 (1) (24) (33) (12) (4) 5 36 Assets (at December 31, 1998) ............... 305 419 -- -- -- -- 1,103 7,952 (a) Includes eliminations and consolidation adjustments.
-------------------------------------------------------------------------------- Segment Information Exploration & Production Geothermal For the Nine Months United States International Global Trade & Power ended September 30, 1999 Spirit Far Operations Millions of dollars Energy 76 Alaska East Other Global Trade Pipelines -------------------------------------------------------------------------------- External sales & operating revenues ......... $ 62 $ 86 $ 523 $ 161 $ 2,887 $ 28 $ 113 Other revenue (loss) ........................ 6 -- (5) 15 4 43 8 Inter-segment revenues ...................... 695 46 127 40 5 8 -- -------------------------------------------------------------------------------- Total revenues ............................. 763 132 645 216 2,896 79 121 Operating profit (loss) before income taxes and minority interest in earnings ......... 57 19 272 (33) (8) 53 35 Income taxes (benefit) .................. 19 7 105 (14) (5) 7 14 Minority interest in earnings ........... 7 -- -- 2 -- -- -- -------------------------------------------------------------------------------- Net earnings (loss) ......................... 31 12 167 (21) (3) 46 21 Assets (at September 30, 1999)............... 2,106 304 1,875 1,530 396 249 511
- ----------------------------------------------------------------------------------------------------------------------------- Diversified Corporate & Unallocated Totals Business Ag Carbon & Admn & Net Int Env & New Products Minerals General Exp Litigation Ventures Other(a) - ----------------------------------------------------------------------------------------------------------------------------- External sales & operating revenue........... $ 245 $121 $ -- $ -- $ -- $ -- $ 4 $ 4,230 Other revenue (loss) ........................ -- 22 -- 17 -- -- 34 144 Inter-segment revenues ...................... -- -- -- -- -- -- (921) -- -------------------------------------------------------------------------------- Total Revenues ............................. 245 143 -- 17 -- -- (883) 4,374 Operating profit (loss) before income taxes and minority interest in earnings ......... (11) 21 (94) (127) (39) (12) (34) 99 Income taxes (benefit) .................. (9) -- (29) (23) (15) (3) (3) 51 Minority interest in earnings ........... -- 2 -- (3) -- -- -- 8 -------------------------------------------------------------------------------- Net earnings (loss) ......................... (2) 19 (65) (101) (24) (9) (31) 40 Assets (at September 30, 1999) .............. 276 272 -- -- -- 3 1,166 8,688 (a) Includes eliminations and consolidation adjustments.
13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
-------------------------------------------------------------------------------- Segment Information Exploration & Production Geothermal For the Nine Months United States International Global Trade & Power ended September 30, 1998 Spirit Far Operations Millions of dollars Energy 76 Alaska East Other Global Trade Pipelines -------------------------------------------------------------------------------- External sales & operating revenues ......... $ 72 $ 82 $ 519 $ 122 $ 2,230 $ 30 $ 121 Other revenue (loss) ........................ 1 -- (25) 178 -- 39 42 Inter-segment revenues ...................... 699 56 192 8 1 7 -- -------------------------------------------------------------------------------- Total revenues ............................. 772 138 686 308 2,231 76 163 Operating profit (loss) before income taxes and minority interest in earnings ......... 26 24 320 84 21 53 66 Income taxes (benefit) .................. 9 9 194 27 8 9 22 Minority interest in earnings ........... 2 -- -- -- -- -- -- -------------------------------------------------------------------------------- Net earnings (loss) ......................... 15 15 126 57 13 44 44 Assets (at December 31, 1998) ............... 2,094 329 1,848 641 317 298 598
- ----------------------------------------------------------------------------------------------------------------------------- Diversified Corporate & Unallocated Totals Business Ag Carbon & Admn & Net Int Env & New Products Minerals General Exp Litigation Ventures Other(a) - ----------------------------------------------------------------------------------------------------------------------------- External sales & operating revenues.......... $ 299 $171 $ -- $ -- $ -- $ -- $ 37 $ 3,683 Other revenue (loss) ........................ 1 23 -- 24 -- (5) 37 315 Inter-segment revenues ...................... -- -- -- -- -- -- (963) -- -------------------------------------------------------------------------------- Total revenues ............................. 300 194 -- 24 -- (5) (889) 3,998 Operating profit (loss) before income taxes and minority interest in earnings ......... 40 26 (87) (106) (119) (26) 21 343 Income taxes (benefit) .................. 7 2 (29) (23) (44) (10) (4) 177 Minority interest in earnings ........... -- 5 -- -- -- -- -- 7 -------------------------------------------------------------------------------- Net earnings (loss) ......................... 33 19 (58) (83) (75) (16) 25 159 Assets (at December 31, 1998) ............... 305 419 -- -- -- -- 1,103 7,952 (a) Includes eliminations and consolidation adjustments.
14 OPERATING HIGHLIGHTS UNOCAL CORPORATION (UNAUDITED) For the Three Months For the Nine Months Ended September 30 Ended September 30 ----------------------------------------------- 1999 1998 1999 1998 ----------------------------------------------- NET DAILY PRODUCTION Crude oil and condensate (thousand barrels daily) United States ...................................................................... Spirit Energy 76 ................................................ 40 44 40 44 Alaska .......................................................... 27 27 27 29 ----------------------------------------------- Total United States ........................................... 67 71 67 73 International (a) Far East ........................................................ 73 81 72 83 Other (b) ....................................................... 40 31 35 31 ----------------------------------------------- Total International ........................................... 113 112 107 114 ----------------------------------------------- Worldwide .......................................................... 180 183 174 187 =============================================== Natural gas (million cubic feet daily) United States Spirit Energy 76 ................................................ 729 808 756 795 Alaska .......................................................... 106 118 124 126 ----------------------------------------------- Total United States ........................................... 835 926 880 921 International (a) Far East ........................................................ 884 828 859 851 Other (b) ....................................................... 149 37 93 53 ----------------------------------------------- Total International ........................................... 1,033 865 952 904 ----------------------------------------------- Worldwide .......................................................... 1,868 1,791 1,832 1,825 =============================================== (a) Includes host countries' shares of: Crude oil and condensate ........................................... 30 6 23 11 Natural gas ........................................................ 95 44 86 44 (b) Production includes 100% of Northrock Resources Ltd. in Canada of: Crude oil and condensate ........................................... 8 -- 4 -- Natural gas ........................................................ 110 -- 56 --
15
OPERATING HIGHLIGHTS UNOCAL CORPORATION (UNAUDITED) For the Three Months For the Nine Months Ended September 30 Ended September 30 ----------------------------------------------- 1999 1998 1999 1998 ----------------------------------------------- AVERAGE PRICES (a) Crude oil (per barrel) United States ...................................................................... Spirit Energy 76 ................................................ $ 18.32 $ 12.20 $ 14.87 $ 12.80 Alaska .......................................................... 14.50 9.35 11.43 9.69 Total United States ........................................... 16.77 11.11 13.43 11.56 International Far East ........................................................ $ 16.43 $ 12.28 $ 13.75 $ 13.02 Other ........................................................... 16.69 10.58 13.96 11.07 Total International ........................................... 16.55 11.82 13.83 12.48 Worldwide .......................................................... $ 16.65 $ 11.54 $ 13.65 $ 12.09 Natural gas (per thousand cubic feet) United States Spirit Energy 76 ................................................ $ 2.26 $ 1.97 $ 2.09 $ 2.08 Alaska .......................................................... 1.20 1.20 1.20 1.38 Total United States ........................................... 2.12 1.87 1.96 1.98 International Far East ........................................................ $ 2.02 $ 2.23 $ 1.97 $ 2.10 Other ........................................................... 2.09 2.38 1.99 2.26 Total International ........................................... 2.03 2.23 1.98 2.10 Worldwide .......................................................... $ 2.07 $ 2.04 $ 1.97 $ 2.04 (a) average prices include hedging gains and losses, but exclude other Global Trade margins.
16 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 For the Nine Months Ended September 30 Ended September 30 ---------------------------------------------------- Millions of dollars 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ After-tax earnings (loss) ...................................................... $ 24 $ 36 $ 40 $ 159 Less: special items (net of tax) Environmental and litigation provisions/proceeds............................ (12) (10) (14) (71) Kenai plant accident........................................................ ( 6) -- ( 6) -- Asset sales ................................................................ -- 49 (10) 102 Deferred tax adjustments ................................................... -- ( 7) -- (21) Restructuring provision .................................................... -- -- (11) -- Insurance settlement ....................................................... -- -- -- 11 ---------------------------------------------------- Total special items ........................................................ (18) 32 (41) 21 ---------------------------------------------------- Adjusted after-tax earnings (loss) ............................................. $ 42 $ 4 $ 81 $ 138 ====================================================
Adjusted after-tax earnings increased $38 million in the third quarter of 1999 compared with the same period last year. The third quarter 1999 results benefited from higher worldwide average crude oil prices, which increased by 44 percent from the third quarter of 1998. In addition, the third quarter of 1999 benefited from lower dry hole costs and a lower effective tax rate primarily due to a change in the Thailand foreign exchange rate. These factors were partially offset by lower crude oil and natural gas sales volumes and reduced earnings from non-exploration and production businesses. In the third quarter of 1999, the hedge program lowered sale realizations for crude oil and natural gas by $23 million after-tax. Adjusted after-tax earnings decreased $57 million in the first nine months of 1999 compared with the first nine months of 1998. The major factors contributing to the decrease were lower worldwide crude oil and natural gas sales volumes, lower natural gas prices, lower agricultural products prices, reduced earnings from other non-exploration and production businesses and higher corporate net interest expense. These factors were partially offset by higher worldwide crude oil prices, a lower effective tax rate primarily due to a change in the Thailand foreign exchange rate and lower dry hole costs. For the first nine months of 1999, the hedge program lowered sale realizations for crude oil and natural gas by $16 million after-tax. EXPLORATION AND PRODUCTION The company engages in oil and gas exploration, development, and production worldwide. 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 the 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. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the Three Months For the Nine Months Ended September 30 Ended September 30 ---------------------------------------------------- Millions of dollars 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ After-tax earnings (loss) Spirit Energy 76 ............................................................ $ 17 $ ( 9) $ 31 $ 15 Alaska ...................................................................... 6 2 12 15 ---------------------------------------------------- Total ....................................................................... 23 ( 7) 43 30 Less: special items (net of tax) Litigation provision/proceeds (Spirit Energy 76)............................ -- -- 7 -- Litigation provisions (Alaska)............................................... (2) -- (4) -- ---------------------------------------------------- Total special items ......................................................... (2) -- 3 -- ---------------------------------------------------- Adjusted after-tax earnings (loss) ............................................. $ 25 $ ( 7) $ 40 $ 30 ====================================================
Adjusted after-tax earnings increased $32 million in the third quarter of 1999 compared with the same period last year. The increase was primarily due to higher United States average crude oil and natural gas prices, which increased by $5.66 per barrel and $0.25 per MCF, respectively. In addition to the higher prices, dry hole costs were lower than the same period last year. These factors were partially offset by lower United States natural gas sales volumes and lower Spirit Energy 76 crude oil sales volumes. In the third quarter of 1999, the hedge program lowered sale realizations for crude oil and natural gas by $17 million after-tax. Adjusted after-tax earnings increased $10 million in the first nine months of 1999 compared with the first nine months of 1998. The increase was primarily due to higher United States crude oil prices, lower dry hole costs and lower operating expenses. These factors were partially offset by lower United States crude oil and natural gas sales volumes, increased exploratory land amortization and lower Alaska natural gas prices. For the first nine months of 1999, the hedge program lowered sale realizations for crude oil and natural gas by $10 million after-tax. International - Includes the company's international exploration and production activities and related business development activities. The company is engaged in oil and gas production activities in eight foreign countries: Thailand, Indonesia, Canada, The Netherlands, Azerbaijan, Myanmar, the Democratic Republic of Congo and Bangladesh.
For the Three Months For the Nine Months Ended September 30 Ended September 30 ---------------------------------------------------- Millions of dollars 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ After-tax earnings (loss) Far East .................................................................. $ 78 $ 40 $ 167 $ 126 Other ..................................................................... ( 7) 27 (21) 57 ---------------------------------------------------- Total ..................................................................... 71 67 146 183 Less: special items (net of tax) Asset sales (Other) ....................................................... -- 49 -- 102 Deferred tax adjustment (Far East) ........................................ -- ( 7) -- (21) Litigation proceeds (Far East) ............................................ -- -- 2 -- ---------------------------------------------------- Total special items ....................................................... -- 42 2 81 ---------------------------------------------------- Adjusted after-tax earnings (loss) ............................................. $ 71 $ 25 $ 144 $ 102 ====================================================
Adjusted after-tax earnings increased $46 million in the third quarter of 1999 compared with the same period last year. The increase was primarily due to higher average crude oil prices, lower dry hole costs, lower exploration and operating expenses, and a lower effective tax rate primarily due to a change in the Thailand foreign exchange rate. Partially offsetting these factors were lower Far East crude oil sales volumes, primarily in Indonesia, and lower International natural gas prices. Adjusted after-tax earnings increased $42 million in the first nine months of 1999 compared with the first nine months of 1998. The major factors contributing to the increase were higher average crude oil prices, lower exploration and operating expenses, lower dry hole costs, lower depreciation, depletion and amortization expense, and a lower effective tax rate primarily due to a change in the Thailand foreign exchange rate. These factors were partially offset by lower crude oil sales volumes, primarily in Indonesia, and lower international natural gas prices. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the third quarter and the first nine months of 1999, the hedge program lowered sale realizations for crude oil by $6 million after-tax. 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 commodity-specific risk management activities on behalf of most of the company's exploration and production segment. 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. In addition, Global Trade takes pricing positions in hydrocarbon derivative instruments. 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 For the Nine Months Ended September 30 Ended September 30 ---------------------------------------------------- Millions of dollars 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ After-tax earnings (loss) Global Trade ................................................................ $ ( 5) $ 3 $ ( 3) $ 13 Pipelines ................................................................... 13 14 46 44 ---------------------------------------------------- Total ..................................................................... 8 17 43 57 Less: special items (net of tax) ............................................... -- -- -- -- ---------------------------------------------------- Adjusted after-tax earnings (loss) ............................................. $ 8 $ 17 $ 43 $ 57 ====================================================
Adjusted after-tax earnings decreased $9 million in the third quarter of 1999 compared with the same period last year. The decrease was primarily due to lower margins on domestic natural gas trading. Adjusted after-tax earnings decreased $14 million for the first nine months of 1999 compared with the same period last year. The decrease was primarily due to lower margins on domestic natural gas and crude oil trading. 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 the operation of power plants in Indonesia and an interest in a gas-fired power plant under construction in Thailand.
For the Three Months For the Nine Months Ended September 30 Ended September 30 ---------------------------------------------------- Millions of dollars 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ After-tax earnings (loss) ...................................................... $ 6 $ 16 $ 21 $ 44 Less: special items (net of tax) Asset sales (a) ............................................................ -- -- (10) -- ---------------------------------------------------- Adjusted after-tax earnings .................................................... $ 6 $ 16 $ 31 $ 44 ==================================================== (a) Represents the first quarter sale of a geothermal production operation at The Geysers in Northern California
Adjusted after-tax earnings decreased $10 million in the third quarter of 1999 compared with the same period last year. Lower affiliate earnings, higher foreign exchange losses in Indonesia and the loss of earnings from The Geysers assets in Northern California contributed to the lower results. These factors were partially offset by lower Indonesia receivable provisions. Adjusted after-tax earnings decreased $13 million in the first nine months of 1999 compared with the first nine months of 1998. This decrease was primarily due to the difference in the recognition of cash received related to the construction of the Salak power plant units 4 through 6, lower affiliate earnings and the loss of earnings from The Geysers assets in Northern California. These factors were partially offset by lower Indonesia receivable provisions. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 For the Nine Months Ended September 30 Ended September 30 ---------------------------------------------------- Millions of dollars 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ After-tax earnings (loss) Agricultural Products ....................................................... $ ( 8) $ 12 $ ( 2) $ 33 Carbon and Minerals ......................................................... 6 ( 1) 19 19 ---------------------------------------------------- Total ....................................................................... ( 2) 11 17 52 Less: special items (net of tax) Kenai plant accident (Agricultural Products)................................. (6) -- ( 6) -- Environmental and litigation provisions (Carbon and Minerals) ............... -- (2) ( 3) (4) ---------------------------------------------------- Total special items ........................................................ ( 6) (2) ( 9) (4) ---------------------------------------------------- Adjusted after-tax earnings (loss) ............................................. $ 4 $ 13 $ 26 $ 56 ====================================================
Adjusted after-tax earnings decreased $9 million in the third quarter of 1999 compared with the same period last year. The decrease was primarily due to lower agricultural products prices and lower tax benefits, the effect of which was partially offset by decreased mining costs and increased affiliate earnings. Adjusted after-tax earnings decreased $30 million in the first nine months of 1999 compared with the first nine months of 1998. This decrease was primarily due to lower agricultural products prices. CORPORATE AND UNALLOCATED Corporate and Unallocated includes all unallocated corporate administrative and general items, miscellaneous operations, including real estate, and non-exploration and production new ventures activities. Net interest expense represents interest expense, net of interest income and capitalized interest.
For the Three Months For the Nine Months Ended September 30 Ended September 30 ---------------------------------------------------- Millions of dollars 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ After-tax earnings (loss) Administrative and general expense .......................................... $ (23) $ (24) $ (65) $ (58) Net interest expense ........................................................ (36) (33) (101) (83) Environmental and litigation expense ........................................ (12) (12) (24) (75) New ventures ................................................................ (4) (4) (9) (16) Other ....................................................................... ( 7) 5 (31) 25 ---------------------------------------------------- Total ....................................................................... (82) (68) (230) (207) Less: special items (net of tax) Environmental and litigation provisions .................................... (10) ( 8) (16) (67) Restructuring provision (Other) ............................................ -- -- (11) -- Insurance settlement (Other) ............................................... -- -- -- 11 ---------------------------------------------------- Total special items ........................................................ (10) ( 8) (27) (56) ---------------------------------------------------- Adjusted after-tax earnings (loss) ............................................. $ (72) $ (60) $(203) $(151) ====================================================
The adjusted after-tax loss increased by $12 million in the third quarter of 1999 compared with the same period last year. The third quarter of 1998 included a net benefit related to certain tax adjustments, in the Other category. In addition, the third quarter of 1999 had higher interest expense due to lower capitalized interest and increased debt levels. The adjusted after-tax loss increased by $52 million in the first nine months of 1999 compared with the same period last year. The negative factors included higher interest expense due to lower capitalized interest and increased 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) debt levels, lower pension income and higher employee benefit-related expenses, both in the Other category. The first nine months of 1998 included a net benefit related to certain tax adjustments and higher earnings and dividends from a petroleum industry mutual insurance company, both in the Other category. Those factors were partially offset by lower new ventures expenditures and gains related to miscellaneous asset sales, in the Other category. FINANCIAL CONDITION AND CAPITAL EXPENDITURES For the first nine months of 1999, net cash flow provided by operating activities was $517 million compared with $711 million in the same period a year ago. This decrease reflects the effects of lower worldwide crude oil and natural gas sales volumes, lower natural gas prices, lower agricultural products prices and reduced earnings from other non-exploration and production businesses. These factors were partially offset by higher worldwide crude oil prices. Working capital and other changes included the effects of increased net foreign income tax payments over refunds, the delivery of crude oil under a 1998 pre-paid forward sale and increased inventories. Working capital changes benefited from the receipt of $120 million in the first quarter of 1999 for a ten-year natural gas pre-paid forward sale and the advance sale of certain domestic trade receivables in the third quarter of 1999. Proceeds from asset sales for the first nine months of 1999 were $163 million, consisting primarily of $101 million from the sale of the company's interest in a geothermal operation at The Geysers in Northern California, completed in the first quarter, $27 million from the sale of Michigan oil and gas assets and $35 million from the sale of other miscellaneous domestic oil and gas and real estate properties. Capital expenditures for the first nine months of 1999 totaled $761 million compared with $1,248 million in the same period a year ago. The decrease was primarily due to lower worldwide drilling activities and lower lease acquisitions in the Gulf of Mexico. The company also spent $184 million in the second quarter of 1999 to acquire an approximate 46-percent ownership interest in Northrock Resources Ltd. (Northrock). Total capital expenditures are expected to be approximately $1.17 billion for 1999, excluding the Northrock acquisition. The company will continue to focus on deepwater exploration programs in Indonesia and the Gulf of Mexico. In the second quarter of 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. 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. An unaffiliated investor contributed $250 million in cash to the partnership in exchange for an initial limited partnership interest of approximately 45 percent. The limited partner is entitled to receive a priority allocation of profits and cash distributions. The company's long-term debt was $2.83 billion at September 30, 1999, compared with $2.56 billion at year-end 1998. Most of this increase reflects the consolidation of the company's investment in Northrock, including its outstanding debt. The company's debt-to-total capitalization ratio was 52 percent at September 30, 1999, compared with 48 percent at year-end 1998. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ENVIRONMENTAL MATTERS At September 30, 1999, the company's reserves for environmental remediation obligations totaled $247 million, of which $145 million was included in current liabilities. During the third quarter of 1999, cash payments of $30 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 11 to the consolidated financial statements. The company's total environmental reserve amount is grouped into the following five categories:
Reserve Summary September 30, Millions of dollars 1999 - -------------------------------------------------------------------------------- Superfund and similar sites $ 11 Former company-operated sites 14 Company facilities sold with retained liabilities 50 Inactive or closed company facilities 125 Active company facilities 47 - -------------------------------------------------------------------------------- Total reserves $247 ================================================================================
OUTLOOK Certain of the statements in this discussion, as well as other forward-looking statements within this document, contain estimates and projections of amounts of or increases / decreases in future revenues, earnings, cash flows, capital expenditures, assets, liabilities and other financial items and of future levels of or increases / decreases in reserves, production, sales including related costs and prices, 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, as well as pages 24 through 26 of this report. The company's Spirit Energy 76 (Spirit) business unit averaged 729 MMCF per day of net natural gas production in the third quarter of 1999. The company estimates that, because of the current drilling activity and the return to production of key wells after repairs, Spirit's net natural gas production will average approximately 750 MMCF per day in the fourth quarter of 1999. The company drilled a deepwater well in the Sumatra sub-salt prospect in Garden Banks block 941 in the Gulf of Mexico during the third quarter of 1999. The well encountered mechanical difficulties before reaching its primary objective and has been suspended until next year, when the larger Discoverer Spirit drillship will be delivered and drilling will be resumed. During the third quarter, oil was discovered on the K-2 deepwater well, on Green Canyon block 562 in the Gulf of Mexico, in which the company was participating. The joint interest participants decided to temporarily suspend the well and develop plans for appraisal of the hydrocarbon zone. The company was drilling an appraisal well of the McKinley discovery on Garden Banks block 416 at the end of the third quarter. The company is participating in the drilling of an appraisal well on the Mad Dog discovery which began at the end of the third quarter. The company is currently evaluating the Mirage discovery and no additional drilling is expected this year. During the third quarter of 1999, the company was the apparent successful high bidder for interests in 15 lease blocks in the western Gulf of Mexico, including seven deepwater blocks and eight shelf blocks. The company has been awarded nine out of the fifteen blocks with the remaining blocks yet to be awarded. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 downturn. In Thailand, net natural gas sales are expected to average approximately 600 MMCF per day in the fourth quarter of 1999, as compared with an average of 643 MMCF per day for the third quarter of 1999. Production from the Pailin field in the Gulf of Thailand started in August of 1999 and is currently producing approximately 185 MMCF (gross) per day in the fourth quarter. Unocal Thailand, Ltd., is operator of the Pailin field and holds a 35 percent working interest. In Myanmar, commercial production from the Yadana field is now expected to begin very late in 1999 or in early 2000. The company received approvals from Indonesia's national oil company to begin initial development activities on the West Seno and Merah Besar oil and gas fields in the deepwater Kutei Basin, offshore East Kalimantan. Unocal Makassar, Ltd., a wholly owned subsidiary, is operator of the West Seno discovery in the Makassar Strait production-sharing contract (PSC) area and has a 50-percent working interest. The Merah Besar field is located on the Makassar Strait PSC and the East Kalimantan PSC areas. Unocal Indonesia Company, also a wholly owned subsidiary, holds a 100-percent working interest in the East Kalimantan PSC. Development activity is planned in two phases, with phase one production from the West Seno field expected in 2002. With this approval, the two fields now qualify to supply gas for the latest package of LNG sales and natural gas is also available for LPG extraction. In November, the company announced discoveries of oil and gas in the Bangka and Aton prospects in the Rapak PSC area which further confirm the hydrocarbon resource potential of the Kutei Basin deepwater properties. The company has a 60-percent working interest in the Rapak PSC. The company completed, in October, an exchange of its interest in a subsidiary holding a 28.57 percent stake in three producing fields in Yemen for the stock of two Occidental Petroleum Corporation subsidiaries holding 50-percent working interests in three blocks in northeast Bangladesh. These Bangladesh assets, received by the company in July 1999, include two production sharing contracts in which the company already held 50-percent working interests. In addition, the assets include the Bibiyana gas field, discovered in 1998. The company transferred to Occidental Petroleum Corporation its working interest in the production-sharing contract of the East Shabwa contract area in Yemen in the fourth quarter of 1999. As of September 30, 1999, the company had a gross receivable balance of approximately $158 million related to its geothermal operations in Indonesia. Approximately $61 million related to Salak electric generating Units 1, 2, and 3 and is due by November 27, 1999, of which $53 million represents past due amounts and accrued interest resulting from partial payments for March 1998 through July 1999. Although invoices have generally not been paid in full, amounts that have been paid have been received in a timely manner per the steam sales contract. The remaining $97 million relates to Salak electric generating Units 4, 5 and 6 which the company has received partial payments for the period of March 1998 through July 1999. Provisions covering a portion of these receivables were recorded in 1998 and 1999. The company is vigorously pursuing collection of the outstanding receivables. The company, at times, employs a commodity price option program that establishes a price floor, while retaining most of the benefits of higher price movements. This program is designed to protect cash flow and the capital spending program against the effects of severe commodity price deterioration. For the first nine months of 1999, the program resulted in lower realizations for crude oil and natural gas totaling about $16 million after-tax. For the full-year 1999, based on recent NYMEX oil and gas futures prices, the company anticipates this program will lower earnings by approximately $29 million after-tax. This program's results exclude hedging activities by Northrock. In 1999, Northrock's hedging activities are expected to lower the company's share of Northrock's earnings by approximately $3 million after-tax. Most of the company's existing non-trading positions close out in the fourth quarter, with the exception of certain options and fixed-price contracts for Northrock which extend to the year 2004. For more information, refer to note 9 to the consolidated financial statements. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The company adopted two separate restructuring plans in the second quarter of 1999 and the fourth quarter of 1998that will result in the termination of approximately 250 and 475 employees, respectively. For more information, refer to note 15 to the consolidated financial statements. The company expects implementation of the plans to reduce future annualized salaries and benefits by an estimated $32 million after-tax. Cash expenditures related to the plans are estimated to be $19 million and $8 million for the years 1999 and 2000, respectively. YEAR 2000 The company is essentially complete in addressing the Year 2000 (Y2K) issue for critical systems and applications. 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 are 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 appointed a program manager and assembled various teams of professionals, principally at the business unit level, which developed plans to implement these efforts. The plans established 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 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 planning phases of the internal systems portion of the project have been completed. The company has written and tested business contingency and recovery plans for 99 percent of its "mission critical" systems, applications and processes. These systems, applications and processes, if not operable, could materially adversely impact cash flow, operations, safety or the environment. 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 non-IT embedded systems and detailed planning to correct or work around the anticipated problems in these systems. The remediation/renovation and validation/testing of its IT and non-IT embedded systems were approximately 98 percent complete as of September 30, 1999. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following schedule sets forth the company's estimated timetable for achieving Y2K readiness of its IT and embedded systems:
Project Phases Target Completion Dates - ------------------------------------------ ------------------------------------------ Worldwide inventory of systems Completed Worldwide assessment Completed Initial plan for corrections/work arounds Completed Remediation/renovation 98% Completed; Finish fourth quarter 1999 Contingency planning 99% Completed; Finish fourth quarter 1999 Validation/testing 98% Completed; Finish fourth quarter 1999 Implementation 98% Completed; Finish fourth quarter 1999 Continuous system review Ongoing-through first quarter 2000
The company has identified approximately 400 "critical business partners". The overall assessment of the Year 2000 readiness of these partners has been positive. 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 $25 million. These expenditures are recorded at the business unit and corporate levels and are funded from cash provided by operating activities. Expenditures as of September 30, 1999, were approximately $21 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 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, Bangladesh, Thailand and The Philippines. 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. Future Accounting Changes In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 137, which delayed the effective date of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 required that companies recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative instrument depends upon the intended use of the instrument and its resulting designation. Unless designated as a hedge, changes in the fair value of a derivative instrument are to be accounted for as gains or losses in the period of change. In the case of certain hedging activities, changes in the fair values of derivative instruments that are effective as hedges, are deferred and reported as part of other comprehensive income. 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Changes in the fair value of derivative instruments that are not effective as hedges are reported in earnings in the period of the change. SFAS No. 133 had required companies to adopt its provisions for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 137 delays the effective date to all fiscal quarters of fiscal years beginning after June 15, 2001. The company is planning to adopt SFAS 133 in the first quarter of the year 2001 and is currently evaluating the impact the statement will have on its reporting for derivative instruments and hedging activities. 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 and options contracts. Interest Rate Risk - From time to time the company temporarily invests its excess cash in interest-bearing securities issued by high-quality issuers. Company policies limit the amount of investment in securities of any one financial institution. Due to the short time the investments are outstanding and their general liquidity, these instruments are classified as cash equivalents in the consolidated balance sheet and do not represent a material interest rate risk to the company. The company's primary market-risk exposure for changes in interest rates relates to the company's long-term debt obligations. The company manages its exposure to changing interest rates principally through the use of a combination of fixed and floating-rate debt. Interest-rate risk-sensitive derivative financial instruments, such as swaps, 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 September 30, 1999. Assuming a ten-percent decrease in the company's weighted average borrowing costs at September 30, 1999, the potential increase in the fair value of the company's debt obligations and associated derivative instruments, including the company's net interests in the debt obligations and associated derivative instruments of its subsidiaries, would have been approximately $118 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-currency exchange rates. In most countries, energy products are valued and sold in U.S. dollars and foreign currency operating cost exposures have not been significant. In other countries, the company is paid for product deliveries in local currencies but at prices indexed to the U.S. dollar. These funds, less amounts retained for operating costs, are converted to U.S. dollars as soon as practicable. The company's Canadian subsidiaries are paid in Canadian dollars for 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 forward contracts to limit the exposure related to its foreign-currency obligations. At September 30, 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 contracts. Assuming an adverse change of ten percent in foreign-currency exchange rates at September 30, 1999, the potential decrease in fair value of the company's foreign-currency forward contracts, including the company's net interests in the foreign-currency forward contracts of its subsidiaries, would have been approximately $13 million. 26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED) 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 uses hydrocarbon derivative financial instruments, such as futures contracts, swaps and options generally with maturities of 24 months or less, to mitigate its exposure to commodity price fluctuations. However, these instruments may also limit some of the future gains otherwise available from favorable commodity price movements. When these instruments are used to hedge the company's future production, the impacts are reflected in the average sales prices of the associated commodities at the time of sale. As a result, the company's reported crude oil and natural gas revenues may be higher or lower than what would have been reported if the company had not employed the use of these instruments. From time to time, the company also enters into longer-term derivative instruments, such as swap contracts, to refloat its 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 pre-paid crude oil and natural gas forward sales, as well the company's net interests in its subsidiaries' crude oil and natural gas derivative instruments including offsetting physical positions of forward sales contracts to which those contracts relate. 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 $7 million at September 30 (refer to note 9 to the consolidated financial statements for information on pre-tax unrealized losses as of September 30, 1999 relating to hydrocarbon price-sensitive derivative financial instruments held for purposes other than trading). The value at risk related to hydrocarbon-price-sensitive derivative financial instruments held for trading purposes was approximately $1 million at September 30, 1999. 27 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) and in Item 1 of Part II of Unocal's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (First Quarter 1999 Form 10-Q) and Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (Second Quarter Form 10-Q), the information regarding environmental remediation reserves in note 10 to the consolidated financial statements in Item 1 of Part I of this report , the discussion of such reserves in the Environmental Matters section of Management's Discussion and Analysis in Item 2 of Part I, and the information regarding certain legal proceedings and other contingent liabilities in note 11 to the consolidated financial statements. Information with respect to certain recent developments is set forth below: 1. In connection with the Notices of Preliminary Determination of Underpaid Royalties received from the MMS, described in Paragraph 6 of Item 3 of the 1998 Form 10-K, in Paragraph 4 of Item 1 of Part II of the First Quarter 1999 Form 10-Q and in Paragraph 3 of Item 1 of Part II of the Second Quarter Form 10-Q, the settlement amount of $7 million was paid by the company in August 1999. 2. In the lawsuits captioned Aguilar, et al. v. Atlantic Richfield, et al. and Gilley, et al. v. Atlantic Richfield, et al., described in Paragraph 7 of Item 3 of the 1998 Form 10-K and in Paragraph 4 of Item 1 of Part II of the Second Quarter Form 10-Q, the Aguilar settlement amount of $3,000,000 was approved by the court and paid by the company in September 1999 and the Gilley settlement amount of $525,000 received the preliminary approval of the court in October 1999. Certain Environmental Matters Involving Civil Penalties 3. In connection with the company's negotiations with the South Coast Air Quality Management District concerning issues involving the company's former Los Angeles Refinery, described in Paragraph 14 of Item 3 of the 1998 Form 10-K and in Paragraph 7 of Item 1 of Part II of the Second Quarter Form 10-Q, the company settled the past emissions fees issues for an aggregate of $290,000, which was paid in September 1999. 4. On November 2, 1999, the District Attorney for San Joaquin County, California filed a lawsuit against the company and Tosco Corporation (The People of the State of California v. Union Oil Company of California, et al., Superior Court of California, San Joaquin County No. CV009241) alleging that company has failed to take appropriate corrective action with respect to releases from underground fuel storage tanks at six former company service stations in San Joaquin County. The complaint seeks civil penalties as well as an injunction requiring further remedial action and restraining violations of applicable requirements. As of November 12, 1999, the company had not been served with the complaint. The company intends to vigorously contest the allegations of the complaint. 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: The Exhibit Index on page 31 of this report lists the exhibits that are filed as part of this report. (b) Reports on Form 8-K: Filed during the third quarter of 1999: 1. Current Report on Form 8-K dated July 6, 1999, and filed July 9, 1999, for the purpose of reporting, under Item 5, the results of wells drilled by the company's Spirit Energy 76 business unit in the Gulf of Mexico. 2. Current Report on Form 8-K dated July 27, 1999, and filed July 29, 1999, for the purpose of reporting, under Item 5, the company's second quarter 1999 earnings and related information. 3. Current Report on Form 8-K dated September 29, 1999, and filed September 30, 1999, for the purpose of reporting, under Item 5, the results of wells drilled by the company's Spirit Energy 76 business unit in the Gulf of Mexico. Filed during the fourth quarter of 1999 to the date hereof: 1. Current Report on Form 8-K dated October 26, 1999, and filed October 29, 1999, for the purpose of reporting, under Item 5, the company's third quarter 1999 earnings and related information. 29 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNOCAL CORPORATION (Registrant) Dated: November 12, 1999 By: /s/ JOE D. CECIL ------------------------------ Joe D. Cecil Vice President and Comptroller (Duly Authorized Officer Principal Accounting Officer) 30 EXHIBIT INDEX 3. Restated Certificate of Incorporation of Unocal Corporation, dated October 1, 1999. 10. Termination and Employment Agreement and Release, by and between John Imle, Union Oil Company of California and Unocal Corporation, effective as of September 11, 1999. 12.1 Statement regarding computation of ratio of earnings to fixed charges of Unocal Corporation for the nine months ended September 30, 1999 and 1998. 12.2 Statement regarding computation of ratio of earnings to fixed charges of Union Oil Company of California for the nine months ended September 30, 1999 and 1998. 27. Financial data schedule for the period ended September 30, 1999 (included only in the copy of this report filed electronically with the Commission). 31 EX-3 2 UNOCAL RESTATED CERTIFICATE OF INCORPORATION RESTATED CERTIFICATE OF INCORPORATION OF UNOCAL CORPORATION (Originally incorporated on March 18, 1983) FIRST: The name of this corporation is: UNOCAL CORPORATION SECOND: The name and address of the registered agent of the corporation in the State of Delaware is: The Corporation Trust Company Corporation Trust Center 1209 Orange Street Wilmington, New Castle County, Delaware 19801 THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of stock which the corporation shall have authority to issue is eight hundred fifty million (850,000,000) shares, consisting of seven hundred fifty million (750,000,000) shares of Common Stock, having a par value of $1.00 per share, and one hundred million (100,000,000) shares of Preferred Stock, having a par value of $0.10 per share. The board of directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in one of more series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock. Pursuant to the authority vested in the board of directors by the preceding paragraph of this Article FOURTH, the following series of Preferred Stock has been created, and the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as set forth in the exhibit attached hereto as specified below and incorporated herein by reference: Exhibit I Series A Junior Participating Cumulative Preferred Stock FIFTH: New bylaws may be adopted or the bylaws may be amended or repealed by a vote of seventy-five percent of the outstanding stock of the corporation entitled to vote thereon. Bylaws may also be adopted, amended or repealed by the Board of Directors as provided or permitted by law; however, any bylaw amendment adopted by the Board of Directors increasing or reducing the authorized number of directors shall require a resolution adopted by the affirmative vote of not less than seventy-five percent of the directors. SIXTH: The number of directors which shall constitute the whole Board of Directors of the corporation shall be as specified in the bylaws of the corporation, subject to the provisions of Article FIFTH hereof and this Article SIXTH. The board is divided into three classes, Class I, Class II and Class III. Such classes shall be as nearly equal in number of directors as possible. Each director shall serve for a term ending on the third annual meeting following the annual meeting at which such director was elected; provided, however, that the directors first elected to Class I shall serve for a term ending on the annual meeting next following the end of the calendar year 1983, the directors first elected to Class II shall serve for a term ending on the second annual meeting next following the end of the calendar year 1983, and the directors first elected to Class III shall serve for a term ending on the third annual meeting next following the end of the calendar year 1983. The foregoing notwithstanding, each director shall serve until his successor shall have been duly elected and qualified, unless he shall resign, become disqualified, disabled or shall otherwise be removed. At each annual election, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the Board shall designate one or more directorships whose term then expires as directorships of another class in order more nearly to achieve equality of number of directors among the classes. Notwithstanding the rule that the three classes shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors each director then continuing to serve as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, or his prior death, resignation or removal. If any newly created directorship may, consistent with the rule that the three classes shall be as nearly equal in number or directors as possible, be allocated to one or two or more classes, the Board shall allocate it to that of the available classes whose term of office is due to expire at the earliest date following such allocation. SEVENTH: The affirmative vote of the holders of not less than seventy-five percent of the outstanding stock of the corporation entitled to vote shall be required for approval if (1) this corporation merges or consolidates with any other corporation if such other corporation and its affiliates singly or in the aggregate are directly or indirectly the beneficial owners of more than ten percent (10%) of the total voting power of all outstanding shares of the voting stock of this corporation (such other corporation being herein referred to as a "Related Corporation"), or if (2) this corporation sells or exchanges all or a substantial part of its assets to or with such Related Corporation, or if (3) this corporation issues or delivers any stock or other securities of its issue in exchange or payment for any properties or assets of such Related Corporation or securities issued by such Related Corporation, or in a merger of any affiliate of this corporation with or into such Related Corporation or any of its affiliates; provided, however, that the foregoing shall not apply to any such merger, consolidation, sale or exchange, or issuance or delivery of stock or other securities which was (i) approved by resolution of the Board of Directors adopted by the affirmative vote of not less than seventy-five percent of the directors prior to the acquisition of the beneficial ownership of more than ten percent (10%) of the total voting power of all outstanding shares of the voting stock of the corporation by such Related Corporation and its affiliates, nor shall it apply to any such transaction solely between this corporation and another corporation fifty percent (50%) or more of the voting stock of which is owned by this corporation. For the purposes hereof, an "affiliate" is any person (including a corporation, partnership, trust, estate or individual) who directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise; and in computing the percentage of outstanding voting stock beneficially owned by any person the shares outstanding and the shares owned shall be determined as of the record date fixed to determine the stockholders entitled to vote or express consent with respect to such proposal. The stockholder vote, if any, required for mergers, consolidations, sales or exchanges of assets or issuances of stock or other securities not expressly provided for in this Article, shall be such as may be required by applicable law. A "substantial part" of the corporation's assets shall mean assets comprising more than ten percent of the book value of fair market value of the total assets of the corporation and its subsidiaries taken as a whole. EIGHTH: No action shall be taken by the stockholders except at an annual or special meeting of stockholders. No action shall be taken by stockholders by written consent. NINTH: Special meetings of the stockholders of the corporation for any purpose or purposes may be called at any time by the Board of Directors, or by a majority of the members of the Board of Directors, or by a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority, as provided in a resolution of the Board of Directors or in the by-laws of the corporation, include the power to call such meetings, but such special meetings may not be called by any other person or persons; provided, however, that, if and to the extent that any special meeting of stockholders may be called by any other person or persons specified in any provisions of this Certificate of Incorporation or any amendment thereto, then such special meeting may also be called by the person or persons, in the manner, at the times and for the purposes so specified. 2 TENTH: The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH and this Article TENTH may not be repealed or amended in anyrespect unless such repeal or amendment is approved by the affirmative vote of the holders of not less than seventy-five percent of the total voting power of all outstanding shares of voting stock of this corporation. ELEVENTH: A director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the shareholders 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 Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the shareholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which only restates and integrates and does not further amend the provisions of the corporation's Certificate of Incorporation as heretofore amended or supplemented, there being no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation except as permitted by Section 245 of the General Corporation Law of Delaware, having been duly adopted by the corporation's Board of Directors in accordance with Section 245 of the General Corporation Law, has been executed by its duly authorized officer this 1st day of October, 1999. UNOCAL CORPORATION By: /s/ Dennis P.R. Codon ----------------------- Name: Dennis P.R. Codon Title: Vice President 3 EXHIBIT I SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK Section 1. Designation and Amount. The shares of such series shall be designated as Series A Junior Participating Cumulative Preferred Stock, par value $.10 per share (the "Series A Preferred Stock"), and the number of shares constituting such series shall be 3,000,000. Section 2. Dividends and Distributions. (a) The holders of shares of Series A Preferred Stock, in preference to the holders of shares of Common Stock, $1.00 per share, of the Corporation (the "Common Stock") and of any other junior stock of the Corporation that may be outstanding, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the tenth day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $0.25 per share ($1.00 per annum), or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock, or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event that the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then and in each such event, the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event, and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (a) of this Section 2 immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided, however, that in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $0.25 per share ($1.00 per annum) on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which cases such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall cumulate but shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. 4 Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (a) Each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes (and each one one-hundredth of a share of Series A Preferred Stock shall entitle the holder thereof to one vote) on all matters submitted toa vote of the stockholders of the Corporation. In the event that the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then and in each such event, the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event, and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided in the Certificate of Incorporation of the Corporation or herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) In addition, the holders of shares of Series A Preferred Stock shall have the following special voting rights: In the event that at any time dividends on Series A Preferred Stock, whenever accrued and whether or not consecutive, shall not have been paid or declared and a sum sufficient for the payment thereof set aside, in an amount equivalent to six quarterly dividends on all shares of Series A Preferred Stock at the time outstanding, then and in each such event, the holders of shares of Series A Preferred Stock and each other series of preferred stock now or hereafter issued that shall be accorded such class voting right by the Board of Directors and that shall have the right to elect three directors as the result of a prior or subsequent default in payment of dividends on such series (each such other series being hereinafter called "Other Series of Preferred Stock"), voting separately as a class without regard to series, shall be entitled to elect three directors at the next annual meeting of stockholders of the Corporation, in addition to the directors to be elected by the holders of all shares of the Corporation entitled to vote for the election of directors, and the holders of all shares (including the Series A Preferred Stock) otherwise entitled to vote for directors, voting separately as a class, shall be entitled to elect the remaining members of the Board of Directors, provided that the Series A Preferred Stock and each Other Series of Preferred Stock, voting as a class, shall not have the right to elect more than three directors. Such special voting right of the holders of shares of Series A Preferred Stock may be exercised until all dividends in default on the Series A Preferred Stock shall have been paid in full or declared and funds sufficient therefor set aside, and when so paid or provided for, such special voting right of the holders of shares of Series A Preferred Stock shall cease, but subject always to the same provisions for the vesting of such special voting rights in the event of any such future dividend default or defaults. At any time after such special voting rights shall have so vested in the holders of shares of Series A Preferred Stock, the Secretary of the Corporation may, and upon the written request of the holders of record of 10% or more in number of the shares of Series A Preferred Stock and each Other Series of Preferred Stock then outstanding addressed to the Secretary at the principal executive office of the Corporation shall, call a special meeting of the holders of shares of Preferred Stock so entitled to vote, for the election of the directors to be elected by them as herein provided, to be held within 60 days after such call and at the place and upon the notice provided by law and in the Bylaws for the holding of meetings of stockholders; provided, however, that the Secretary shall not be required to call such special meeting in the case of any such request received less than 90 days before the date fixed for any annual meeting of stockholders, and if in such case such special meeting is not called or held, the holders of shares of Preferred Stock so entitled to vote shall be entitled to exercise the special voting rights provided in this paragraph at such annual meeting. If any such special meeting required to be called as above provided shall not be called by the Secretary within 30 days after receipt of any such request, then the holders of record of 10% or more in number of the shares of Series A Preferred Stock and each Other Series of Preferred Stock then outstanding may designate in writing one of their number to call such meeting, and the person so designated may, at the expense of the Corporation, call such meeting to be held at the place and upon the notice given by such person, and for that purpose shall have access to the 5 stock books of the Corporation. No such special meeting and no adjournment thereof shall be held on a date later than 60 days before the annual meeting of stockholders. If, at any meeting so called or at any annual meeting held while the holders of shares of Series A Preferred Stock have the special voting rights provided for in this paragraph, the holders of not less than 40% of the shares of Series A Preferred Stock and each Other Series of Preferred Stock then outstanding are present in person or by proxy, which percentage shall be sufficient to constitute a quorum for the election of additional directors as herein provided, the then authorized number of directors of the Corporation shall be increased by three, as of thetime of such special meeting or the time of the first such annual meeting held while such holders have special voting rights and such quorum is present, and the holders of shares of Series A Preferred Stock and each Other Series of Preferred Stock, voting as a class, shall be entitled to elect the additional directors so provided for. If the directors of the Corporation are then divided into classes under provisions of the Certificate of Incorporation of the Corporation or the Bylaws, the three additional directors shall be members of those respective classes of directors in which a vacancy is created as a result of such increase in the authorized number of directors. If the foregoing expansion of the size of the Board of Directors shall not be valid under applicable law, then the holders of shares of Series A Preferred Stock and of each Other Series of Preferred Stock, voting as a class, shall be entitled, at the meeting of stockholders at which they would otherwise have voted, to elect directors to fill any then existing vacancies on the Board of Directors, and shall additionally be entitled, at such meeting and each subsequent meeting of stockholders at which directors are elected, to elect all of the directors then being elected until by such class vote three members of the Board of Directors have been so elected. Upon the election at such meeting by the holders of shares of Series A Preferred Stock and each Other Series of Preferred Stock, voting as a class, of the directors they are entitled so to elect, the persons so elected, together with such persons as may be directors or as may have been elected as directors by the holders of all shares (including Series A Preferred Stock) otherwise entitled to vote for directors, shall constitute the duly elected directors of the Corporation. The additional directors so elected by holders of shares of Series A Preferred Stock and each Other Series of Preferred Stock, voting as a class, shall serve until the next annual meeting or until their respective successors shall be elected and qualified, or if any such director is a member of a class of directors under provisions dividing the directors into classes, each such director shall serve until the annual meeting at which the term of office of such director's class shall expire or until such director's successor shall be elected and shall qualify, and at each subsequent meeting of stockholders at which the directorship of any director elected by the vote of holders of shares of Series A Preferred Stock and each Other Series of Preferred Stock under the special voting rights set forth in this paragraph is up for election, said special class voting rights shall apply in the reelection of such director or in the election of such director's successor; provided, however, that whenever the holders of shares of Series A Preferred Stock and each Other Series of Preferred Stock shall be divested of the special rights to elect three directors as above provided, the terms of office of all persons elected as directors by the holders of shares of Series A Preferred Stock and each Other Series of Preferred Stock, voting as a class, or elected to fill any vacancies resulting from the death, resignation, or removal of directors so elected by the holders of shares of Series A Preferred Stock and each Other Series of Preferred Stock, shall forthwith terminate and, if applicable, the number of directors shall be reduced accordingly. If, at any time after a special meeting of stockholders or an annual meeting of stockholders at which the holders of shares of Series A Preferred Stock and each Other Series of Preferred Stock, voting as a class, have elected directors as provided above, and while the holders of shares of Series A Preferred Stock and each Other Series of Preferred Stock shall be entitled so to elect three directors, the number of directors who have been elected by the holders of shares of Series A Preferred Stock and each Other Series of Preferred Stock (or who by reason of one or more resignations, deaths or removals have succeeded any directors so elected) shall by reason of resignation, death or removal be less than three but at least one, the vacancy in the directors so elected by the holders of shares of the Series A Preferred Stock and each Other Series of Preferred Stock may be filled by the remaining director elected by such holders, and in the event that such election shall not occur within 30 days after such vacancy arises, or in the event that there shall not be incumbent at least one director so elected by such holders, the Secretary of the Corporation may, and upon the written request of the holders of record of 10% or more in number of the shares of Series A Preferred Stock and each Other Series of Preferred Stock then outstanding addressed to the Secretary at the principal office of the Corporation shall, call a special meeting of the holders of shares of Series A Preferred Stock and each Other Series of Preferred Stock so entitled to vote, for an election to fill such vacancy or vacancies, to be held within 60 days after such call and at the place and upon the notice provided by law and in the Bylaws for the holding of meetings of 6 stockholders; provided, however, that the Secretary shall not be required to call such special meeting in the case of any such request received less than 90 days before the date fixed for any annual meeting of stockholders, and if in such case such special meeting is not called, the holders of shares of Preferred Stock so entitled to vote shall be entitled to fill such vacancy or vacancies at such annual meeting. If any such special meeting required to be called as above provided shall not be called by the Secretary within 30 days after receipt of any such request, then the holders of record of 10% or more in number of the shares of Series A Preferred Stock and each Other Series of Preferred Stock then outstanding may designate in writing one of their number to call such meeting, and the person so designated may, at the expense of the Corporation, call such meeting to be held at the place and upon the notice above provided, and for that purpose shall have access to the stock books of the Corporation; no such special meeting and no adjournment thereof shall be held on a date later than 60 days before the annual meeting of stockholders. (d) Nothing herein shall prevent the directors or stockholders from taking any action to increase the number of authorized shares of Series A Preferred Stock, or increasing the number of authorized shares of Preferred Stock of the same class as the Series A Preferred Stock or the number of authorized shares of Common Stock, or changing the par value of the Common Stock or Preferred Stock, or issuing options, warrants or rights to any class of stock of the Corporation as authorized by the Certificate of Incorporation of the Corporation, as it may hereafter be amended. (e) Except as set forth herein, holders of shares of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote as set forth in the Certificate of Incorporation of the Corporation or herein or by law) for taking any corporate action. Section 4. Certain Restrictions. (a) Whenever any dividends or other distributions payable on the Series A Preferred Stock as provided in Section 2 hereof are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not and shall cause its subsidiaries not to, directly or indirectly: (i) declare or pay dividends on, or make any other distributions with respect to, any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on, or make any other distributions with respect to, any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on shares of the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a Purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. 7 (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of preferred stock, without designation as to series, and may be reissued as part of any series of preferred stock created by resolution or resolutions of the Board of Directors (including Series A Preferred Stock), subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made to: (a) the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received the greater of (i) $100.00 per share ($1.00 per one one-hundredth of a share), plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (ii) an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock; or (b) the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event that the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then and in each such event, the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (a) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event, and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In the event that the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, or otherwise changed, then and in each such event, the shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event that the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then and in each such event, the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event, and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. Notwithstanding the foregoing, the Corporation may acquire shares of Series A Preferred Stock in any other manner permitted by law, the Certificate of Incorporation of the Corporation or herein. Section 9. Rank. Unless otherwise provided in the Certificate of Incorporation of the Corporation or a Certificate of Designations relating to a subsequent series of preferred stock of the Corporation, the Series A Preferred Stock shall rank junior to all other series of the Corporation's preferred stock as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up, and senior to the Common Stock of the Corporation. 8 Section 10. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner that would materially and adversely alter or change the powers, preferences or special rights of the Series A Preferred Stock without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single series. Section 11. Fractional Shares. Series A Preferred Stock maybe issued in fractions of a share (in one one-hundredths (1/100) of a share and integral multiples thereof) that shall entitle the holder thereof, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of shares of Series A Preferred Stock. 9 EX-10 3 TERMINATION AND EMPLOYMENT AND RELEASE TERMINATION AND EMPLOYMENT AGREEMENT AND RELEASE This Termination and Employment Agreement and Release ("Agreement"), is made and entered into as of the Effective Date, as defined herein, by and between John Imle ("Employee"), Union Oil Company of California ("Company") and Unocal Corporation ("Unocal"). The Company and Unocal are sometimes referred to herein jointly as "Companies". WHEREAS, Employee (i) presently serves as a director of each of Companies, (ii) is Vice Chairman of Unocal, and (iii) is an employee of Company. WHEREAS, effective as of December 31, 1999, Employee hereby resigns his positions as a director of the Companies. NOW, THEREFORE, in consideration of the mutual promises contained in this Agreement and other valuable consideration, the sufficiency of which is hereby acknowledged, Companies and Employee agree as follows: 1. Termination of Employment. In the best interests of the Company and its shareholders, upon execution of this agreement, the Companies hereby terminate Employee from all of his current employment-related positions with the Companies, effective as of December 31, 1999. Employee shall be on vacation from October 15, 1999 through December 31, 1999. Employee shall receive a cash payment for all accrued but not taken vacation determined as of January 2, 2000 - such payment, less Applicable Withholding, to be made by January 15, 2000. 2. Services to be Rendered by Employee On and After Effective Date. (a) Term of Employment. Employee shall be employed by the Companies continuously as a Consulting Employee, commencing January 2, 2000 and continuing through March 31, 2001. Such employment may be terminated earlier, provided that such termination shall be exclusively in accordance with Section 9(2) of this Agreement. (b) Duties to be Performed. Employee shall make himself available during regular business hours at Employee's reasonable convenience to perform telephonic consultation on matters not involving Confidential Information of the Companies, provided that such telephonic consultation shall not be required of Employee at times which interfere with Employee's ability to conduct employment or business activities and in any case not more than 80 hours per month. In addition, Employee shall make himself available during regular business hours to provide testimony in litigation to which any of the Companies is a party, but such time shall reduce his obligation under the preceding sentence (unless Employee is otherwise compelled by judicial process). (c) Non-Exclusive Employment. Employee may, without restrictions as to time, place or nature of undertaking, perform services for others during the term of employment described in Section 2(a) as long as such services do not compromise Employee's obligations under Sections 6 or 7 of this Agreement or are not with respect to the oil and gas exploration and production business in a country in which the Companies are currently conducting significant oil and gas exploration or production activities or are currently in negotiations with respect to such activities. Following execution of this Agreement, and the Effective Date of same, and during the term of employment described in Section 2(a), Employee agrees to inform Companies in writing within 10 days of commencing other employment, consulting assignments or any other position for which he receives compensation for his services. (d) Expense Reimbursement. Company will reimburse Employee for all reasonable and documented travel and out-of-pocket expenses incurred by Employee while traveling on behalf of Company when such travel or expenses have been authorized by Company. 3. Compensation. (a) Salary. During the period January 1, 2000 through December 31, 2000 term of employment described in Section 2(a), and in consideration of Employee services as a Consulting Employee and his agreement to the restrictions on other employment set forth in Section 2(c), Employee shall receive a salary, payable in semi-monthly installments, of $525,000 less Applicable Withholding. Employee shall receive the sum of $65,625 less Applicable Withholding for the term of employment for January 1, 2001 through March 31, 2001, payable in semi-monthly installments. Employee shall not accrue any vacation pay for the period of his status as a Consulting Employee. (b) Revised Incentive Compensation Plan. Employee shall receive distribution of the cash portion of deferred RICP awards made with respect to years prior to 1999 in accordance with his existing deferral elections on a 100% vested and non-forfeitable basis. Employee shall receive an RICP award for calendar year 1999 equal to that which he would have received had the Companies not terminated his employment under Section 1. Employee's "target award" 50% (fifty percent) of base annual salary shall be adjusted only for the Company's performance. With respect to such adjustments, Employee shall be treated at least as well as employees at or above his salary grade level. There shall be no adjustment, neither increase nor decrease for Employee's individual performance. If the RICP is interpreted, modified, amended or terminated, or the Management Development and Compensation Committee ("Committee") thereunder acts, in a manner which would result in the foregoing award (after having been rendered in a manner that is non-discriminatory relative to Employee) being reduced, Employee shall receive a bonus, less Applicable Withholding, in the amount of such reduction, payable at the time the RICP award is payable, or would have been payable. (c) Long Term Incentive Plans of 1991 and 1998. (1) Performance Shares. The parties acknowledge and agree that Employee has been awarded, under the LTIP, with respect to the Performance Cycles set forth in Column A below, the number of Performance Shares appearing to the right of each Performance Cycle in Column B below, and that under the terms of the LTIP, such Performance Share awards will be pro-rated as set forth in Column C below, assuming Employee's employment continues through March 31, 2001: A. B. C. Performance Performance Proration Cycle Share Award Amount 1996-1999 9400 9400 1997-2000 7000 7000 1998-2001 7700 6256 1999-2002 9000 5063 The Companies agree that payout of the above referenced awards shall be "at the convenience of the Company" for purposes of said plans and the equivalent section of the Employee's LTIP agreements. Accordingly, the Companies shall cause the LTIP Committee to make Performance Share payments to Employee based on the Awards described in Column B above following the 2 close of each Performance Cycle (in the form and at the time such awards are generally paid) subject only to the following LTIP variables: (a) Pro-ration for service under Section 8(d)(I) of the LTIP shall be as described in Column C above for termination of employment on March 31, 2001; in the event of an earlier termination of the term of employment described in Section 2(a), the date of such termination shall not be earlier than the Effective Date and the pro-ration shall be based on the principles used to derive Column C above. (b) The original Performance Share award shall be subject to variation in accordance with Section 8(b) of the LTIP and the "Peer Group Companies" relative performance fraction contemplated by the LTIP agreement. (c) The price of Stock under the LTIP at the end of the Performance Cycle. (d) LTIP Rights Vested; No Further Awards. The termination of the term of Employee's employment under Section 2 by reason of Section 8(b) shall not modify Employee's rights under this Section 3(c). Employee shall not be eligible for any additional grants under the Long Term Incentive Plan of 1998 after the Effective Date. (2) Stock Options. The parties acknowledge and agree that Employee has been awarded, under the LTIP, Option Grants dated as set forth in Column A below, the number of non-qualified stock options appearing to the right of each Option grant in Column B below, exercisable at the applicable strike price set forth in Column C below and that under the terms of the Option Grants, such Option Grants become exercisable in accordance with the terms increments over the 3 years following the Option Grant date and will therefore be exercisable in the numbers set forth in Column D below, assuming Employee's employment continues through March 31, 2001: A. B. C. D. Options Number xercisable Option of Strike on Grants Options Price 03/31/2001 01/28/91 16,521 $24.3125 16,521 03/30/92 27,164 $20.9375 27,164 03/29/93 25,466 $29.6875 25,466 03/28/94 30,512 $26.3750 30,512 03/27/95 30,000 $28.5000 30,000 03/25/96 28,600 $32.8125 28,600 03/24/97 29,800 $38.8125 29,800 Companies agree that the exercisable options described in Column D are vested and non-forfeitable and shall be exercisable by Employee without restriction until the earlier of (I) the tenth anniversary of the grant or (ii) the third anniversary of the termination of the term of Employee's employment under Section 2(a). 3 (3) Restricted Shares. The parties acknowledge and agree that Employee has 14,932 shares of Restricted Stock resulting from his deferral of a portion of RICP awards, as of the effective date. Notwithstanding any other provisions of this Agreement, such Restricted Stock shall be 100% vested and non-forfeitable, and distributed to Employee without restriction, on the earlier of the termination of the term of employment described in Section 2(a) or March 31, 2001. Notwithstanding any other provisions of this Agreement, such Restricted Stock shall be 100% vested and non-forfeitable, and distributed to Employee without restriction, on the earlier of the termination of the restrictions thereunder or April 6, 2001. (4) Performance Stock Options. Employee will continue to "time vest" in his Performance Stock Options. Employee was granted 400,000 Performance Stock Options in 1998 and such options will be 100% vested and non-forfeitable if he remains an employee until March 31, 2001 and will be subject to pro rata vesting in the event of earlier termination of employment. The options remain subject to the terms of the plan, including satisfaction of the performance requirements necessary for them to become exercisable. In the event that Employee's Performance Stock Options fail to become exercisable solely because the performance requirements necessary for them to become exercisable have not been met, the Companies shall pay to Employee not later than April 6, 2001 a lump sum cash settlement amount determined in accordance with the terms of the Unocal Retirement Plan equal to the benefit accruals that would have occurred in the aggregate under the Unocal Retirement Plan and the Non-Qualified Retirement Plans had Employee continued employment for three (3) additional years beyond the date of his termination. Said three (3) year period shall be reduced by the amount of any service recognized by said plans for the period of January 1, 2001 through March 31, 2001 and using "includable compensation" currently as used in the Unocal Retirement Plan with respect to Employee as of March 31, 2001. "Includable Compensation" for purposes of the Non-Qualified Retirement Plan shall not be subject to any Internal Revenue Code limitations. (d) Benefits. (1) Participation After Effective Date. On and after the Effective Date, and during the term of Employee's employment under Section 2(a) above, Employee shall be entitled to participate in all Benefit Plans and fringe benefit and payroll practices of Unocal on the same terms and conditions as would be applicable were Employee serving, during the term of employment described in Section 2(a), in good standing and receiving as compensation the amounts described in Sections 3(a), 3(b), 3(c) and 3(d) of this Agreement. For purposes of the preceding sentence, "terms and conditions" includes Employee making required elections, and Employee's paying generally applicable employee contributions required by a Benefit Plan to obtain one or more benefits under the Benefit Plan. If, for any reason, Employee does not receive, pursuant to a Benefit Plan, at the time required by such Benefit Plan, all or any portion of the benefit under such Benefit Plan as contemplated by this Section 3(d), the Companies shall be jointly and severally obligated to provide the Employee the After Tax Equivalent of the benefit not then received by the Employee pursuant to the Benefit Plan. The parties agree that the rights and obligations created under the preceding sentence are contractual rights and obligations between Employee and the Companies under the law of California, and not rights and obligations under a Benefit Plan. 4 (a) Without limiting the foregoing Section 3(a)(1), Employee shall continue to accrue Benefit Service under Unocal's defined benefit and defined contribution plans under which he is currently covered. Any amendment to the Unocal Retirement Plan or any of the Non-Qualified Retirement Plans which would adversely affect the Employee's benefit thereunder shall be of no force and effect with respect to the Employee except where such amendment also adversely affects the benefit with respect to the Company's most senior executives in a substantially identical manner. (b) Retiree Health Benefits. Companies hereby acknowledge and agree that Employee shall continue to be eligible, during all periods following the termination of his employment under Section 2(a), to participate in those Benefit Plans providing post-retirement health benefits in accordance with the terms thereof as applicable to similarly situated former employees. (c) Financial Counseling. Employee shall remain eligible for financial counseling services through December 31, 2001. 4. Severance Payment Employee shall receive payments in accordance with the terms set forth in Appendix A hereto. The Company's obligations under this Section 4, as set forth in Appendix A hereto shall survive the termination of this Agreement, whether pursuant to Section 9 hereof or otherwise. This payment shall be made as early as practical in the calendar year 2000 following the completion of the RICP calculation in respect of the 1999 calendar year. 5. Retirement Plans (a) Qualified Plan. Not later than 30 days following Company's receipt of all required and properly completed forms, the Companies shall pay (or cause to be paid) to Employee a lump sum amount in cash equal to the present value of Employee's accrued benefit under the Unocal Retirement Plan accrued through March 31, 2001 (assuming Employee's employment through March 31, 2001.) (b) Non-Qualified Plans. Not later than 30 days following Company's receipt of all required and properly completed forms, the Companies shall pay to Employee a lump sum amount in cash equal to the present value of Employee's accrued benefit under the Non-Qualified Retirement Plans accrued through March 31, 2001 (assuming Employee's employment through March 31, 2001). (c) Certain Assumptions. For purposes of calculating the benefits payable under Sections 5(a) and (b) above, [in addition to the assumptions set forth on Exhibit A hereto,] the Companies shall (1) credit Employee with 60 years, 4 months of age and 37 years, 10 months service (provided that if Employee's employment terminates prior to March 31, 2001 the Companies shall be entitled to a reduction in such age and service assumptions on a month-for-month basis), (ii) use Employee's "includible compensation" in effect as of March 31, 2001, (iii) take into account any increases in IRC section 415 limits taking effect as of or prior to March 31, 2001, and (iv) take into account any changes in the terms of the Unocal Retirement Plan taking effect as of or prior to March 31, 2001 that would result in a greater benefit becoming payable to employee, to the extent allowable by law and applicable regulations. 5 6. Confidential Information. Employee acknowledges that in the course of carrying out his responsibilities to Companies, he has had fiduciary responsibilities to Companies and has had access to and has been entrusted with the confidential and proprietary information and trade secrets of Companies including, without limitation, information not previously disclosed to the public regarding current and projected revenues, expenses, costs, profit margins and any other financial and budgeting information; marketing and distribution plans and practices; manufacturing processes, formulae, methods and facilities; research and development; business plans, opportunities, projects and any other business and corporate strategies; product information including reserves, exploration and research; terms of contracts and other arrangements with customers suppliers, agents and employees of Companies; confidential and sensitive information of record regarding other employees (other than Employee's personal opinions), including information with respect to their job descriptions, documented performance strengths and weaknesses, and compensation; and other information not generally known regarding the business, affairs and plans of Companies (collectively, the "Confidential Information"). Employee acknowledges that the unauthorized use or disclosure of Confidential Information would be detrimental to Companies and would reasonably be anticipated to materially impair Companies' value. Employee acknowledges and agrees that such Confidential Information is the exclusive property of Companies and that he shall not at any time, without the prior written consent of an authorized officer of Unocal either during his employment by Companies or after the termination of that employment, directly or indirectly use for himself or others, or disclose to others, any Confidential Information. The foregoing shall not apply to information which either (I) is known to Employee other than as a result of work performed for Companies and from some authorized source other than Companies, (ii) is or becomes part of the public domain, other than by Employee's direct or indirect disclosure, or (iii) consists of explanations of his work experience that are reasonably necessary to interview for employment. Employee's obligations under this paragraph shall survive termination of his employment as described in Section 2(a) for a period of two years from such termination. Employee represents he has made available to Companies all of his files and materials taken from his Unocal office, and Companies have had an opportunity to inspect same, and Companies acknowledge that such files and materials contain no Confidential Information. 7. Change of Control. Employee agrees that during the period commencing on the Effective Date and ended two years after the termination of Employee's employment as described in Section 2(a). Employee will not directly or indirectly participate in or assist any person or entity in activities designed to effectuate, or reasonably likely to result in, a change in control of Unocal or other extraordinary transaction involving Unocal. The foregoing sentence shall not be interpreted as preventing Employee from holding a position with an employer where Employee is "walled off" from any activity prohibited to Employee under this Section. Without limiting the generality of the preceding sentence, activities prohibited by this paragraph 7 include activities designed to effectuate, or reasonably likely to result in (I) a merger or consolidation involving Unocal, (ii) a sale or other disposition of all, or a substantial portion of, Unocal's assets, (iii) any transaction that would require a vote of Unocal's stockholders under Unocal's Certificate of Incorporation or bylaws or under applicable law, (iv) any person or entity (individually or as a group within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) becoming the beneficial owner of 15% or more of the combined voting owner of Unocal's then-outstanding equity securities or (v) a change in the composition of Unocal's Board of Directors such than, during any period of two consecutive calendar years, Continuing Directors (as defined below) cease, for any reason, to constitute at least a majority of the Board of Directors at the beginning of the applicable two year period together with new directors whose election by the stockholders was approved by a vote of at least two-thirds 6 of the directors than in office who either were directors at the beginning of the applicable two-year period or whose election was previously approved. Employee acknowledges and agrees that in light of Employee's position and history with Companies and their affiliates and the circumstances as they exist as of the Effective Date of this Agreement, it would be impossible for Employee to engage in any of the activities prohibited by this paragraph 7 without making use of Confidential Information, and the prohibitions contained in this paragraph 7 are reasonable. 8. Remedies: (1) Damages. The parties agree that the damages according to proof shall be the remedy at law for breaches hereunder. However, the Companies shall not be entitled to withhold any payment or portion thereof provided under Section 3 as an alleged offset against any such claim of damages by the Companies unless (i) Companies have submitted the issue to arbitration under Section 8 by written notice given in accordance with the procedures thereunder on or before September 14, 1998 and (ii) after a full evidentiary hearing, the arbitrator determines that the Companies have such a right of offset as a matter of law and that there has been a material breach by Employee of Section 7 hereof. (2) Companies' Equitable Remedies. Employee acknowledges and agrees that full compliance with his obligations under Sections 6 or are essential to the Companies, and in the event of any breach or threatened breach by Employee of Sections 5 or 6 Companies will sustain losses which are impossible to determine and not fully compensable by monetary damages. Therefore, Company and/or Unocal shall be entitled to institute and prosecute proceedings in any court of competent jurisdiction to enjoin any such breach or threatened breach and to enforce the specific performance of such provisions. (3) Employee's Equitable Remedies. Companies acknowledge and agree that full compliance with their obligations under this Agreement are essential to the Employee, and in the event of any breach or threatened breach by Companies of this Agreement, Employee will sustain losses which are impossible to determine and not fully compensable by monetary damages. Therefore, Employee shall be entitled to institute and prosecute proceedings in any court of competent jurisdiction to enjoin any such breach or threatened breach and to enforce the specific performance of such provisions. (4) Defense of Validity. The Companies agree to defend the validity of this Agreement in any proceeding, which threatens to make this Agreement unenforceable in any material respect. 9. Termination of Employee. Employee's employment with the Companies described in Section 2(a) shall terminate only as a result of one of the following conditions: (1) The termination of such employment effective March 31, 2001, pursuant to the first sentence of Section 2(a). (2) The Employee's material breach of Employee's obligations under Section 6 or 7 providing services to others contrary to the requirements of Section 2 (c). 7 10. General Release by Employee. In consideration for this Agreement, Employee hereby releases and forever discharges Companies and their respective predecessors, successors, partners, assigns, employees, shareholders, owners, officers, directors, agents, attorneys, subsidiaries, divisions, and affiliates (jointly referred to as "Employee's Released Parties") from any and all claims, demands, causes of action, obligations, damages, attorneys' fees, costs and liabilities of any nature whatsoever ("Claims"), 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' employment with Companies and/or the termination of such employment, other than those claims arising by reason of Employee's rights under this Agreement and Benefit Plans of the Companies under this Agreement, and hereby covenants not to assert any such released 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 Company's rights to terminate its employees, including without limitation the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of 1964, and the Civil Rights Act of 1991. 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 benefits under Benefit Plans that have accrued and vested as of the Effective Date. Nothing in this Agreement shall affect in any way, apply to, increase or diminish, any rights which Employee ma have with respect to coverage by Companies' liability insurance policies, including directors and officers liability coverages, or Company's or Unocal's defense or indemnification of Employee during and after his employment with the Companies, or service as an officer or director thereof for acts or omissions occurring during the term of his employment with Company or the term of his service as an officer or director. 11. General Release by Companies. In consideration for this Agreement, Companies hereby release and forever discharge Employee and his successors, heirs, spouse, executors, insurers, creditors, administrators, devisees, partners, assigns, employees, shareholders, owners, officers, directors, agents, financial consultants, attorneys and affiliates (jointly referred to as "Companies' Released Parties") from any and all claims, demands, causes of action, obligations, damages, attorneys' fees, costs and liabilities of any nature whatsoever ("Company Claims"), whether or not now known, suspected or asserted, which Companies may have or claim to have against the Companies' Released Parties relating in any manner to Employee's employment with Companies and/or the termination of such employment (other than Company Claims arising under this Agreement), and hereby covenants not to assert any such released Company Claims through a lawsuit, an administrative proceeding or otherwise. 12. Section 1542 Waiver. Companies and Employee waive 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 Employee's and Companies' Released Parties as provided in Sections 9 and 10 hereof, Companies and Employee expressly acknowledge that Sections 9 and 10 of this Agreement are intended to release, without limitation, Claims and Company Claims which Companies or Employee do not know or suspect to exist in their or his favor at the time of execution of this document, and that the settlement agreed upon completely extinguishes all such Claims and Company Claims. 8 13. Arbitration. Except for claims for equitable or injunctive relief, the parties hereby agree to submit any claim or dispute arising out of the terms of this Agreement (including exhibits) to private and confidential arbitration by a single neutral arbitrator. Subject to the terms of this paragraph, the arbitration proceedings shall be governed by the Commercial Arbitration Rules of the American Arbitration Association, and shall take place in Los Angeles County. The arbitrator shall be appointed by agreement of the parties hereto or, if no agreement can be reached, by the American Arbitration Association pursuant to its Rules. The decision of the arbitrator shall be final and binding on all parties to this Agreement , and judgment thereon may be entered in any court having jurisdiction. All costs of the arbitration proceeding or litigation to enforce this Agreement, including reasonable attorneys' fees shall be paid to the prevailing party by the party against whom the arbitrator or court rules. The parties shall instruct the arbitrator to specify which party is the prevailing party. Except for claims for equitable or injunctive relief, this arbitration procedure is intended to be the exclusive method of resolving any claim relating to the obligations set forth in this Agreement or otherwise relating in any way to Employee's employment relationship with Companies. 14. Entire Agreement. This Agreement 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. Amendment. This Agreement may not be modified except by a written agreement signed by both Employee and by a Vice President of Unocal. 16. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without reference to the conflicts of law provisions thereof. 17. Severability. In the event any provision of this Agreement shall finally be determined to be unlawful, such provision shall be deemed to be severed from this Agreement and every other provision of this Agreement shall remain in full force and effect. If any one or more of the provisions of this Agreement shall for any reason be held to be excessively broad, it shall be construed, by limiting and reducing it, so as to be enforceable to the full extent possible under applicable law. 18. Assignment. Employee warrants and represents that he has not assigned or in any way transferred any right or claim related to the subject matter of this Agreement and that he will not allow or assist in such transfer or assignment in the future. Any purported assignment or transfer shall be deemed void ab initio. 19. No Admission. This Agreement shall not constitute an admission by any Released Party of any wrongful action or inaction whatsoever. 20. Voluntariness. Employee agrees that this Agreement is understood by Employee and is voluntarily entered into by the Employee. 21. Beneficiary Designation. Employee may file a written beneficiary designation for any payments in the event of his death prior to receipt of the amounts due under this Agreement in the form of Exhibit A. The last such designation received by Company prior to his death shall control any such payments. 22. Employee's Right to Review Agreement. Employee has twenty-two (22) days from the date of Employee's receipt of this Agreement to consider whether or not to sign this Agreement. 23. Effective Date. This Agreement shall not be effective until eight (8) days from the date of execution of this Agreement by Employee (the "Effective Date"). During the seven days following his execution of this Agreement, Employee may notify Company in writing of his revocation of this Agreement. 9 24. Employee's Right to Consult Counsel. Employee is advised to consult with Employee's attorney before deciding whether or not to sign this Agreement. 25. Parties in Interest. Except as expressly provided to the contrary herein, this Agreement shall be binding upon each successor to, and assign of, the parties, and inure to the benefit of each permitted successor to, and assign of, the parties. 26. Waiver. Employee shall not be entitled to any other separation benefits except as specifically provided in this Agreement. 27. Definitions. Capitalized terms herein shall have the meanings set forth below. (a) "After Tax Equivalent" means, with respect to the value of a benefit under a Benefit Plan that is tax-free or tax deferred, the amount necessary to replace the value of such benefit after the tax effect on Employee, assuming a 50% effective tax rate. For example, if Employee were not able to receive a tax deferred allocation of $1,000 in a Benefit Plan that was a defined contribution plan, the After Tax Equivalent would be $2,000 payable in taxable form to Employee (on the assumption that at least $1,000 net of taxes would be generated which Employee could choose to deposit in a deferred annuity). Similarly, the After Tax Equivalent of a tax deferred defined benefit future accrual would be twice the lump sum present value of the accrual at the time the accrual would otherwise have occurred using plan actuarial assumptions. (b) "Applicable Withholding" means the sum of (i) required Federal, state and local payroll and income tax withholding and (ii) withholdings for employee-side contributions pursuant to the terms of Benefit Plans. (c) "Benefit Plan" means all of the Unocal employee benefit plans (as defined in Section 3(3) of ERISA), programs or fringe benefit arrangements or payroll practices in effect at the Companies on October 14, 1999, any amendment, modification, restatement or successor to same, and any other "employee benefit plans" as defined in Section 3(3) of ERISA or fringe benefit programs established by the Companies during the term of Employee's employment described in Section 2(a) in which the Chief Financial Officer of Unocal is eligible to participate. (d) "Confidential Information" has the meaning assigned by Section 5. (e) "Effective Date" has the meaning assigned by Section 23. (f) "LTIP" means the Long Term Incentive Compensation Plan forming a part of the Unocal Management Incentive Program of 1998. (g) "Non-Qualified Retirement Plans" means the Unocal Retirement Supplementary Compensation Plan and the Unocal Supplemental Retirement Plan for Key Management Personnel. (h) "RICP" means the Revised Incentive Compensation Plan forming a part of the Unocal Corporation Management Incentive Program. 10 IN WITNESS WHEREOF, this Agreement has been executed in duplicate originals. UNION OIL COMPANY OF EMPLOYEE CALIFORNIA By: Dennis Codon ss By: J. F. Imle ss ---------------------- V.P.& Chief Legal Officer Dennis Codon J. F. Imle ------------------ ---------------- Print Name Print Name 9/3/99 9/3/99 ----------------- ---------------- Date Date September 3, 1999 UNOCAL CORPORATION By: Dennis Codon ss -------------------------- V.P. & Chief Legal Officer Dennis Codon ------------------ Print Name 9/3/99 ------------------ Date 11 APPENDIX A A. Employee's benefits under Section 4 of the Agreement shall be a lump sum equal to the sum of the following: (1) $1,575,000 (One Million Five Hundred and Seventy-Five Thousand Dollars), plus (2) $75,000 (Seventy-Five Thousand Dollars), plus (3) The sum of Employee's Revised Incentive Plan Awards for calendar years 1998 and 1999 multiplied by 1.5 (one and one-half).plus (4) An amount equal to $94,500 B. The above payment shall be considered full satisfaction of all rights, benefits and payments under Employee's Unocal Employment Agreement dated July 28, 1998. C. Employee shall not be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Employee under any provisions of this Agreement. D. Certain Additional Payments by the Company may be due as follows: (1) In the event it shall be determined that any payment or distribution by the Company or its affiliates to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise but determined without regard to any additional payments required under this Agreement), (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties are incurred by Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Employee of all taxes (including any interest or penalties imposed with respect such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Paragraph D(1), if it shall be determined that Employee is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to Employee such that the receipt of payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to Employee and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (2) Subject to the provisions of Paragraph D(3), all determinations required to the made under this Paragraph D, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst and Young or such other certified public accounting firm as may be designated by Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Employee within 15 business days of the receipt of notice from Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, Employee shall appoint another nationally recognized accounting firm to make the determinations required (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Paragraph D, shall be paid by the Company to Employee within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting firm shall be binding upon the Company and Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will 12 not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts itsremedies pursuant to Paragraph D(3) and Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee. (3) Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after Employee is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claims is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Employee in writing prior to the expiration of such period that it desires to contest such claim, Employee shall: (i) give the Company any information reasonably requested by the Company relating t such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii)cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representations and payment of costs and expenses. Without limitation on the foregoing provisions of this Paragraph D(3), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Employee, on an interest-free basis and shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to the such advance or with respect to any imputed income with respect to taxes for the taxable year of Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up payment would be payable hereunder and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (4) If, after the receipt by Employee of an amount advanced by the Company pursuant to Paragraph D(3), Employee becomes entitled to receive any refund with respect to such claim, Employee shall (subject to the Company's employing with the requirements of Paragraph D) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Employee of an amount advanced by the Company with 13 respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 14 EX-12.1 4 STATEMENT RE: COMPUTATION OF RATIOS
EXHIBIT 12.1 UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES For the Nine Months Ended September 30 -------------------- Millions of dollars 1999 1998 - -------------------------------------------------------------------------------- ........................................................ Earnings (loss) from operations ............................ $ 40 $159 Provision for income taxes ................................. 51 177 - -------------------------------------------------------------------------------- Earnings (loss) subtotal .......................... 91 336 Fixed charges included in earnings: Interest expense ........................................ $145 $131 Distribution on convertible preferred securities ........ 24 24 Interest portion of rentals ............................. 15 17 - -------------------------------------------------------------------------------- Fixed charges subtotal ............................ 184 172 Earnings from operations available before fixed charges .......................... $275 $508 - -------------------------------------------------------------------------------- Fixed charges: Fixed charges included in earnings ...................... $184 $172 Capitalized interest .................................... 13 22 - -------------------------------------------------------------------------------- Total fixed charges ............................... $197 $194 - -------------------------------------------------------------------------------- Ratio of earnings from operations to fixed charges ........................................ 1.4 2.6 - --------------------------------------------------------------------------------
EX-12.2 5 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 Nine Months Ended September 30 -------------------- Millions of dollars 1999 1998 - -------------------------------------------------------------------------------- .................................................. Earnings (loss) from operations ...................... $ 61 $179 Provision for income taxes ........................... 57 184 - -------------------------------------------------------------------------------- Earnings subtotal .............................. 118 363 Fixed charges included in earnings: Interest expense .................................. 145 131 Interest portion of rentals ....................... 15 17 - -------------------------------------------------------------------------------- Fixed charges subtotal ......................... 160 148 Earnings (loss) from operations available before fixed charges .................... 278 511 - -------------------------------------------------------------------------------- Fixed charges: Fixed charges included in earnings ................ 160 148 Capitalized interest .............................. 13 22 - -------------------------------------------------------------------------------- Total fixed charges ............................ $173 $170 - -------------------------------------------------------------------------------- Ratio of earnings from operations to fixed charges ................................. 1.6 3.0 - --------------------------------------------------------------------------------
EX-27 6 ARTICLE 5 FC FOR 3RD Q 10-Q
5 Unocal Corporation FDS 1,000,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 209 0 863 (65) 197 1,360 16,263 (10,395) 8,688 1,346 2,834 0 0 253 2,346 8,688 4,230 4,374 3,136 4,283 224 0 145 91 51 40 0 0 0 40 0.17 0.17
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