Unocal Corporation's 2nd Quarter 2000 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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Number of shares of Common Stock, $1 par value, outstanding as of July 31, 2000:
242,862,032
TABLE OF CONTENTS
PART I PAGE
Item 1. Financial Statements
Consolidated Earnings............................................ 1
Consolidated Balance Sheet........................................ 2
Consolidated Cash Flows........................................... 3
Notes to Financial Statements..................................... 4
Operating Highlights ....................................................... 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 16
Item 3 Quantative and Qualitative Disclosures about Market Risk............ 28
PART II
Item 1 Legal Proceedings................................................... 30
Item 4 Submission of Matters to a Vote of Security Holders................. 31
Item 6 Exhibits and Reports on Form 8-K.................................... 32
SIGNATURES 33
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED EARNINGS UNOCAL CORPORATION
(UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- --------------------
Millions of dollars except per share amounts 2000 1999 2000 1999
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Revenues
............................................................................
Sales and operating revenues ................................................... $ 2,011 $ 1,381 $ 3,838 $ 2,507
Interest, dividends and miscellaneous income ................................... 140 28 171 56
Equity in earnings of affiliated companies ..................................... 32 21 57 48
Gain (loss) on sales of assets ................................................. 65 11 63 (2)
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Total revenues ........................................................... 2,248 1,441 4,129 2,609
Costs and other deductions
Crude oil, natural gas and product purchases ................................... 1,144 782 2,195 1,360
Operating expense .............................................................. 288 236 524 454
Selling, administrative and general expense .................................... 37 50 85 81
Depreciation, depletion and amortization ....................................... 224 179 430 375
Dry hole costs ................................................................. 37 47 51 74
Exploration expense ............................................................ 37 35 86 73
Interest expense ............................................................... 53 48 106 93
Property and other operating taxes ............................................. 17 13 30 25
Distributions on convertible preferred securities of subsidiary trust ......... 8 8 16 16
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Total costs and other deductions ......................................... 1,845 1,398 3,523 2,551
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Earnings from operations before income taxes and minority interests ............ 403 43 606 58
Income taxes ................................................................... 159 33 242 44
Minority interests ............................................................. (6) 4 (10) 4
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Earnings from continuing operations before discontinued operations ............. 250 6 374 10
Discontinued operations
Agricultural Products
Earnings from operations (net of tax) ..................................... -- 3 -- 6
Gain on disposal (net of tax) ............................................. 14 -- 23 --
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Earnings from discontinued operations .......................................... 14 3 23 6
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Net earnings ............................................................. $ 264 $ 9 $ 397 $ 16
====================================================================================================================================
Basic earnings per share of common stock (a)
Continuing operations ....................................................... $ 1.03 $ 0.03 $ 1.54 $ 0.04
Discontinued operations ..................................................... 0.05 0.01 0.09 0.03
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Net earnings ................................................................ $ 1.08 $ 0.04 $ 1.63 $ 0.07
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Diluted earnings per share of common stock (b)
Continuing operations ....................................................... $ 1.00 $ 0.03 $ 1.51 $ 0.04
Discontinued operations ..................................................... 0.05 0.01 0.09 0.03
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Net earnings ................................................................ $ 1.05 $ 0.04 $ 1.60 $ 0.07
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Cash dividends declared per share of common stock .............................. $ 0.20 $ 0.20 $ 0.40 $ 0.40
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<FN>
(a) Basic weighted average shares outstanding (in thousands) ................. 242,875 242,270 242,789 241,649
(b) Diluted weighted average shares outstanding (in thousands) ................ 256,245 244,001 255,758 242,717
</FN>
See notes to the consolidated financial statements
-1-
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
June 30, December 31,
------------ ---------------
Millions of dollars 2000 (a) 1999
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Assets
Current assets
........................................................................................
Cash and cash equivalents ............................................................... $ 158 $ 332
Accounts and notes receivable ........................................................... 973 994
Inventories ............................................................................. 148 179
Deferred income taxes ................................................................... 159 100
Other current assets .................................................................... 27 26
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Total current assets ................................................................. 1,465 1,631
Investments and long-term receivables ...................................................... 1,336 1,264
Properties - net (b) ....................................................................... 6,410 5,980
Deferred income taxes ...................................................................... 111 16
Other assets ............................................................................... 125 76
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Total assets ......................................................................... $ 9,447 $ 8,967
====================================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ........................................................................ $ 859 $ 979
Taxes payable ........................................................................... 212 192
Interest payable ........................................................................ 53 62
Current portion of environmental liabilities ............................................ 120 100
Current portion of long-term debt and capital leases .................................... 92 --
Other current liabilities ............................................................... 268 226
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Total current liabilities ............................................................ 1,604 1,559
Long-term debt and capital leases .......................................................... 2,692 2,853
Deferred income taxes ...................................................................... 434 230
Accrued abandonment, restoration and environmental liabilities ............................. 547 567
Other deferred credits and liabilities ..................................................... 804 620
Minority interests ......................................................................... 389 432
Company-obligated mandatorily redeemable convertible preferred securities
of a subsidiary trust holding solely parent debentures .................................. 522 522
Common stock ($1 par value) ................................................................ 253 253
Shares authorized: 750,000,000 (c)
Capital in excess of par value ............................................................. 517 493
Unearned portion of restricted stock issued ................................................ (26) (20)
Retained earnings .......................................................................... 2,201 1,902
Accumulated other comprehensive loss ....................................................... (40) (33)
Notes receivable - key employees ........................................................... (39) --
Treasury stock - at cost (d) .............................................................. (411) (411)
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Total stockholders' equity ........................................................... 2,455 2,184
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Total liabilities and stockholders' equity ........................................ $ 9,447 $ 8,967
====================================================================================================================================
<FN>
(a) Unaudited
(b) Net of accumulated depreciation, depletion and amortization of ........................ $ 10,829 $ 10,535
(c) Number of shares outstanding (in thousands) ........................................... 242,872 242,441
(d) Number of shares (in thousands) ....................................................... 10,623 10,623
</FN>
See notes to the consolidated financial statements
-2-
CONSOLIDATED CASH FLOWS UNOCAL CORPORATION
(UNAUDITED)
For the Six Months
Ended June 30,
------------------------------
Millions of dollars 2000 1999
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Cash Flows from Operating Activities
........................................................................................
Net earnings ............................................................................... $ 397 $ 16
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation, depletion and amortization ............................................. 430 383
Dry hole costs ....................................................................... 51 74
Deferred income taxes ................................................................ 48 (9)
(Gain) loss on sales of assets (pre-tax) ............................................. (64) 2
Other ................................................................................ 34 (21)
Working capital and other changes related to operations
Accounts and notes receivable ..................................................... (20) (59)
Inventories ....................................................................... 31 21
Accounts payable .................................................................. (103) (7)
Taxes payable ..................................................................... 20 (168)
Other ............................................................................. (56) (62)
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Net cash provided by operating activities ...................................... 768 170
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Cash Flows from Investing Activities
Capital expenditures (includes dry hole costs) .......................................... (558) (468)
Acquisition of Northrock Resources, Ltd. ................................................ (161) (184)
Proceeds from sales of assets ........................................................... 67 154
Proceeds from sale of discontinued operations ........................................... 25 --
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Net cash used in investing activities .......................................... (627) (498)
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Cash Flows from Financing Activities
Long-term borrowings .................................................................... 58 798
Reduction of long-term debt and capital leases .......................................... (231) (705)
Minority interests ...................................................................... (14) 242
Proceeds from issuance of common stock .................................................. 2 21
Dividends paid on common stock .......................................................... (97) (97)
Loans to key employees .................................................................. (32) --
Other ................................................................................... (1) (1)
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Net cash provided by (used in) financing activities ............................... (315) 258
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Decrease in cash and cash equivalents ...................................................... (174) (70)
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Cash and cash equivalents at beginning of year ............................................. 332 238
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Cash and cash equivalents at end of period ................................................. $ 158 $ 168
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Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest (net of amount capitalized) ................................................. $ 113 $ 95
Income taxes (net of refunds) ........................................................ $ 182 $ 259
See notes to the consolidated financial statements
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General
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 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 1999 Annual Report on Form 10-K.
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.
Results for the six months ended June 30, 2000, are not necessarily indicative
of future financial results.
Segment data and certain other items in the prior year financial statements have
been reclassified to conform to the 2000 presentation.
(2) Other Financial Information
During the second quarters of 2000 and 1999, approximately 50 percent and 48
percent, respectively, of total sales and operating revenues were attributable
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 six months ended June 30, 2000 and 1999, these percentages were
approximately 50 percent and 47 percent, respectively. 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 $3 million and $4 million for the second quarters
of 2000 and 1999, respectively, and $5 million and $9 million for the first six
months of 2000 and 1999, respectively.
(3) Income Taxes
Income taxes on earnings from continuing operations for the second quarter and
first six months of 2000 were $159 million and $242 million, respectively,
compared with $33 million and $44 million for the comparable periods of 1999.
The effective income tax rates for the second quarter and first six months of
2000 were 40 percent and 40 percent, respectively, compared with 77 percent and
76 percent for the comparable periods of 1999. In 1999, the effect of domestic
losses versus foreign earnings resulted in higher effective tax rates in both
the second quarter and first six months results.
-4-
(4) Earnings Per Share
The following are reconciliations of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations for earnings from
continuing operations for the second quarters and the six months ended June 30,
2000 and 1999:
Earnings Shares Per Share
Millions except per share amounts (Numerator) (Denominator) Amount
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Three months ended June 30, 2000
.....................................................................................
Earnings from continuing operations ................................................ $250 242.9
Basic EPS ...................................................................... $ 1.03
======
Effect of dilutive securities
Options and common stock equivalents ........................................... 1.1
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250 244.0 $ 1.02
Distributions on subsidiary trust preferred securities (after-tax) ............. 7 12.3
------------------------
Diluted EPS .................................................................... $257 256.3 $ 1.00
======
Three months ended June 30, 1999
Earnings from continuing operations ................................................ $ 6 242.3
Basic EPS ...................................................................... $ 0.03
======
Effect of dilutive securities
Options and common stock equivalents ........................................... 1.7
------------------------
Diluted EPS .................................................................... 6 244.0 $ 0.03
======
Distributions on subsidiary trust preferred securities (after-tax) ............. 6 12.3
------------------------
Antidilutive ................................................................... $ 12 256.3 $ 0.05
Six months ended June 30, 2000
Earnings from continuing operations ................................................ $374 242.8
Basic EPS ...................................................................... $ 1.54
======
Effect of dilutive securities
Options and common stock equivalents ........................................... 0.7
------------------------
374 243.5 $ 1.54
Distributions on subsidiary trust preferred securities (after-tax) ............. 13 12.3
------------------------
Diluted EPS .................................................................... $387 255.8 $ 1.51
======
Six months ended June 30, 1999
Earnings from continuing operations ................................................ $ 10 241.6
Basic EPS ...................................................................... $ 0.04
======
Effect of dilutive securities
Options and common stock equivalents ........................................... 1.1
------------------------
Diluted EPS .................................................................... 10 242.7 $ 0.04
======
Distributions on subsidiary trust preferred securities (after-tax) ............. 13 12.3
------------------------
Antidilutive ................................................................... $ 23 255.0 $ 0.09
Not included in the computation of diluted EPS were options outstanding at June
30, 2000 to purchase approximately 7.3 million shares of common stock. These
options were not included in the computation because their exercise prices were
greater than the year-to-date average market price of $31.58 for the common
shares. The exercise prices of these options range from $32.16 to $51.01 per
share and they expire in the years 2006 through 2010.
-5-
(5) Comprehensive Income
The company's comprehensive earnings were as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
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............................................................
Net earnings ................................................... $ 264 $ 9 $ 397 $ 16
Change in foreign currency translation adjustments (net of tax) (8) 1 (7) 1
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Comprehensive earnings ................................... $ 256 $ 10 $ 390 $ 17
==================================================================================================================================
(6) Sale of Accounts Receivable
In 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 company had sold $100 million of its domestic trade receivables
under this agreement as of December 31, 1999. This balance ncreased to $200
million at June 30, 2000. The $100 million increase since the beginning of the
year 2000 is reflected as a reduction of accounts and notes receivable in the
consolidated balance sheet and a corresponding increase in net cash provided by
operating activities in the consolidated statement of cash flows. At June 30,
2000, the company's balance sheet included a note receivable of approximately
$237 million due from URC representing the unsold balance of trade receivables
transferred to URC.
(7) Long Term Debt and Credit Agreements
During the first six months of 2000, the company decreased its commercial paper
borrowings by $125 million to a zero outstanding balance. The company also
reduced its borrowings under the $1 billion bank credit agreement by $60 million
to a zero outstanding balance. The company also retired $34 million of maturing
medium-term notes. In June 2000, the company reclassified $91 million of
long-term debt to current liabilities, consisting of its 9 3/4 percent notes and
a portion of its outstanding medium-term notes, which it plans to retire by
December 31, 2000.
During the first six months of 2000, the company added $96 million to its
consolidated total debt from the Pure Resources, Inc. (Pure) transaction. The
Pure debt consisted of borrowings under a Titan Exploration, Inc. (Titan)
revolving credit facility assumed by Pure (see note 14 for further detail). In
addition, the company's Northrock Resources Ltd. (Northrock) subsidiary
increased its outstanding debt by $56 million due primarily to an increase in
borrowings under its senior credit facility. Neither Northrock's or Pure's debt
is guaranteed by the parent company (Union Oil).
(8) Stockholder Rights Plan
On January 5, 2000, the Board of Directors adopted a new stockholder rights plan
(2000 Rights Plan) to replace the 1990 Rights Plan. The Board declared a
dividend of one preferred share purchase right (new Right) for each share of
common stock outstanding, which was paid to stockholders of record on January
29, 2000, when the rights outstanding under the 1990 Rights Plan expired. The
Board also authorized the issuance of one new Right for each common share issued
after January 29, 2000, and prior to the earlier of the date on which the new
Rights become exercisable, the redemption date or the expiration date. Until the
new Rights become exercisable, as described below, the outstanding new Rights
trade with, and will be inseparable from, the common stock and will be evidenced
only by certificates or book-entry credits that represent shares of common
stock.
-6-
The Board of Directors has designated 5,000,000 shares of preferred stock as
Series B Junior Participating Preferred Stock (Series B preferred stock) in
connection with the 2000 Rights Plan. The Series B preferred stock replaces the
Series A preferred stock that was designated under the 1990 Rights Plan. The
2000 Rights Plan provides that in the event any person or group of affiliated
persons becomes, or commences a tender offer or exchange offer pursuant to which
such person or group would become, the beneficial owner of 15 percent or more of
the outstanding common shares, each new Right (other than new Rights held by the
15 percent stockholder) will be exercisable on and after the close of business
on the tenth business day following such event, unless the new Rights are
redeemed by the Board of Directors, to purchase one one-hundredth of a share of
Series B preferred stock for $180. If such a person or group becomes such a 15
percent beneficial owner of common stock, each new Right (other than new Rights
held by the 15 percent stockholder) will be exercisable to purchase, for $180,
shares of common stock with a market value of $360, based on the market price of
the common stock prior to such 15 percent acquisition. If the company is
acquired in a merger or similar transaction following the date the new Rights
become exercisable, each new Right (other than new Rights held by the 15 percent
stockholder) will become exercisable to purchase, for $180, shares of the
acquiring corporation with a market value of $360, based on the market price of
the acquiring corporation's stock prior to such merger. The Board of Directors
may reduce the 15 percent beneficial ownership threshold to not less than 10
percent.
The new Rights will expire on January 29, 2010, unless previously redeemed by
the Board of Directors. The new Rights do not have voting or dividend rights
and, until they become exercisable, have no diluting effect on the earnings per
share of the company.
(9) Financial Instruments and Commodity Hedging
The company's financial instruments at June 30, 2000 are described below:
Foreign currency contracts - Fair values for foreign currency contracts were
determined by comparing the contract rates to the forward rates in effect at
June 30, 2000 and represent the estimated costs the company would incur, or
proceeds the company would receive, if the contracts were terminated at June 30,
2000.
During the first six months of 2000, the company's wholly owned Canadian
subsidiary repaid $60 million of its outstanding U.S. dollar debt and retired
$60 million of related Canadian dollar currency swap contracts. Gains realized
by the subsidiary on the retirement of the currency swap contracts offset losses
realized on the debt retirement. The company also retired $60 million of
corresponding U.S. dollar currency swap contracts that were designed to mitigate
exchange rate fluctuations to the consolidated company related to the
subsidiary's swapped Canadian dollar loan. Losses related to the U.S. dollar
currency swap contracts were immaterial.
In the first six months of 2000, the company entered into additional foreign
currency forward contracts for Netherlands guilder and Thai baht. At June 30,
2000 the company had foreign currency forward contracts outstanding to purchase
Netherlands guilder 36 million for approximately $17 million. The contracts are
designed to hedge the company's exposure for estimated local foreign currency
denominated obligations and receivables expected to be settled in 2000 and 2001.
The fair values of the Netherlands guilder purchase contracts at June 30, 2000
were approximately $1 million in liabilities. There were no open contracts for
the Thai baht at June 30, 2000.
Commodity hedging activities - The company determines its unrealized gains and
losses on hydrocarbon derivative financial instruments using New York Mercantile
Exchange settlement prices, dealer quotes or by financial modeling using
underlying commodity prices. At June 30, 2000, the company had futures contracts
outstanding for the purchase of approximately 1.9 million barrels of crude oil
and refined products and the sale of approximately 1.4 million barrels of crude
oil and refined products. The company utilizes crude oil futures contracts as a
component of its overall risk management strategy.
-7-
As of June 30, 2000, a portion of these futures contracts offset the fixed price
risk associated with prepaid forward crude oil sales that are scheduled for
delivery for the period July to September 2000. The refined products futures
contracts primarily offset the price risk of inventory purchases. The pre-tax
unrealized gains were $21 million at June 30, 2000. The applicable portion of
the gains approximated pre-tax unrealized losses on the corresponding prepaid
forward crude oil sales and the price risk of inventory purchases of refined
products at June 30, 2000. Natural gas futures contracts and related pre-tax
unrealized gains were immaterial at June 30, 2000.
At June 30, 2000, the company had various hydrocarbon option contracts (options)
outstanding with several counterparties designed to hedge the prices to be
received for the sale of its crude oil and natural gas production for the period
July 2000 to October 2004. These options are generally accounted for as hedges,
with gains and losses deferred and recognized as adjustments to commodity
revenues upon the sale of the underlying production. Portions of the unrealized
losses related to hedging contracts of the company's Northrock and Pure
subsidiaries were capitalized as components of the acquisition costs (see note
14 for further detail). At June 30, 2000, pre-tax unrealized losses not
capitalized approximated $2 million for crude oil options and $24 million for
natural gas options.
The company had a gas price swap agreement with nine years remaining at June 30,
2000, related to a prepaid fixed price forward sale. The pre-tax unrealized gain
related to the swap agreement at June 30, 2000 was approximately $36 million.
The gain is offset by a corresponding unrealized loss on the prepaid fixed price
forward sale.
Commodity trading activities - To assist in the management of price risk, the
company trades hydrocarbon commodities and related derivatives, including
futures, forwards, options and swaps, based upon expectations of future market
conditions. The company determines the market values of its non-hedging
hydrocarbon commodity derivative instruments using dealer quotes, where
available, or by financial modeling using underlying commodity prices. In the
first six months of 2000, the company recorded $47 million in pre-tax losses
($12 million after-tax, after minority interest) related primarily to the
marking to market of its non-hedging hydrocarbon commodity derivative
instruments. The company recorded approximately $7 million in pre-tax gains ($4
million after-tax, after minority interest) related to the marking to market of
its non-hedging hydrocarbon commodity derivative instruments during the first
six months of 1999.
Fair values of debt and other long-term instruments - The estimated fair value
of the company's long-term debt at June 30, 2000, including the current portion,
was approximately $2.756 billion. Fair values were based on the discounted
amounts of future cash outflows using the rates offered to the company for debt
with similar remaining maturities.
The estimated fair value of the mandatorily redeemable convertible preferred
securities of the company's subsidiary trust was $491 million at June 30, 2000.
The fair value was based on the trading prices of the preferred securities on
June 30, 2000.
(10) Accrued Abandonment, Restoration and Environmental Liabilities
At June 30, 2000, the company had accrued $471 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 $628 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 June 30, 2000 totaled $196 million, of which $120
million was included in current liabilities.
-8-
(11) Commitments and Contingencies
The company has certain contingent liabilities with respect to material existing
or potential claims, lawsuits and other proceedings, including those involving
environmental, tax and other matters, certain of which are discussed more
specifically below. The company accrues liabilities when it is probable that
future costs will be incurred and such costs can be reasonably estimated. Such
accruals are based on developments to date, the company's estimates of the
outcomes of these matters and its experience in contesting, litigating and
settling other matters. As the scope of the liabilities becomes better defined,
there will be changes in the estimates of future costs, which could have a
material effect on the company's future results of operations and financial
condition or liquidity.
Environmental matters - The company is subject to loss contingencies pursuant to
federal, state and local environmental laws and regulations. These include
existing and possible future obligations to investigate the effects of the
release or disposal of certain petroleum, chemical and mineral substances at
various sites; to remediate or restore these sites; to compensate others for
damage to property and natural resources, for remediation and restoration costs
and for personal injuries; and to pay civil penalties and, in some cases,
criminal penalties and punitive damages. These obligations relate to sites owned
by the company or others and are associated with past and present operations,
including sites at which the company has been identified as a potentially
responsible party (PRP) under the federal Superfund laws and comparable state
laws.
Liabilities are accrued when it is probable that future costs will be incurred
and such costs can be reasonably estimated.However, in many cases,
investigations are not yet at a stage where the company is able to determine
whether it is liable or, even if liability is determined to be probable, to
quantify the liability or estimate a range of possible exposure. In such cases,
the amounts of the company's liabilities are indeterminate due to the
potentially large number of claimants for any given site or exposure, the
unknown magnitude of possible contamination, the imprecise and conflicting
engineering evaluations and estimates of proper clean-up methods and costs, the
unknown timing and extent of the corrective actions that may be required, the
uncertainty attendant to the possible award of punitive damages, the recent
judicial recognition of new causes of action, the present state of the law,
which often imposes joint and several and retroactive liabilities on PRPs, the
fact that the company is usually just one of a number of companies identified as
a PRP, or other reasons.
As disclosed in note 10, at June 30, 2000, the company had accrued $196 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
$230 million.
Tax matters - The company believes it has adequately provided in its accounts
for tax items and issues not yet resolved. Several prior material tax issues are
unresolved. Resolution of these tax issues impact not only the year in which the
items arose, but also the company's tax situation in other tax years. With
respect to 1979-1984 taxable years, all issues raised for these years have now
been settled, with the exception of the effect of the carryback of a 1993 net
operating loss (NOL) to tax year 1984 and resultant credit adjustments. The
1985-1990 taxable years are before the Appeals division of the Internal Revenue
Service. All issues raised with respect to those years have now been settled,
with the exception of the effect of the 1993 NOL carryback and resultant
adjustments. The settlements were subject to review by the Joint Committee on
Taxation of the U.S. Congress. The Joint Committee has reviewed the settled
issues with respect to 1979-1990 taxable years and no additional issues have
been raised. While all tax issues for the 1979-1990 taxable years have been
agreed and reviewed by the Joint Committee, these taxable years will remain open
due to the 1993 NOL carryback. The 1993 NOL results from certain specified
liability losses which occurred during 1993 and which resulted in a tax refund
of $73 million. Consequently, these tax years will remain open until the
specified liability loss, which gave rise to the 1993 NOL, is finally determined
by the Internal Revenue Service and is either agreed to with the IRS or
-9-
otherwise concluded in the Tax Court proceeding. In 1999, the United States Tax
Court granted Unocal's motion to amend the pleadings in its Tax Court cases to
place the 1993 NOL carryback in issue.
Other matters - The company also has certain other contingent liabilities with
respect to litigation, claims, and contractual agreements arising in the
ordinary course of business. Although these contingencies could result in
expenses or judgments that could be material to the company's results of
operations for a given reporting period, on the basis of management's best
assessment of the ultimate amount and timing of these events, such expenses or
judgments are not expected to have a material adverse effect on the company's
consolidated financial condition or liquidity.
(12) Summarized Financial Data of Union Oil
Unocal guarantees certain indebtedness of Union Oil. Summarized below is
financial information for Union Oil and its consolidated subsidiaries:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
............................................................
Total revenues ................................................. $2,247 $1,441 $4,119 $2,609
Total costs and other deductions, including income taxes ....... 1,991 1,427 3,738 2,585
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before discontinued operations $ 256 $ 14 $ 381 $ 24
Discontinued operations
Agricultural products
Earnings from operations (net of taxes) ................... -- 3 -- 6
Gain on disposal (net of taxes) ........................... 14 -- 23 --
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings ................................................... $ 270 $ 17 $ 404 $ 30
==================================================================================================================================
At June 30, At December 31, (a)
------------ --------------------
Millions of dollars 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
............................................................
Current assets ................................................. $1,464 $1,631
Noncurrent assets .............................................. 8,002 7,352
Current liabilities ............................................ 1,607 1,562
Noncurrent liabilities ......................................... 4,866 4,702
Shareholder's equity ........................................... 2,993 2,719
(a) Audited
(13) Restructuring Costs
In the first quarter of 2000, the company adopted a restructuring plan that
resulted in the accrual of a $17 million pre-tax restructuring charge. This
amount included the estimated costs of terminating approximately 195 employees.
The plan involves the simplifying of the organizational structures to align them
with the company's portfolio requirements and business needs, along with the
creation of a new organizational structure for part of the company's Lower 48
exploration and production segment.
Approximately 125 of the affected employees were from various exploration and
production business units and 70 were from other organizations, including
corporate staff. The restructuring charge included approximately $17 million for
termination costs to be paid to the employees over time, approximately $2
million for outplacement and other costs and a net reduction in pension and post
retirement expenses of $2 million. The charge is included in selling,
administrative and general expense on the consolidated earnings statement. At
June 30, 2000, 157 employees (81 percent) had been terminated or had received
termination notices as a result of the plan, with additional terminations
scheduled primarily in the third quarter of 2000.
In the second quarter of 1999, the company adopted a restructuring plan that
resulted in the accrual of an $18 million pre-tax restructuring charge. This
amount included the estimated costs of terminating approximately 250 employees.
The charge was included in selling, administrative and general expense on the
consolidated earnings statement. The plan involved the blending of several
International and
-10-
Geothermal organizations, a manpower optimization program in Thailand, cost
cutting and efficiency initiatives and a company-wide shared resources
initiative.
Approximately 100 of the affected employees were from the company's
International operations, 31 were from the Carbon and Minerals segment, 25 were
from the Alaska oil and gas operations and 94 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 June 30, 2000, 243 employees
(96 percent) had been terminated or had received termination notices as the
result of the plan, with additional terminations scheduled during 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 estimated costs of terminating approximately 475 employees.
The charge was included in selling, administrative and general expense on the
consolidated earnings statement. The plan involved 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 June 30, 2000, 447
employees (94 percent) had been terminated or had received termination notices
as a result of the plan, with additional terminations scheduled during 2000.
The amount of unpaid benefits remaining on the consolidated balance sheet at
June 30, 2000 was $18 million for the three plans combined. The company expects
to fall short of the expected number of terminations for the three plans
combined by approximately 25 employees. However, no material changes are
expected to the costs accrued for the plans and no adjustments to the liability
have been made to date.
(14) Acquisitions
On June 19, 2000, the company, through a Canadian subsidiary, acquired the
remaining common shares of Northrock pursuant to the May 19, 2000 offer made to
Northrock's shareholders. The company acquired the 23 million shares that it did
not already own for an all-in cost of approximately $161 million. This
acquisition was accounted for as a purchase.
The company completed the merger of its oil and gas exploration and production
assets in the Permian and San Juan basins with Titan on May 25, 2000, when Pure
acquired all of the outstanding common shares of Titan. Titan stockholders
received .4302314 shares of Pure common stock for each share of Titan common
stock. The newly publicly traded company has approximately 50 million common
shares outstanding. Unocal now holds 65.4 percent, or 32.7 million shares, of
Pure, and the former Titan stockholders own the remaining 34.6 percent. Pure's
acquisition of Titan was accounted for as a purchase and the company is fully
consolidating the financial and operating results of Pure. As a result of these
transactions, the company recorded a $67 million pre-tax ($42 million after-tax)
gain.
On February 3, 2000, the company's Spirit Energy Partners, L.P. (partnership),
acquired interests from Tana Corporation in 12 proven properties and nine
offshore platforms located in the shelf area of the Gulf of Mexico. The
partnership is an entity formed by Unocal to acquire producing properties in
existing areas of operations. The company's non-controlling 50 percent interest
is accounted for using the equity method. The purchase had an effective date of
October 1, 1999. The company and its partner each
-11-
contributed $27 million to the partnership for the purchase of the properties.
The partnership also secured outside financing for the purchase.
(15) Minority Interests
As discussed in note 14, in June 2000, a Canadian subsidiary of the company
acquired the remaining outstanding common shares of Northrock. The net result of
this transaction was to reduce minority interests by approximately $137 million.
The Pure transaction, also discussed in note 14, increased minority interests by
$110 million.
(16) Loans to Certain Officers of the Company
On March 16, 2000, the company entered into loan agreements with ten of its
officers pursuant to the company's 2000 Executive Stock Purchase Program (the
Program). The Program was approved by the Board of Directors of the company and
by the company's stockholders at the Annual Stockholders meeting on May 22,
2000. The loans were granted to the officers to enable them to purchase shares
of company stock in the open market. The loans, which except under certain
limited circumstances are full recourse to the officers, mature on March 16,
2008 and bear interest at the rate of 6.8 percent per annum. At June 30, 2000,
loans under the Program totaled $32 million and they were reflected in cash
flows from financing activities on the consolidated cash flows statement and as
a reduction to stockholders' equity on the consolidated balance sheet.
(17) Segment Data
As a result of changes in the organization, the company has made corresponding
changes in the reporting of its segments from the reporting utilized in the 1999
Annual Report on Form 10-K. The company's reportable segments are now:
Exploration and Production, Global Trade, Pipelines, Geothermal and Power
Operations, and Carbon and Minerals Businesses. General corporate overhead,
unallocated costs and other miscellaneous operations, including real estate and
those businesses that were sold or being phased-out, are included under the
Corporate and Unallocated heading. See also Management`s Discussion and Analysis
in Item 2 for further description of the new segments.
-12-
--------------------------------------------------------------------------------
Segment Information Exploration & Production Global Pipelines
For the Three Months North America International Trade
ended June 30, 2000 ------------------------------ --------------------
Millions of dollars Far
Lower 48 Alaska Canada East Other
--------------------------------------------------------------------------------
................................................
External sales & operating revenues ................ $ 33 $ 59 $ 20 $ 239 $ 37 $1,537 $ 9
Other revenues (loss) .............................. 68 -- 3 (2) 2 (6) 15
Inter-segment revenues ............................. 372 16 -- 44 41 1 3
--------------------------------------------------------------------------------
Total .............................................. 473 75 23 281 80 1,532 27
Earnings from continuing operations ................ 134 24 (11) 88 19 6 15
Earnings from discontinued operations .............. -- -- -- -- -- -- --
--------------------------------------------------------------------------------
Net earnings (loss) ................................ 134 24 (11) 88 19 6 15
Assets (at June 30, 2000) .......................... 2,519 307 1,129 1,960 617 58 303
--------------------------------------------------------------------------------
Geothermal Carbon & Corporate & Unallocated Totals
& Power Minerals -----------------------------------------------
Operations Admin Net Int Environmental
& General Exp & Litigation Other (a)
--------------------------------------------------------------------------------
External sales & operating revenues ................ $ 41 $ 49 $ -- $ -- $ -- $ -- $2,024
Other revenues (loss) .............................. 2 8 -- 8 -- 126 224
Inter-segment revenues ............................. -- -- -- -- -- (477) --
--------------------------------------------------------------------------------
Total .............................................. 43 57 -- 8 -- (351) 2,248
Earnings from continuing operations ................ 5 6 (21) (37) (33) 55 250
Earnings from discontinued operations .............. -- -- -- -- -- 14 14
--------------------------------------------------------------------------------
Net earnings (loss) ................................ 5 6 (21) (37) (33) 69 264
Assets (at June 30,2000) (b) ....................... 560 297 -- -- -- 1,697 (b) 9,447
<FN>
(a) Includes eliminations and consolidation adjustments.
(b) Includes assets for discontinued operations(Agricultural Products) of $298 million.
</FN>
--------------------------------------------------------------------------------
Segment Information Exploration & Production Global Pipelines
For the Three Months North America International Trade
ended June 30, 1999 ------------------------------ --------------------
Millions of dollars Far
Lower 48 Alaska Canada East Other
--------------------------------------------------------------------------------
................................................
External sales & operating revenues ................ $ 27 $ 29 $ 28 $ 180 $ 20 $1,022 $ 9
Other revenues (loss) .............................. 4 -- 4 (3) 1 -- 16
Inter-segment revenues ............................. 234 16 -- 45 14 2 3
--------------------------------------------------------------------------------
Total .............................................. 265 45 32 222 35 1,024 28
Earnings from continuing operations ................ 13 4 5 41 (4) -- 16
Earnings from discontinued operations .............. -- -- -- -- -- -- --
--------------------------------------------------------------------------------
Net earnings (loss) ................................ 13 4 5 41 (4) -- 16
Assets (at December 31, 1999) ...................... 2,178 326 946 1,856 586 439 299
--------------------------------------------------------------------------------
Geothermal Carbon & Corporate & Unallocated Totals
& Power Minerals -----------------------------------------------
Operations Admin Net Int Environmental
& General Exp & Litigation Other (a)
--------------------------------------------------------------------------------
External sales & operating revenues ................ $ 32 $ 36 $ -- $ -- $ -- $ (1) $1,382
Other revenues (loss) .............................. 17 7 -- 5 -- 9 60
Inter-segment revenues ............................. -- -- -- -- -- (314) --
--------------------------------------------------------------------------------
Total .............................................. 49 43 -- 5 -- (306) 1,442
Earnings from continuing operations ................ 10 4 (21) (34) (7) (21) 6
Earnings from discontinued operations .............. -- -- -- -- -- 3 3
--------------------------------------------------------------------------------
Net earnings (loss) ................................ 10 4 (21) (34) (7) (18) 9
Assets (at December 31, 1999) (b) .................. 532 277 -- -- -- 1,528 (b) 8,967
<FN>
(a) Includes eliminations and consolidation adjustments.
(b) Includes assets for discontinued operations (Agricultural Products) of $289 million.
</FN>
-13-
--------------------------------------------------------------------------------
Segment Information Exploration & Production Global Pipelines
For the Six Months North America International Trade
ended June 30, 2000 ------------------------------ --------------------
Millions of dollars Far
Lower 48 Alaska Canada East Other
--------------------------------------------------------------------------------
................................................
External sales & operating revenues ................ $ 57 $ 120 $ 64 $ 455 $ 66 $2,905 $ 17
Other revenues (loss) .............................. 68 -- 8 (4) 3 -- 29
Inter-segment revenues ............................. 673 33 -- 112 55 2 6
--------------------------------------------------------------------------------
Total .............................................. 798 153 72 563 124 2,907 52
Earnings from continuing operations ................ 197 47 (7) 170 17 4 30
Earnings from discontinued operations .............. -- -- -- -- -- -- --
--------------------------------------------------------------------------------
Net earnings (loss) ................................ 197 47 (7) 170 17 4 30
Assets (at June 30, 2000) .......................... 2,519 307 1,129 1,960 617 58 303
--------------------------------------------------------------------------------
Geothermal Carbon & Corporate & Unallocated Totals
& Power Minerals -----------------------------------------------
Operations Admin Net Int Environmental
& General Exp & Litigation Other (a)
--------------------------------------------------------------------------------
External sales & operating revenues ................ $ 77 $ 90 $ -- $ -- $ -- $ -- $3,851
Other revenues (loss) .............................. 8 15 -- 14 -- 137 278
Inter-segment revenues ............................. -- -- -- -- -- (881) --
--------------------------------------------------------------------------------
Total .............................................. 85 105 -- 14 -- (744) 4,129
Earnings from continuing operations ................ 14 13 (43) (73) (38) 43 374
Earnings from discontinued operations .............. -- -- -- -- -- 23 23
--------------------------------------------------------------------------------
Net earnings (loss) ................................ 14 13 (43) (73) (38) 66 397
Assets (at June 30,2000) (b) ....................... 560 297 -- -- -- 1,697 (b) 9,447
<FN>
(a) Includes eliminations and consolidation adjustments.
(b) Includes assets for discontinued operations(Agricultural Products) of $298 million.
</FN>
--------------------------------------------------------------------------------
Segment Information Exploration & Production Global Pipelines
For the Six Months North America International Trade
ended June 30, 1999 ------------------------------ --------------------
Millions of dollars Far
Lower 48 Alaska Canada East Other
--------------------------------------------------------------------------------
................................................
External sales & operating revenues ................ $ 61 $ 53 $ 47 $ 335 $ 45 $1,790 $ 19
Other revenues (loss) .............................. 6 -- 7 (2) 3 -- 31
Inter-segment revenues ............................. 418 33 -- 87 14 3 5
--------------------------------------------------------------------------------
Total .............................................. 485 86 54 420 62 1,793 55
Earnings from continuing operations ................ 14 6 9 89 (23) 2 33
Earnings from discontinued operations .............. -- -- -- -- -- -- --
--------------------------------------------------------------------------------
Net earnings (loss) ................................ 14 6 9 89 (23) 2 33
Assets (at December 31, 1999) ...................... 2,178 326 946 1,856 586 439 299
--------------------------------------------------------------------------------
Geothermal Carbon & Corporate & Unallocated Totals
& Power Minerals -----------------------------------------------
Operations Admin Net Int Environmental
& General Exp & Litigation Other (a)
--------------------------------------------------------------------------------
External sales & operating revenues ................ $ 77 $ 79 $ -- $ -- $ -- $ 2 $2,508
Other revenues (loss) .............................. 5 16 -- 11 -- 25 102
Inter-segment revenues ............................. -- -- -- -- -- (560) --
--------------------------------------------------------------------------------
Total .............................................. 82 95 -- 11 -- (533) 2,610
Earnings from continuing operations ................ 10 13 (42) (65) (12) (24) 10
Earnings from discontinued operations .............. -- -- -- -- -- 6 6
--------------------------------------------------------------------------------
Net earnings (loss) ................................ 10 13 (42) (65) (12) (18) 16
Assets (at December 31, 1999) (b) .................. 532 277 -- -- -- 1,528 (b) 8,967
<FN>
(a) Includes eliminations and consolidation adjustments.
(b) Includes assets for discontinued operations (Agricultural Products) of $289 million.
</FN>
-14-
OPERATING HIGHLIGHTS
(UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
North America Net Daily Production
Crude oil (thousand barrels)
.......................................................................
Lower 48 (a) ......................................................... 44 40 44 40
Alaska ............................................................... 26 28 26 28
Canada (a) ........................................................... 15 12 16 10
- ------------------------------------------------------------------------------------------------------------------------------------
Total North America crude oil ................................... 85 80 86 78
Natural gas - wet basis (million cubic feet)
Lower 48 (a) ......................................................... 756 764 744 772
Alaska ............................................................... 138 131 146 137
Canada (a) ........................................................... 94 59 97 31
- ------------------------------------------------------------------------------------------------------------------------------------
Total North America natural gas ................................. 988 954 987 940
North America Average Prices (b)
Crude oil (per barrel)
Lower 48 ............................................................. $27.12 $14.98 $27.16 $13.15
Alaska ............................................................... $23.81 $12.02 $23.25 $10.01
Canada ............................................................... $18.50 $11.91 $18.86 $11.01
Average North America crude oil prices .......................... $24.51 $13.47 $24.40 $11.72
Natural gas (per mcf)
Lower 48 ............................................................. $3.41 $2.05 $2.96 $2.01
Alaska ............................................................... $1.20 $1.20 $1.20 $1.20
Canada ............................................................... $1.50 $1.90 $1.49 $1.90
Average North America natural gas prices ........................ $2.89 $1.93 $2.53 $1.88
International Net Daily Production (c)
Crude oil (thousand barrels)
Far East ............................................................. 71 72 71 71
Other ................................................................ 19 23 19 23
- ------------------------------------------------------------------------------------------------------------------------------------
Total International crude oil ................................... 90 95 90 94
Natural gas - wet basis (million cubic feet)
Far East ............................................................. 945 851 928 840
Other ................................................................ 58 29 60 33
- ------------------------------------------------------------------------------------------------------------------------------------
Total International natural gas ................................. 1,003 880 988 873
International Average Prices (b)
Crude oil (per barrel)
Far East ............................................................. $24.40 $14.76 $24.03 $12.59
Other ................................................................ $26.38 $14.26 $26.19 $12.75
Average International crude oil prices .......................... $25.10 $14.61 $24.67 $12.64
Natural gas (per mcf)
Far East ............................................................. $2.31 $2.03 $2.30 $1.95
Other ................................................................ $2.80 $1.89 $2.76 $1.81
Average International natural gas prices ........................ $2.35 $2.02 $2.34 $1.95
Worldwide Net Daily Production (a) (c) ....................................
Crude oil (thousand barrels) ............................................ 175 175 176 172
Natural gas (million cubic feet) ........................................ 1,991 1,834 1,975 1,813
Barrels oil equivalent (thousands) ...................................... 507 481 506 474
Worldwide Average Prices (b)
Crude oil (per barrel) .................................................. $24.78 $13.99 $24.51 $12.16
Natural gas (per mcf) ................................................... $2.62 $1.97 $2.44 $1.92
<FN>
(a) includes 100 percent of production of consolidated subsidiaries and
proportionate shares of production of equity affiliates.
(b) average prices include hedging gains and losses but exclude gains or losses
on derivative positions not accounted for as hedges and other Global Trade
margins.
(c) includes production of certain host countries' shares of: Crude oil...... 27 26 28 19
Natural gas ... 117 77 114 74
</FN>
-15-
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 1999 Annual
Report on Form 10-K and in Item 2 of Part I of the company's First Quarter 2000
Quarterly Report of Form 10-Q. See also note 17 to the consolidated financial
statements in Item 1 of this report for revisions in the company's reportable
segments.
CONSOLIDATED RESULTS
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
............................................................
Earnings from continuing operations ............................ $ 250 $ 6 $ 374 $ 10
Earnings from discontinued operations .......................... 14 3 23 6
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings ................................................... $ 264 $ 9 $ 397 $ 16
==================================================================================================================================
Earnings from continuing operations totaled $250 million in the second quarter
of 2000, which was an increase of $244 million from the same period a year ago.
The increase was primarily due to higher average crude oil and natural gas
prices. The company's worldwide average crude oil price was $24.78 per barrel in
the second quarter of 2000, which was an increase of $10.79 per barrel, or 77
percent, from the same period a year ago. The company's worldwide average
natural gas price was $2.62 per thousand cubic feet (mcf) in the second quarter
of 2000, which was an increase of $0.65 per mcf, or 33 percent, from the same
period a year ago. The second quarter of 2000 also benefited from lower
worldwide dry hole costs compared with the same period a year ago. The second
quarter of 2000 included a $55 million after-tax benefit (net of related costs)
from payments received for infringement of one of the company's five
reformulated gasoline patents during a five-month period in 1996. The company
also recorded $21 million after-tax related to an insurance recovery and a $42
million after-tax gain from the Pure Resources, Inc. (Pure) transaction (see
note 14 to the consolidated financial statements in Item 1 for further detail).
These positive factors in the second quarter of 2000 were partially offset by
$30 million after-tax in higher litigation and environmental costs and $6
million after-tax losses related to non-hedging commodity derivative positions.
In the second quarter of 1999, the company recorded $2 million after-tax gains
related to such contracts. The second quarter of 2000 was negatively impacted by
higher depreciation, depletion and amortization expense compared with the same
period a year ago. The second quarter of 1999 included an $11 million after-tax
restructuring provision.
Earnings from continuing operations totaled $374 million for the first six
months of 2000, which was an increase of $364 million from the same period a
year ago. Higher average crude oil and natural gas prices were major factors for
the increase. The company's worldwide average crude oil price was $24.51 per
barrel for the first six months of 2000, which was an increase of $12.35 per
barrel, or 102 percent, from the same period a year ago. The company's worldwide
average natural gas price was $2.44 per mcf for the first six months of 2000,
which was an increase of $0.52 per mcf, or 27 percent, from the same period a
year ago. The first six months of 2000 also benefited from lower dry hole costs
compared with the same period a year ago. The first six months of 2000 included
the aforementioned $55 million after-tax benefit related to the reformulated
gasoline patent infringement payments, the $21 million after-tax insurance
recovery and the $42 million after-tax gain from the Pure transaction. These
positive factors in the first six months of 2000 were partially offset by $31
million after-tax in higher litigation and environmental costs, higher
depreciation, depletion and amortization expense and a $ 12 million after-tax
loss related to non-hedging commodity derivative positions. During the first six
months of 1999, the company recorded $4 million after-tax gains on its
non-hedging commodity derivative positions. The first
-16-
six months of 1999 included an after-tax loss of $10 million from the sale of
the company's interest in a geothermal steam production operation at The Geysers
in Northern California.
The company's Agricultural Products business, whose sale is pending and is
therefore reported in discontinued operations, had higher earnings of $11
million and $17 million in the second quarter and first six months periods of
2000, respectively, compared with the same periods a year ago. The sale of the
business is dependent on clearance by the U.S. Federal Trade Commission.
The following is a reconciliation of consolidated adjusted (excluding special
items) after-tax earnings to net earnings for the second quarter and six months
periods, ending June 30:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
............................................................
Adjusted after-tax earnings from continuing operations (a) ..... $ 170 $ 16 $ 309 $ 33
Adjusted after-tax earnings from discontinued operations ....... -- 3 -- 6
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings ............................... $ 170 $ 19 $ 309 $ 39
Special items:
Asset sales ............................................... 42 -- 42 (10)
Environmental and litigation provisions/settlements ....... (29) 1 (33) (2)
Insurance benefits related to environmental issues ........ 21 -- 21 --
Reformulated gasoline patent case ......................... 55 -- 55 --
Restructuring costs ....................................... -- (11) (11) (11)
Executive stock purchase program .......................... (9) -- (9) --
Gain on disposal - Agricultural products .................. 14 -- 23 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total special items ....................................... 94 (10) 88 (23)
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (a) ............................................... $ 264 $ 9 $ 397 $ 16
==================================================================================================================================
<FN>
(a) Includes minority interests of: ........................... $ 6 $ (4) $ 10 $ (4)
</FN>
-17-
EXPLORATION AND PRODUCTION
The company engages in oil and gas exploration, development, and production
worldwide.
North America - Included in this category are the U.S. Lower 48, Alaska, and
Canada oil and gas operations. In 2000, this category was changed from U. S. to
North America, which now includes Canada. The emphasis of the U.S. Lower 48
operations is on the onshore, continental shelf and deepwater areas of the Gulf
of Mexico region and on the Permian Basin in West Texas. A substantial portion
of the crude oil and natural gas produced in the U.S. Lower 48 operations is
sold to the company's Global Trade segment. The remainder of North American
production, including the production of the company's Northrock Resources Ltd.
(Northrock) subsidiary, is sold to third parties or, in the case of Alaska
natural gas production, used in the company's agricultural products operations.
In addition, Northrock and Pure Resources, Inc. (Pure) take pricing positions in
hydrocarbon derivative instruments in support of their oil and gas operations.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings (loss) (before special items)
............................................................
Lower 48 (a) .............................................. $ 92 $ 6 $ 155 $ 7
Alaska .................................................... 23 6 47 8
Canada (b) ................................................ (11) 5 (7) 9
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings (before special items) (a) (b) ..... 104 17 195 24
Special items:
Asset sales (Lower 48) .................................... 42 -- 42 --
Litigation provisions/settlements (Lower 48) .............. -- 7 -- 7
Litigation provisions (Alaska) ............................ 1 (2) -- (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Total special items ....................................... 43 5 42 5
- ----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings (a) (b) ..................................... $ 147 $ 22 $ 237 $ 29
==================================================================================================================================
<FN>
(a) Includes minority interests of: ........................... $ (6) $ (4) $ (11) $ (3)
(b) Includes minority interests of: ........................... $ 12 $ (1) $ 20 $ (1)
</FN>
After-tax earnings totaled $147 million in the second quarter of 2000, which was
an increase of $125 million from the same period a year ago. This increase was
primarily due to higher North America average crude oil prices and higher U.S.
Lower 48 average natural gas prices. North America crude oil prices averaged
$24.51 per barrel in the second quarter of 2000, which was an increase of $11.04
per barrel, or 82 percent, from the same period a year ago. The average natural
gas price in the U.S. Lower 48 was $3.41 per mcf in the second quarter of 2000,
which was an increase of $1.36 per mcf, or 66 percent, from the same period a
year ago. The second quarter of 2000 benefited from lower dry hole costs
compared with the second quarter of 1999, which included significant dry hole
costs from the Gulf of Mexico deepwater drilling program. The second quarter of
2000 also included a $42 million after-tax gain related to the Pure transaction.
These positive results were partially offset by losses of $12 million after-tax
related to non-hedging commodity derivative positions of Northrock. See
information on commodity derivative activities included in note 9 to the
consolidated financial statements in Item 1. In addition, the second quarter of
2000 reflects higher depreciation, depletion and amortization expense in Canada
primarily reflecting the inclusion of Northrock operations for the entire three
months of the second quarter 2000 versus one month in the second quarter of
1999.
After-tax earnings totaled $237 million for the first six months of 2000, which
was an increase of $208 million from the same period a year ago. This increase
was primarily due to higher North America average crude oil prices, higher U.S.
Lower 48 average natural gas prices and lower dry hole costs for the U.S. Lower
48. The average North America crude oil price was $24.40 per barrel for the
first six months of 2000, which was an increase of $12.68 per barrel, or 108
percent, from the same period a year ago.
-18-
The average natural gas price in the U.S. Lower 48 was $2.96 per mcf for the
first six months of 2000,which was an increase of $0.95 per mcf, or 47 percent,
from the same period a year ago. The first six months of 2000 results also
benefited from lower dry hole costs in the U.S. Lower 48 and the $42 million
after-tax gain related to the Pure transaction. These positive results were
partially offset by losses totaling $19 million related to non-hedging commodity
derivative positions of Northrock and the aforementioned higher depreciation,
depletion and amortization expense.
International - Includes the company's oil and gas exploration and production
activities outside of North America. The company operates or participates in
production operations in Thailand, Indonesia, The Netherlands, Azerbaijan,
Myanmar, Bangladesh and the Democratic Republic of Congo. International
operations also include the company's exploration activities and the development
of energy projects primarily in Asia, Latin America and West Africa.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings (loss) (before special items)
............................................................
Far East .................................................. $ 88 $ 39 $170 $ 87
Other ..................................................... 19 (4) 17 (23)
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings (before special items) ............. 107 35 187 64
Special items:
Litigation proceeds (Far East) ............................ -- 2 -- 2
- ----------------------------------------------------------------------------------------------------------------------------------
Total special items ....................................... -- 2 -- 2
- ----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings ............................................. $ 107 $ 37 $187 $ 66
==================================================================================================================================
After-tax earnings totaled $107 million in the second quarter of 2000, which was
an increase of $70 million from the same period a year ago. The increase was
primarily due to higher international average crude oil and natural gas prices.
The International average crude oil price was $25.10 per barrel in the second
quarter of 2000, which was an increase of $10.49 per barrel, or 72 percent, from
the same period a year ago. International's average natural gas price was $2.35
per mcf in the second quarter of 2000, which was an increase of $0.33 per mcf,
or 16 percent, from the same period a year ago. The second quarter of 2000 also
benefited from higher Far East natural gas volumes, primarily in Thailand, and
lower effective tax rates, primarily due to a change in the Thai baht foreign
exchange rate. These positive results were partially offset by higher
depreciation, depletion and amortization expense in Thailand and Indonesia and
higher dry hole costs, primarily in Brunei.
After-tax earnings totaled $187 million for the first six months of 2000, which
was an increase of $121 million from the same period a year ago. The increase
was primarily due to higher average international crude oil and natural gas
prices. International's average crude oil price was $24.67 per barrel for the
first six months of 2000, which was an increase of $12.03 per barrel, or 95
percent, from the same period a year ago. International's average natural gas
price was $2.34 per mcf for the first six months of 2000, which was an increase
of $0.39 per mcf, or 20 percent, from the same period a year ago. The first six
months of 2000 also benefited from higher Far East natural gas volumes,
primarily in Thailand, and a lower effective tax rates, primarily due to a
change in the Thai baht foreign exchange rate. These positive results were
partially offset by higher depreciation, depletion and amortization expense,
primarily in Thailand and Indonesia.
-19-
GLOBAL TRADE
The Global Trade segment conducts most of the company's worldwide crude oil,
condensate and natural gas trading and marketing activities, excluding
Northrock, 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 royalty
owners, joint venture partners and other unaffiliated oil and gas producing and
trading companies for resale. In addition, Global Trade takes pricing positions
in hydrocarbon derivative instruments. The Pipelines business unit has been
segregated from the Global Trade segment.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
............................................................
Adjusted after-tax earnings (before special items) ............. $ 6 $ -- $ 4 $ 2
Special items: ................................................. -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings ............................................. $ 6 $ -- $ 4 $ 2
==================================================================================================================================
After-tax earnings totaled $6 million and $4 million for the second quarter and
first six months of 2000, respectively, which was an increase of $6 million and
$2 million from the same periods a year ago, respectively. The increase in the
second quarter and first six months of 2000 from the same periods a year ago was
primarily due to higher mark to market gains on derivatives trading and higher
margins on domestic crude oil and natural gas sales.
PIPELINES
The Pipelines business segment principally includes the company's equity
interests in affiliated petroleum pipeline companies and wholly-owned pipeline
systems throughout the U.S.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
............................................................
Adjusted after-tax earnings (before special items) ............. $ 15 $ 16 $ 30 $ 33
Special items: ................................................. -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings ............................................. $ 15 $ 16 $ 30 $ 33
==================================================================================================================================
After-tax earnings totaled $15 million and $30 million for the second quarter
and first six months of 2000, respectively, which was a decrease of $1 million
and $3 million from the same periods a year ago, respectively. The decrease in
the first six months of 2000 was primarily due to lower throughput volumes.
-20-
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 equity interest in a gas-fired power plant in Thailand, scheduled to come on
line in the second half of 2000. In 2000, the company's non-exploration and
production business development activities, primarily power-related, are now
also included in the Geothermal and Power Operations segment.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
............................................................
Adjusted after-tax earnings (before special items) ............. $ 5 $ 10 $ 14 $ 20
Special items:
Asset sales (a) ........................................... -- -- -- (10)
- ----------------------------------------------------------------------------------------------------------------------------------
Total special items ....................................... -- -- -- (10)
- ----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings ............................................. $ 5 $ 10 $ 14 $ 10
==================================================================================================================================
<FN>
(a) Represents loss on the sale of a geothermal production operation at The
Geysers in Northern California.
</FN>
After-tax earnings totaled $5 million in the second quarter of 2000, which was a
decrease of $5 million from the same period a year ago. This decrease is
primarily due to the recognition of a fee earned in the second quarter of 1999
related to the construction of the Salak power plant units 4 through 6 in
Indonesia. In addition, the Indonesian operations recorded higher foreign
exchange losses, in the second quarter of 2000, due to a decline in the value of
the Indonesian Rupiah. These negative factors were partially offset by higher
steam sales in the Philippines and higher electricity generation and steam sales
in Indonesia.
After-tax earnings totaled $14 million in the first six months of 2000, which
was an increase of $4 million from the same period a year ago. The first six
months of 1999 included an after-tax loss of $10 million from the sale of the
company's interest in a geothermal steam production operation at The Geysers in
Northern California, which was partially offset by the aforementioned fee earned
related to the construction of the Salak power plant units 4 through 6 in
Indonesia. The Indonesia operations recorded higher foreign exchange losses for
the first six months of 2000, which was partially offset by higher steam sales
in Indonesia and the Philippines and higher electricity generation in Indonesia.
CARBON AND MINERALS
The Carbon and Minerals business segment produces and markets petroleum coke,
graphites and specialty minerals, including lanthanides, molybdenum and niobium.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
............................................................
Adjusted after-tax earnings (before special items) (a) ......... $ 6 $ 7 $ 14 $ 16
Special items:
Environmental, litigation and other provisions ............ -- (3) (1) (3)
- ----------------------------------------------------------------------------------------------------------------------------------
Total special items ....................................... -- (3) (1) (3)
- ----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings (a) ......................................... $ 6 $ 4 $ 13 $ 13
==================================================================================================================================
<FN>
(a) Includes minority interests of: ........................... $ (1) $ -- $ (1) $ (1)
</FN>
After-tax earnings totaled $6 million in the second quarter of 2000, which was
an increase of $2 million from the same period a year ago. The second quarter of
1999 earnings included environmental and litigation provisions. The second
quarter of 2000 results reflect lower earnings from specialty minerals
operations.
-21-
After-tax earnings remained unchanged for the first six months of 2000 from the
same period a year ago. In the first six months of 2000, lower environmental and
litigation provisions were offset by lower affiliate earnings in Brazil and
lower graphite results.
CORPORATE AND UNALLOCATED
Corporate and Unallocated expense include general corporate overhead,
miscellaneous operations, including real estate activities and other unallocated
costs. Net interest expense represents interest expense, net of interest income
and capitalized interest.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings effect (before special items)
............................................................
Administrative and general expense ........................ $ (21) $ (21) $ (43) $ (42)
Net interest expense ...................................... (37) (34) (73) (65)
Environmental and litigation expense ...................... (3) (4) (6) (6)
Other (a) ................................................. (12) (10) (13) (13)
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings effect (before special items) (a) .. (73) (69) (135) (126)
Special items:
Environmental and litigation provisions ................... (30) (3) (32) (6)
Insurance benefits related to environmental issues (Other) 21 -- 21 --
Reformulated gasoline patent case (Other) ................. 55 -- 55 --
Restructuring costs (Other) ............................... -- (11) (11) (11)
Executive stock purchase program (Other) .................. (9) -- (9) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total special items ....................................... 37 (14) 24 (17)
- ----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings effect (a) .................................. $ (36) $ (83) $(111) $(143)
==================================================================================================================================
<FN>
(a) Includes minority interests of: ........................... $ 1 $ 1 $ 2 $ 1
</FN>
After-tax earnings effect was a loss of $36 million in the second quarter of
2000, which was an improvement of $47 million from the same period a year ago.
The company recorded a $55 million after-tax benefit related to the payments
received (net of associated costs) for its reformulated gasoline patent case and
a $21 million after-tax insurance recovery related to environmental issues.
These positive factors were offset by higher environmental and litigation
provisions, compensation expense related to an executive stock purchase program
and higher net interest expense, primarily due to the consolidation of Northrock
and Pure debt and lower capitalized interest. The second quarter of 1999
included an after-tax restructuring charge of $11 million.
After-tax earnings effect was a loss of $111 million for the first six months of
2000, which was an improvement of $32 million from the same period a year ago.
The company recorded the aforementioned $55 million after-tax benefit related to
its reformulated gasoline patent case and a $21 million after-tax insurance
recovery. These positive factors were offset by higher environmental and
litigation provisions, compensation expense related to an executive stock
purchase program and higher net interest expense, primarily due to the
consolidation of Northrock and Pure debt and lower capitalized interest.
-22-
DISCONTINUED OPERATIONS
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
Millions of dollars 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
............................................................
Adjusted after-tax earnings (before special items) ............. $ -- $ 3 $ -- $ 6
Special items:
Gain on disposal - Agricultural products .................. 14 -- 23 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total special items ....................................... 14 -- 23 --
- ----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings ............................................. $ 14 $ 3 $ 23 $ 6
==================================================================================================================================
The Agricultural Products business reported earnings of $14 million in the
second quarter of 2000, which was an increase of $11 million from the same
period a year ago. The increase was primarily due to higher agricultural
commodity prices partially offset by lower urea export volumes.
Agricultural Products earnings totaled $23 million for the first six months of
2000, which was an increase of $17 million from the same period a year ago. The
increase was primarily due to higher agricultural commodity prices.
FINANCIAL CONDITION AND CAPITAL EXPENDITURES
For the first six months of 2000, net cash flow provided by operating activities
was $768 million compared with $170 million in the same period a year ago. This
increase primarily reflects the effects of higher worldwide crude oil and
natural gas prices. The first six months of 2000 also included the payments
received for infringement of one of the company's reformulated gasoline patents
and an insurance recovery related to environmental issues. Working capital and
other changes in the first six months of 2000 included benefits from the effects
of decreases in net foreign income tax payments and the sale of certain domestic
trade receivables. Working capital and other changes also included the negative
effect of increases in accounts receivable from geothermal related sales in
Indonesia.
Pre-tax proceeds from asset sales, including discontinued operations, were $92
million for the first six months of 2000. The proceeds consisted of $67 million
from the sale of certain oil and gas properties and other miscellaneous
properties. Pre-tax proceeds also included $25 million received from Tosco
Corporation associated with a participation agreement involving certain gasoline
margins related to the sale, in 1997, of the company's former West Coast
refining, marketing and transportation assets.
Capital spending for the first six months of 2000 was $558 million compared with
$468 million in the same period a year ago. The capital spending for the first
six months of 2000 was higher than the same period of 1999 as it reflected six
months of expenditures by Northrock, while the first six months of 1999 included
capital expenditures only subsequent to the mid-May 1999 acquisition date. The
capital spending amounts exclude $161 million and $184 million from the first
six months of 2000 and 1999, respectively, related to the acquisition of
Northrock common shares.
Total capital expenditures, excluding the Northrock acquisition, are currently
expected to be approximately $1.3 billion in 2000. Of this total, about 60
percent will be spent in support of North American exploration and development
(E&P) programs, including the company's Gulf of Mexico deepwater drilling
program, with the bulk of the remainder for International E&P expenditures. The
company may adjust its capital spending forecast, later, depending on commodity
prices and acquisition opportunities.
-23-
The company's long-term debt, excluding the current portion, was $2.692 billion
at June 30, 2000, compared with $2.853 billion at year-end 1999. This decrease
primarily reflects the retirement of commercial paper borrowings and the
repayment of all outstanding borrowing under the $1 billion BankCredit
Agreement. The company also reclassified $91 million of long term debt to
current portion of long-term debt, reflecting its intent to repay notes
scheduled to mature within the next 12 months. These decreases were partially
offset by increases from the consolidation of the Pure debt and higher Northrock
borrowings.
ENVIRONMENTAL MATTERS
At June 30, 2000, the company's reserves for environmental remediation
obligations totaled $196 million, of which $120 million was included in current
liabilities. During the first six months of 2000, cash payments of $36 million
were applied against the reserve. The company also estimates that it possibly
could incur additional remediation costs aggregating approximately $230 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
June 30,
Millions of dollars 2000
- --------------------------------------------------------------------------------
Superfund and similar sites $ 7
Former company-operated sites 6
Company facilities sold with retained liabilities 35
Inactive or closed company facilities 103
Active company facilities 45
- --------------------------------------------------------------------------------
Total reserves $196
================================================================================
-24-
RESTRUCTURING
In February 2000, the company adopted a restructuring plan that resulted in the
accrual of a $11 million after-tax restructuring charge as reflected in the
company's first quarter of 2000 results. This amount included the estimated
costs of terminating approximately 195 employees. The plan involved the
simplifying of the organizational structure to align it with our portfolio
requirements and business needs. The charge was recorded in aggregate in
Corporate and Unallocated. Approximately $7 million of the after-tax
restructuring charge was related to the Exploration and Production segment. Cash
expenditures before taxes related to this restructuring plan are estimated to be
$14 million and $5 million in the years 2000 and 2001.
Approximately 125 of the affected employees were from various exploration and
production business units and 70 were from other organizations, including
corporate staff. At June 30, 2000, 157 employees (81 percent) had been
terminated or had received termination notices as a result of the plan with the
remaining terminations scheduled primarily for the third quarter of 2000.
In the second quarter of 1999, the company adopted a restructuring plan that
resulted in the accrual of a $11 million after-tax restructuring charge. This
amount included the estimated costs of terminating approximately 250 employees.
The plan involved the blending of several International and Geothermal
organizations, a manpower optimization program in Thailand, cost cutting and
efficiency initiatives and a company-wide shared resources initiative. The
charge was recorded in aggregate in Corporate and Unallocated. Approximately $8
million and $1 million of the after-tax charge related to the Exploration and
Production and Carbon and Minerals segments, respectively.
Approximately 100 of the affected employees were from the company's
International operations, 31 were from the Carbon and Minerals segment, 25 were
from the Alaska oil and gas operation and 94 were from other organizations,
including corporate staff. At June 30, 2000, 243 employees (96 percent) had been
terminated or had received termination notices as the result of the plan, with
additional terminations scheduled during early 2000.
In the fourth quarter of 1998, the company adopted a restructuring plan that
resulted in the accrual of a $17 million after-tax restructuring charge. This
amount included the estimated costs of terminating approximately 475 employees.
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. The restructuring charge was recorded in aggregate in Corporate and
Unallocated. Approximately $5 million, $3 million and $1 million of the
after-tax charge related to the Exploration and Production, Carbon and Minerals
and Pipelines segments, respectively.
Approximately 240 of the affected employees were from the company's mining
operations, 95 were from various exploration and production business units and
140 are support personnel at various locations. At June 30, 2000, 447 employees
(94 percent) were terminated or had received termination notices as a result of
the plan.
Cash expenditures before taxes related to the three restructuring plans in total
are estimated to be $26 million and $7 million in years 2000 and 2001,
respectively, including $15 million expended in the first six months of 2000.
The company expects the plans to reduce annualized salaries and benefits by an
estimated $75 million pre-tax. The company expects to fall short of the expected
number of terminations for the three plans combined by approximately 25
employees, however, no material adjustments to the amounts accrued are expected.
For more information on the restructuring charges, see note 13 to the
consolidated financial statements.
-25-
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 45 through 47 of Management's
Discussion and Analysis in Item 7 of the company's 1999 Annual Report on Form
10-K for a discussion of certain of such conditions and events.
The company is currently participating in delineation activity on the Timon
prospect on Green Canyon Block 563 in the deepwater Gulf of Mexico. This well is
a follow-up well to the K-2 well on Green Canyon Block 562. The company's share
of the cost of both wells is currently estimated to be $27 million.
In the second half of 2000, the company plans to drill two deepwater wildcat
wells in the Gulf of Mexico, with the arrival of the Discoverer Spirit
drillship, which is now scheduled for delivery in the third quarter of 2000. The
Dana Point prospect is expected to be the first prospect drilled using the new
drillship.
The 1999 "take-or-pay" obligation of the Petroleum Authority of Thailand (PTT)
with respect to natural gas produced in Myanmar for delivery to Thailand was
billed to PTT in late January of 2000. The company received $65 million,
representing its full entitlement under the gas sales contracts, when this
obligation was paid in full on August 1, 2000.
As of June 30, 2000, the company had a gross receivable balance of approximately
$234 million related to its geothermal operations in Indonesia. Approximately
$95 million was related to Gunung Salak electric generating Units 1, 2, and 3,
of which $92 million represents past due amounts and accrued interest resulting
from partial payments for March 1998 through June 2000. Although invoices
generally have not been paid in full, amounts that have been paid have been
received in a timely manner in accordance with the steam sales contract. The
remaining $139 million primarily relates to Salak electric generating Units 4, 5
and 6. Provisions covering a portion of these receivables have been recorded.
The company continues to pursue collection of the outstanding receivables.
In January 2000, the company reached agreement to sell its Agricultural Products
business to Agrium Inc., a Canadian-based company, for approximately $325
million and possible future consideration. Under the agreement, Unocal would
receive $250 million in cash plus $50 million in newly-issued Agrium six percent
junior convertible subordinated debentures and $25 million in Agrium common
stock at a four percent discount to market. In addition, the agreement provides
for a retaining interest in the form of participation payments to Unocal if
ammonia and urea prices rise above projected levels over the next six years. The
sale of the business unit is dependent on clearance by the U.S. Federal Trade
Commission.
In April 2000, the company engaged a financial advisor to assist in the possible
sale of Poco Graphite, Inc., a Texas-based subsidiary which produces specialty
graphite products, and certain other assets located in Illinois that manufacture
petroleum coke products. The company is currently in the process of evaluating
offers received from several interested parties.
In March 2000, the United States Court of Appeals for the Federal Circuit
affirmed a judgement of the U.S. District Court for the Central District of
California that upheld the validity of one of the company's reformulated motor
gasolines patents. Following a 1997 trial in the District Court, a jury had
found the patent was valid and that the six defendant companies had infringed
the patent with respect to 1.19 billion gallons, or 29.1 percent of the total
California reformulated gasoline manufactured by the defendants
-26-
between March 1, 1996, and July 31, 1996. The jury also awarded the company
5-3/4 cents per gallon in damages for this infringement. In June 2000, the
company received $91 million for the five-month period, which included interest
and attorney's fees. The company believes that its patents may offer significant
potential revenue. With the Court of Appeals decision, the company will now ask
the District Court for an accounting by the defendants of nationwide infringing
gallons manufactured by them for the period since August 1, 1996, to the
present, multiplied by 5-3/4-cents per gallon. The defendants have indicated
their intention to file a petition with the U.S. Supreme Court by mid-August to
seek its review of the decision of the Court of Appeals.
-27-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the values of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices. As part of its overall risk
management strategies, the company uses derivative financial instruments to
manage and reduce risks associated with these factors. The company also pursues
outright pricing positions in certain hydrocarbon derivative financial
instruments, such as futures contracts.
Interest Rate Risk - From time to time the company temporarily invests its
excess cash in interest-bearing securities issued by high-quality issuers.
Company policies limit the amount of investment to any one financial
institution. Due to the short time the investments are outstanding and their
general liquidity, these instruments are classified as cash equivalents in the
consolidated balance sheet and do not represent a material interest rate risk to
the company. The company's primary market risk exposure for changes in interest
rates relates to the company's long-term debt obligations. The company manages
its exposure to changing interest rates principally through the use of a
combination of fixed and floating rate debt. Interest rate risk sensitive
derivative financial instruments, such as swaps or options 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 June 30, 2000. Assuming a ten percent decrease in the
company's weighted average borrowing costs at June 30, 2000, the potential
increase in the fair value of the company's debt obligations and associated
interest rate derivative instruments, including the company's net interests in
the debt obligations and associated interest rate derivative instruments of its
subsidiaries, would have been approximately $113 million at June 30, 2000.
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 their crude oil and
natural gas sales.
From time to time the company may purchase foreign currency options or enter
into foreign currency swap or foreign currency forward contracts to limit the
exposure related to its foreign currency debt or other obligations. At June 30,
2000, the company had various foreign currency swaps and foreign currency
forward contracts outstanding to hedge its Canadian dollar denominated debt and
other local currency obligations in Canada, Thailand and The Netherlands. The
company evaluated the effect that near term changes in foreign exchange rates
would have had on the fair value of the company's combined foreign currency
position related to its outstanding foreign currency swaps and forward
contracts. Assuming an adverse change of ten percent in foreign exchange rates
at June 30, 2000, the potential decrease in fair value of the company's foreign
currency forward contracts, foreign-currency denominated debt, foreign currency
swaps and foreign currency forward contracts of its subsidiaries, would have
been approximately $21 million at June 30, 2000.
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 (derivatives), such as
futures contracts, swaps and options to mitigate its overall exposure to
fluctuations in hydrocarbon commodity prices. The company may also enter into
derivatives to hedge contractual delivery commitments and future crude oil and
natural gas production against price exposure.
-28-
The company also actively trades derivatives, primarily exchange regulated
futures and options contracts, subject to internal policy limitations.
The company uses a variance-covariance value at risk model to assess the market
risk of its hydrocarbon price sensitive (price sensitive) derivatives. Value at
risk represents the potential loss in fair value the company would experience on
its price sensitive derivatives, using calculated volatilities and correlations
over a specified time period with a given confidence level. The company's risk
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 price sensitive derivatives related to the company's fixed price and
pre-paid crude oil and pre-paid natural gas sales. The model also includes the
company's net interests in its subsidiaries' crude oil and natural gas
derivative instruments and forward sales contracts. Based upon the company's
risk model, the value at risk related to price sensitive derivative financial
instruments held for purposes other than trading was approximately $11 million
at June 30, 2000. The value at risk related to price sensitive derivative
financial instruments held for trading purposes was approximately $11 million at
June 30, 2000.
-29-
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, 1999 (1999 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, 2000
(First Quarter 2000 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 the lawsuit captioned Bridas Corporation v. Unocal Corporation,
described in Paragraph 1 of Item 3 of the 1999 Form 10-K and in Paragraph 1
of Item 1 of Part II of the First Quarter 2000 Form 10-Q, in June 2000,
Bridas petitioned the Supreme Court of Texas to review the decision of the
Court of Appeals.
2. The Company has entered into negotiations with the U.S. Department of
Interior Minerals Management Service and the U.S. Department of Justice to
settle the matters involving claims for alleged underpayments of crude oil
royalties described in Paragraph 2 of Item 3 of the 1999 Form 10-K and
Paragraph 2 of Item 1 of Part II of the First Quarter 2000 Form 10-Q,
including the lawsuit captioned Union Oil Company of California v. Bruce
Babbitt, et al., and described in Paragraph 3 of Item 3 of the 1999 Form
10-K and Paragraph 3 of Item 1 of Part II of the First Quarter 2000 Form
10-Q, including the company's involvement in the lawsuit captioned United
States, ex rel. Johnson v. Shell Oil Company et al.
3. In the lawsuits captioned John Doe I, et al. v. Unocal Corporation, et al.
and John Roe III, et al. v. Unocal Inc. [sic], et al., involving the
company's alleged liability for alleged acts by the government of Myanmar
in that country, and described in Paragraph 5 of Item 3 of the 1999 Form
10-K, the company's motions for summary judgment dismissing the actions
were heard in July 2000 and taken under submission by the trial court.
4. In the "Group 5 Lockheed Litigation Cases", described in Paragraph 6 of
Item 3 of the 1999 Form 10-K, in June 2000 the California Second District
Court of Appeal reversed the trial court award of compensatory and punitive
damages and remanded the cases to the trial court for retrial as to
compensatory damages only.
Certain Environmental Matters Involving Possible Civil Penalties
5. The lawsuit captioned The People of the State of California v. Union Oil
Company of California, et al., involving releases from underground fuel
storage tanks at six former service stations, and described in Paragraph 11
of Item 3 of the 1999 Form 10-K, was served on the company in July 2000.
-30-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2000 Annual Meeting of Stockholders of Unocal was held on May 22, 2000. The
following actions were taken by the stockholders at the Annual Meeting, for
which proxies were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934, as amended:
1. The four nominees proposed by the board of directors were elected as
directors by the following votes for three-year terms expiring at the 2003
Annual Meeting of Stockholders, or until their successors are duly elected
and qualified:
Name Votes For Votes Withheld
John W. Amerman 211,287,129 4,486,603
Roger C. Beach 210,253,171 5,520,561
John W. Creighton Jr. 211,551,298 4,222,434
Kevin W. Sharer 211,629,776 4,143,956
2. A proposal to ratify the appointment of PricewaterhouseCoopers LLP as
Unocal's independent accountants for 2000 was passed by a vote of
213,588,689 for versus 1,329,341 against and 855,702 abstentions. There
were no broker non-votes.
3. A proposal to approve the 2000 Executive Stock Purchase Program was passed
by a vote of 162,613,809 for versus 30,783,547 against and 2,142,890
abstentions. There were 20,233,486 broker non-votes.
4. A proposal to approve amendments to the 1998 Management Incentive Program
was passed by a vote of 179,026,886 for versus 34,713,168 against and
2,033,678 abstentions. There were no broker non-votes.
5. A stockholder proposal to link compensation and bonus packages of Unocal's
executives to the company's ethical and social performance failed to pass,
with a vote of 32,521,206 for versus 158,799,796 against and 4,214,156
abstentions. There were 20,238,574 broker non-votes.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The Exhibit Index on page 34 of this report lists the
exhibits that are filed as part of this report.
(b) Reports on Form 8-K:
Filed during the second quarter of 2000
1. Current Report on Form 8-K dated April 10, 2000, and filed April 12,
2000, for the purpose of reporting, under Item 5, the company's intent
to make a conditional offer to purchase the remaining shares of
Northrock Resources Ltd. (Northrock).
2. Current Report on Form 8-K dated April 25, 2000, and filed May 1,
2000, for the purpose of reporting, under Item 5, the company's first
quarter 2000 earnings and related information; and other matters
relating to forecast earnings for the year 2000 and possible future
asset sales.
3. Current Report on Form 8-K dated May 18, 2000, and filed May 23, 2000,
for the purpose of reporting, under Item 5, the company's update of
its reformulated patent case and the company's offer to purchase the
remaining shares of Northrock.
4. Current Report on Form 8-K dated May 25, 2000, and filed May 31, 2000,
for the purpose of reporting, under Item 5, the company's completion
of the merger of its oil and gas exploration and production assets in
the Permian and San Juan basins with Titan Exploration, Inc., in a new
publicly traded company named Pure Resources, Inc.
5. Current Report on Form 8-K dated June 15, 2000, and filed June 23,
2000, for the purpose of reporting, under Item 5, the company's
acquisition of the remaining shares of Northrock and the company's
receipt of the jury award relating to the reformulated gasoline patent
case.
Filed during the third quarter of 2000 to the date hereof:
1. Current Report on Form 8-K dated July 27, 2000, and filed August 2,
2000, for the purpose of reporting, under Item 5, the company's second
quarter 2000 earnings and related information; and other matters
relating to forecast earnings for the year 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNOCAL CORPORATION
(Registrant)
Dated: August 14, 2000 /s/ JOE D. CECIL
-----------------------------
Joe D. Cecil
Vice President and Comptroller
(Duly Authorized Officer
Principal Accounting Officer)
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EXHIBIT INDEX
3. Bylaws of Unocal, as amended through May 22, 2000, and currently in effect.
10.1 Termination Agreement and Release, dated May 30, 2000, by and between
Unocal and Lucius E. (Ed) Scott.
10.2 Employment Agreement, effective as of May 30, 2000, by and between Unocal
and Terry G. Dallas.
12.1 Statement regarding computation of ratio of earnings to fixed charges of
Unocal Corporation for the three months ended June 30, 2000 and 1999.
12.2 Statement regarding computation of ratio of earnings to fixed charges of
Union Oil Company of California for the three months ended June 30, 2000
and 1999.
27. Financial data schedule for the period ended June 30, 2000 (included only
in the copy of this report filed electronically with the Commission).
99. Bylaws of Union Oil Company of California, as amended through May 22, 2000,
and currently in effect.
Copies of exhibits will be furnished upon request. Requests should be addressed
to the Corporate Secretary.
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