UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------------
Commission file number 1-8483
UNOCAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3825062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2141 ROSECRANS AVENUE, SUITE 4000, EL SEGUNDO, CALIFORNIA 90245
(Address of principal executive offices)
(Zip Code)
(310) 726-7600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
Number of shares of Common Stock, $1 par value, outstanding as of
October 31, 2001: 243,991,498
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 ............................................... 24
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 25
Item 3 Quantative and Qualitative Disclosures About Market Risk............ 38
PART II
Item 1 Legal Proceedings................................................... 40
Item 5 Other Information................................................... 40
Item 6 Exhibits and Reports on Form 8-K.................................... 41
SIGNATURES.................................................................. 42
EXHIBIT INDEX............................................................... 43
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED EARNINGS UNOCAL CORPORATION
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-----------------------------------------------------
Millions of dollars except per share amounts 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues $ 1,573 $ 2,333 $ 5,463 $ 6,199
Interest, dividends and miscellaneous income 8 9 27 152
Gain (loss) on sales of assets (2) 5 (1) 68
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 1,579 2,347 5,489 6,419
Costs and other deductions
Crude oil, natural gas and product purchases 617 1,377 2,141 3,572
Operating expense 352 322 1,011 846
Selling, administrative and general expense 25 21 96 106
Depreciation, depletion and amortization 270 239 783 669
Dry hole costs 53 47 140 98
Exploration expense 37 48 103 134
Interest expense 48 53 145 159
Property and other operating taxes 19 20 60 50
Distributions on convertible preferred securities of subsidiary trust 8 8 24 24
- -----------------------------------------------------------------------------------------------------------------------------
Total costs and other deductions 1,429 2,135 4,503 5,658
Earnings from equity investments 37 44 128 101
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes and minority interests 187 256 1,114 862
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes 77 67 447 309
Minority interests 8 13 38 3
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 102 176 629 550
Discontinued operations
Gain on disposal (net of tax) - 14 16 37
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from discontinued operations - 14 16 37
Cumulative effect of accounting change (net of tax) - - (1) -
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 102 $ 190 $ 644 $ 587
=============================================================================================================================
Basic earnings per share of common stock (a)
Continuing operations $ 0.42 $ 0.72 $ 2.59 $ 2.27
Discontinued operations - 0.06 0.06 0.15
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 0.42 $ 0.78 $ 2.65 $ 2.42
- -----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share of common stock (b)
Continuing operations $ 0.42 $ 0.71 $ 2.53 $ 2.23
Discontinued operations - 0.06 0.06 0.14
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 0.42 $ 0.77 $ 2.59 $ 2.37
- -----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share of common stock $ 0.20 $ 0.20 $ 0.60 $ 0.60
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Basic weighted average shares outstanding (in thousands) 243,601 242,888 243,426 242,822
(b) Diluted weighted average shares outstanding (in thousands) 244,566 256,005 256,812 255,774
See Notes to Consolidated Financial Statements.
</FN>
-1-
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
September 30, December 31,
-------------------------------------
Millions of dollars 2001 (a) 2000
- ------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 371 $ 235
Accounts and notes receivable 953 1,299
Inventories 92 88
Deferred income taxes 154 155
Other current assets 32 25
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 1,602 1,802
Investments and long-term receivables 1,446 1,379
Properties - net (b) 7,344 6,433
Deferred income taxes 133 231
Other assets 171 165
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 10,696 $ 10,010
========================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 894 $ 1,022
Taxes payable 258 282
Dividends payable 49 49
Interest payable 48 55
Current portion of environmental liabilities 117 124
Current portion of long-term debt and capital leases 9 114
Other current liabilities 154 199
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,529 1,845
Long-term debt and capital leases 2,850 2,392
Deferred income taxes 663 618
Accrued abandonment, restoration and environmental liabilities 595 554
Other deferred credits and liabilities 893 968
Minority interests 443 392
Company-obligated mandatorily redeemable convertible preferred securities
of a subsidiary trust holding solely parent debentures 522 522
Common stock ($1 par value, shares authorized: 750,000,000 (c)) 254 254
Capital in excess of par value 539 522
Unearned portion of restricted stock issued (20) (21)
Retained earnings 2,966 2,468
Accumulated other comprehensive income (86) (53)
Notes receivable - key employees (41) (40)
Treasury stock - at cost (d) (411) (411)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,201 2,719
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 10,696 $ 10,010
========================================================================================================================
<FN>
(a) Unaudited
(b) Net of accumulated depreciation, depletion and amortization of: $ 11,457 $ 10,745
(c) Number of shares outstanding (in thousands) 243,621 243,045
(d) Number of shares (in thousands) 10,623 10,623
See Notes to the Consolidated Financial Statements.
</FN>
-2-
CONSOLIDATED CASH FLOWS UNOCAL CORPORATION
(UNAUDITED)
For the Nine Months
Ended September 30,
----------------------------
Millions of dollars 2001 2000
- --------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net earnings $ 644 $ 587
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation, depletion and amortization 783 669
Dry hole costs 140 98
Deferred income taxes 113 (41)
(Gain) loss on sales of assets (pre-tax) 1 (68)
Gain on disposal of discontinued operations (pre-tax) (25) (23)
Earnings applicable to minority interests 38 3
Other 115 158
Working capital and other changes related to operations
Accounts and notes receivable 360 (178)
Inventories (4) 11
Accounts payable (194) 133
Taxes payable (24) 69
Other (167) (161)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,780 1,257
- --------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures (includes dry hole costs) (1,257) (872)
Major acquisitions (536) (161)
Proceeds from sales of assets 26 97
Proceeds from sale of discontinued operations 25 267
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,742) (669)
- --------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Long-term borrowings 467 45
Reduction of long-term debt and capital lease obligations (221) (266)
Minority interests (17) (19)
Proceeds from issuance of common stock 14 4
Dividends paid on common stock (146) (146)
Loans to key employees - (32)
Other 1 1
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 98 (413)
- --------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 136 175
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 235 332
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 371 $ 507
========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 150 $ 176
Income taxes (net of refunds) $ 354 $ 282
See Notes to the Consolidated Financial Statements.
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General
The consolidated financial statements included in this report 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 related notes filed with the
Commission in Unocal Corporation's 2000 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 entities
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 income taxes.
Results for the nine months ended September 30, 2001, 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 2001 presentation:
|X| The Pipelines business has been combined with certain activities of the
Company's gas storage businesses in Canada, which were previously reported
in the Exploration and Production segment, into a new segment called
Midstream.
|X| The Carbon and Minerals businesses are no longer disclosed as a separate
segment and are now reported in the Corporate and Other heading.
-4-
(2) Accounting Changes
ADOPTION OF NEW ACCOUNTING STANDARDS - Effective January 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) and Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" (SFAS 138). These standards require
that all derivative instruments be recorded on the balance sheet at their fair
values. Changes in the fair values of derivative instruments are reported in
current-period earnings unless they are designated and qualify as effective
hedges.
In accordance with the transition provisions of SFAS 133, the Company recorded a
one-time after-tax charge of approximately $1 million during the first quarter
of 2001 in its consolidated earnings statement, representing the cumulative
effect of the accounting change, and an after-tax unrealized loss of
approximately $59 million to accumulated other comprehensive income in its
consolidated balance sheet, of which $28 million is expected to be reclassified
to the consolidated earnings statement during 2001. The transition amounts
represented accumulated changes in the fair values of derivative instruments
that were previously off balance sheet and used to hedge certain future
commodity sales (e.g., commodity swaps, options). Accumulated losses in fair
value of these derivative instruments will be substantially offset by
corresponding gains on the hedged commodity sales when those sales occur.
Amounts pertaining to the derivative contracts of acquired companies that were
previously capitalized under purchase accounting rules were not impacted.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - The objectives of
the Company's risk management policies include reducing the overall volatility
of the Company's cash flows, preserving revenues and pursuing outright pricing
positions in hydrocarbon derivative financial instruments. As part of its
overall risk management strategy, the Company enters into various derivative
instrument contracts to offset portions of its exposures to changes in interest
rates, changes in foreign currency exchange rates, and fluctuations in crude oil
and natural gas prices.
At the inception of a derivative contract, the Company may choose to designate
and document a derivative as a hedge of a certain exposure. In general, the
Company enters into derivative instruments to hedge two types of exposures: cash
flow exposures and fair value exposures. Hedges of cash flow exposures are
generally undertaken to reduce cash flow volatility associated with forecasted
transactions. They may also be used to reduce volatility associated with cash
flows to be paid related to recognized liabilities. Hedges of fair value
exposures are undertaken to hedge recognized assets or liabilities or
unrecognized firm commitments against changes in fair value.
On the date that a hedge is established, the Company designates and documents
the derivative as either a cash flow hedge or a fair value hedge. Changes in the
values of derivatives not designated and documented as hedges are recorded in
current-period earnings. Changes in the values of derivatives that qualify for,
and are designated and effective as, cash flow hedges are deferred and recorded
as components of accumulated other comprehensive income until the hedged
transactions occur and are then recognized in earnings. The ineffective portions
of cash flow hedge derivatives' changes in values are recognized immediately in
earnings as components of sales revenues. During the second quarter of 2001, the
Company changed its methodology for calculating the effectiveness of options
purchased as cash flow hedges to conform with the April 2001 interpretation of
SFAS 133 by the Financial Accounting Standards Board's "Derivatives
Implementation Group". Most gains and losses associated with the time value of
cash flow hedging options will be included in the effectiveness calculations
and, generally, deferred as components of other comprehensive income until the
hedged transactions are recognized in earnings. Previously, these gains and
losses had been excluded from the measurement of hedge effectiveness and
recognized in sales revenues. Changes in the values of derivatives that qualify
for, and are designated and effective as, fair value hedges are recognized in
current-period earnings as components of the line items reflecting the
underlying hedged transactions. Changes in the fair values of the underlying
hedged items (e.g., recognized assets, liabilities or unrecognized firm
commitments) are also recognized in current-period earnings and offset the
changes in the values of the corresponding hedging derivatives. Any resulting
fair value hedge ineffectiveness is recognized
-5-
in current-period earnings as the difference between the offsetting changes in
values of the derivative and theunderlying hedged item.
The Company documents its risk management objectives, its strategies for
undertaking various hedge transactions and the relationships between hedging
instruments and hedged items. Derivatives designated as cash flow hedges are
linked to forecasted transactions. Derivatives identified as fair value hedges
are linked to specific assets, liabilities or firm commitments. At hedge
inceptions and on an on-going basis, the Company assesses whether changes in the
values of derivatives used in hedging activities are highly effective in
offsetting changes in the values of the hedged items. The Company discontinues
hedge accounting prospectively when either (1) it determines that a derivative
is not highly effective as a hedge, (2) the derivative is sold, exercised or
otherwise terminated, (3) management elects to remove the derivative's hedge
designation, (4) the hedged transaction is no longer expected to occur, or (5) a
hedged item no longer meets the definition of a firm commitment. When a hedged
forecasted transaction is no longer expected to occur, the derivative continues
to be carried on the balance sheet at its fair value and all gains and losses
that were previously deferred in accumulated other comprehensive income are
recognized immediately in earnings. When a hedged item no longer meets the
definition of a firm commitment, the derivative continues to be carried on the
balance sheet at its fair value and any asset or liability that was recorded on
the balance sheet for the change in value of the hedged firm commitment are
removed from the balance sheet and recognized immediately in current-period
earnings. In all other situations where hedge accounting is discontinued, the
derivatives continue to be carried on the balance sheet at their fair values and
any prospective changes in their fair values are recognized in current-period
earnings. Deferred gains and losses already recorded in accumulated other
comprehensive income remain until the forecasted transactions occur, at which
time those gains and losses are recognized in earnings.
Effective July 1, 2001, the Company adopted SFAS No. 141, "Business
Combinations," which eliminated the pooling method of accounting for a business
combination, except for qualifying business combinations that were initiated
prior to July 1, 2001, and requires that all combinations be accounted for using
the purchase method. Any Goodwill acquired in a business combination under the
provisions of SFAS No. 141 shall be accounted for in accordance with the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," which allows
for the nonamortization of any purchased goodwill prior to the effective
adoption date of SFAS No. 142. The Company will adopt all the other provisions
of SFAS No. 142 effective January 1, 2002.
(3) Major Acquisitions
In July 2001, the Company's Northrock Resources Ltd. (Northrock) Canadian
subsidiary completed its cash acquisition of all the outstanding shares of
common stock of Tethys for $2.76 (C$4.25) per share. The asset base of Tethys
was complementary to Northrock's operations in Western Canada, providing
significant operational synergies with existing activity in Northrock's
West-Central Alberta and Southeast Saskatchewan core areas. The results of
Tethys' operations have been included in the consolidated financial statements
since the acquisition date of July 17, 2001. The cash value of the transaction
was approximately $93 million, which included acquired identifiable assets of
$121 million, goodwill of $30 million, assumed debt of $20 million, net negative
working capital and other obligations of $4 million and a liability for deferred
income taxes of $34 million. The assumed debt was repaid at the end of July
subsequent to the acquisition. The acquisition was accounted for as a purchase
and was funded using cash on hand. None of the goodwill amount recorded is
expected to be deductible for income tax purposes.
In May 2001, the Company's Pure Resources, Inc. (Pure), subsidiary completed its
cash acquisition of all the outstanding shares of common stock of Hallwood
Energy Corporation (Hallwood) for $12.50 per share and all the outstanding
shares of Series A Cumulative Preferred Stock of Hallwood at a price of $10.84
per share. The total transaction was valued at approximately $271 million,
including assumed debt of $87 million, which was subsequently refinanced in May
2001 (see note 10), and other obligations. The acquisition was accounted for as
a purchase and was funded through the combination of a new Pure line of credit
and borrowings under Pure's existing revolving credit facilities, none of which
are guaranteed by the Company. This acquisition added to Pure's positions in its
business areas of the San Juan and Permian Basins and the Gulf Coast region.
-6-
In January 2001, Pure acquired oil and gas properties, certain general and
limited oil and gas partnership interests and fee mineral and royalty interests
from International Paper Company. The total cost of the acquisition was
approximately $271 million in cash. Included in the transaction were total
proved reserves of approximately 25 million barrels of oil equivalent and
ownership in 6 million gross fee mineral acres (3.2 million net) along with
participation in several offshore exploration programs. The transaction was
funded from Pure's credit facilities (see note 10). This acquisition expanded
Pure's business areas into the Gulf Coast region and offshore in the Gulf of
Mexico.
(4) Other Financial Information
During the third quarters of 2001 and 2000, approximately 32 percent and 55
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 nine months ended September 30, 2001 and 2000, these percentages were
approximately 32 percent and 54 percent, respectively. Related purchase costs
were classified as expenses in the crude oil, natural gas and product purchases
category on the consolidated earnings statement. The lower resale activity in
both the third quarter and nine months periods of 2001, compared to the same
periods a year ago, reflected decreases primarily related to the marketing and
trading of crude oil and condensate.
Capitalized interest totaled $8 million and $4 million for the third quarters of
2001 and 2000, respectively, and $19 million and $9 million for the nine months
ended 2001 and 2000, respectively. The increases were primarily due to the
capitalized interest related to the West Seno oil and gas development project in
the deepwater Kutei Basin, offshore East Kalimantan, Indonesia.
(5) Income Taxes
Income taxes on earnings from continuing operations for the third quarter and
nine months periods of 2001 were $77 million and $447 million, respectively,
compared with $67 million and $309 million for the comparable periods of 2000.
The effective income tax rates for the third quarter and nine months periods of
2001 were 43 percent and 42 percent, respectively, compared with 28 percent and
36 percent for the comparable periods of 2000.
The higher effective income tax rate for the third quarter of 2001, compared to
the same period a year ago, reflected the effects of changes in the mix of
foreign versus domestic earnings, currency-related adjustments in Thailand, and
adjustments made in the third quarter of 2000 related to prior year U.S. and
Canadian tax matters. The higher effective income tax rate for the nine months
period of 2001, compared to the same period a year ago, reflected the effects of
currency-related adjustments in Thailand and an adjustment made in 2000 related
to prior year Canadian tax matters.
(6) Discontinued Operations
In 2001, the Company recorded its initial pre-tax gain of $25 million ($16
million after-tax) related to a participation agreement tied to its former West
Coast refining, marketing and transportation assets, which were sold in 1997.
The participation agreement covers price differences between California Air
Resources Board Phase 2 gasoline and conventional gasoline. The maximum
potential payments under this participation agreement are capped at $100 million
and extend to 2003.
The 2000 results reflected the Company's former agricultural products business,
which was sold later in that year.
-7-
(7) 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 third quarters and the nine months ended September
30, 2001 and 2000:
Earnings Shares Per Share
Millions except per share amounts (Numerator) (Denominator) Amount
- ---------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2001
Earnings from continuing operations $ 102 243.6
Basic EPS 0.42
=============
Effect of dilutive securities
Options and common stock equivalents 1.0
--------------------------------
Diluted EPS 102 244.6 $ 0.42
=============
Distributions on subsidiary trust preferred securities (after-tax) 7 12.3
--------------------------------
Antidilutive $ 109 256.9 $ 0.42
Three months ended September 30, 2000
Earnings from continuing operations $ 176 242.9
Basic EPS $ 0.72
=============
Effect of dilutive securities
Options and common stock equivalents 0.8
--------------------------------
176 243.7 $ 0.72
Distributions on subsidiary trust preferred securities (after-tax) 7 12.3
--------------------------------
Diluted EPS $ 183 256.0 $ 0.71
=============
Nine months ended September 30, 2001
Earnings from continuing operations $ 629 243.4
Basic EPS $ 2.59
=============
Effect of dilutive securities
Options and common stock equivalents 1.1
--------------------------------
629 244.5 $ 2.57
Distributions on subsidiary trust preferred securities (after-tax) 20 12.3
--------------------------------
Diluted EPS $ 649 256.8 $ 2.53
=============
Nine months ended September 30, 2000
Earnings from continuing operations $ 550 242.8
Basic EPS $ 2.27
=============
Effect of dilutive securities
Options and common stock equivalents 0.7
--------------------------------
550 243.5 $ 2.26
Distributions on subsidiary trust preferred securities (after-tax) 20 12.3
--------------------------------
Diluted EPS $ 570 255.8 $ 2.23
=============
Not included in the computation of diluted EPS for the period ended September
30, 2001 and 2000, were options outstanding to purchase approximately 5.2
million and 7.4 million shares, respectively, of common stock. These options
were not included in the computation as the exercise prices were greater than
the year-to-date average market price of the common shares. The diluted EPS
computation for the three months ended September 30, 2001 and 2000, did not
include options outstanding to purchase approximately 6.3 million and 6.9
million shares, respectively, of common stock because their exercise prices
were greater than the average market prices of the common shares during the
respective quarters.
-8-
(8) Comprehensive Income
The Company's comprehensive income was:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------------------------------
Millions of dollars 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 102 $ 190 $ 644 $ 587
Cumulative effect of change in accounting principle
SFAS 133 adoption (a) - - (59) -
Change in unrealized loss on hedging instruments (b) 17 - 43 -
Reclassification adjustment for settled hedging contracts (c) (3) - 23 -
Change in foreign currency translation adjustments (24) (8) (40) (15)
- ------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 92 $ 182 $ 611 $ 572
========================================================================================================================
<FN>
(a) Net of tax effect of: - - 36 -
(b) Net of tax effect of: (10) - (25) -
(c) Net of tax effect of: 2 - (14) -
</FN>
(9) Restricted Cash
Of the total amounts of cash and cash equivalents reported at September 30,
2001, cash in the amount of $29 million was restricted as to usage or
withdrawal, compared to $33 million that was restricted as of December 31, 2000.
Under the terms of the Company's limited-recourse project financing for its
share of the Azerbaijan International Operating Company Early Oil Project, the
Company's share of principal and interest payments to the lenders are payable
only out of the proceeds from the Company's sale of crude oil from the project.
In keeping with the terms of the financing agreements, $5 million at September
30, 2001, of the Company's oil sales proceeds (cash) were reserved for debt
principal and interest obligations falling due within the next 180 days. In
addition, at September 30, 2001, the Company had reserved $24 million in cash,
which was placed in December 2000 with a trustee to ultimately be used in
settlement of claims arising out of the valuation of the royalty owners'
portions of crude oil produced from certain federal and Indian land leases.
Per the terms of the trust agreement the trustee invests the cash in acceptable
investments and will deliver to the Company any cash balances remaining in the
trust after final settlement of the claims. The Company anticipates final
settlement and disbursement of all funds by the end of 2001.
(10) Long Term Debt and Credit Agreements
During the nine months period of 2001, the Company's consolidated debt,
including the current portion, increased by $353 million. This was substantially
due to an increase of $467 million in long term debt incurred by the Company's
Pure subsidiary to fund two of its acquisitions (see note 3). In June 2001, Pure
issued, in a private placement, $350 million in unsecured senior notes, which
bear interest at 7.125 percent and mature in 10 years. The notes were issued at
a discount to their face value. Pursuant to a registration rights agreement,
Pure registered the notes in the fourth quarter of 2001. Pure used the proceeds
to repay a portion of its senior credit facilities and to repay interim
financing associated with the Hallwood acquisition (see note 3). At September
30, 2001, Pure had $188 million outstanding under a 364-day revolving credit
facility due September 29, 2002, and had nothing outstanding under its five-year
revolving credit facility due September 29, 2005. Each of these unsecured credit
agreements provides a $250 million line of credit. None of the Pure debt is
guaranteed by the Company.
During the third quarter of 2001, the Company retired $61 million of medium-term
notes, $39 million of 8.75 percent notes, which matured as scheduled during the
quarter, and $20 million of long-term debt assumed in the Tethys acquisition
(see note 3).
-9-
(11) Accrued Abandonment, Restoration and Environmental Liabilities
At September 30, 2001, the Company had accrued $476 million for the estimated
future costs to abandon and remove wells and production facilities. The total
costs for these abandonments are predominantly accrued for on a
unit-of-production basis and are estimated to be approximately $640 million.
This estimate was derived in large part from abandonment cost studies performed
by independent third party firms and is used to calculate the amount to be
amortized. The Company's reserve for environmental remediation obligations at
September 30, 2001 totaled $236 million, of which $117 million was included in
current liabilities.
(12) 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 11, at September 30, 2001, the Company had accrued $236
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 $250 million.
-10-
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 (IRS). 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 IRS and is either agreed to with the IRS or 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. The 1991-1992 taxable years are now before the Appeals
Division of the IRS. The 1993-1997 taxable years are under examination by the
IRS.
Pure Resources, Inc. Employment and Severance Agreements - Under circumstances
specified in the employment and/or severance agreements entered into between the
Company's Pure subsidiary and its officers, each covered officer will have the
right to require Pure to purchase its common shares currently held or
subsequently obtained by the exercise of any option held by the officer at a
calculated "net asset value" per share. The circumstances under which certain
officers may exercise this right include the termination of the officer without
cause prior to May 25, 2003, termination for any reason after May 24, 2003, a
change in control of either Pure or Unocal and other events specified in the
agreements. The net asset value per share is calculated by reference to each
common share's pro rata amount of the present value of Pure's proved reserves
discounted at 10 percent, as defined, times 110 percent, less funded debt, as
defined. At September 30, 2001, Pure estimated that the amount which it would
have to repurchase under these agreements was approximately $114 million, which
is reflected in other deferred credits and liabilities on the consolidated
balance sheet. The repurchase amount will fluctuate with the market value of
Pure's common stock and/or changes in the net asset value per share.
-11-
Other matters - The Company has a five-year lease agreement relating to its
Discoverer Spirit deepwater drillship, with a remaining term of approximately
four years at September 30, 2001. The drillship has a minimum daily rate of
approximately $210,000. In August 2001, the Company signed a sublease agreement
with a third party for a minimum period of 200 days. Under the provisions of the
agreement, the third party will assume the lease payments to the lessor during
the sublease period. The sublease period is expected to begin in early 2002
after the Company completes its current drilling of a well in the Gulf of Mexico
deep water. The future remaining minimum lease payment obligation excluding the
minimum sublease 200-day period was approximately $260 million at September 30,
2001.
The Company's Molycorp subsidiary, working cooperatively and collaboratively
with the New Mexico Environmental Department and other state agencies, has
secured permits covering discharges from its Questa, New Mexico, molybdenum
mine. This process involved the posting by Molycorp of two performance bonds
totaling $152 million that are intended to provide financial assurance of
completion of preliminary closure plans (only required upon cessation of
operations) and other obligations required under the terms of the permits. The
amounts of the performance bonds were based on estimations provided by the state
of New Mexico agencies. Unocal has indemnified the insurance company that issued
the bonds with respect to all amounts that may be drawn against them.
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.
(13) Financial Instruments and Commodity Hedging
Fair values of debt and other long-term instruments - The estimated fair value
of the Company's long-term debt at September 30, 2001, including the current
portion, was approximately $3.065 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 $499 million at September 30,
2001. The fair value was based on the trading prices of the preferred securities
on September 28, 2001, as reported to the Company.
Commodity hedging activities - During the third quarter of 2001, the Company
recognized $2 million in after-tax gains for the ineffectiveness of both cash
flow and fair value hedges. During the nine months period of 2001, the Company
recognized $3 million in after-tax losses for the ineffectiveness of both cash
flow and fair value hedges. At September 30, 2001, the Company had approximately
$3 million of after-tax deferred losses in accumulated other comprehensive
income on the consolidated balance sheet related to cash flow hedges for future
commodity sales for the period beginning October 2001 through October 2004. Of
this amount, approximately $10 million in after-tax gains are expected to be
reclassified to the consolidated earnings statement during the next twelve
months.
-12-
(14) Supplemental Condensed Consolidating Financial Information
Unocal guarantees all the publicly held securities issued by its 100
percent-owned subsidiaries Unocal Capital Trust and Union Oil. Such guarantees
are full and unconditional and no other subsidiaries of Unocal or Union Oil
guarantee these securities.
The following tables present condensed consolidating financial information for
(a) Unocal (Parent), (b) the Trust, (c) Union Oil (Parent) and (d) on a combined
basis, the subsidiaries of Union Oil. Virtually all of the Company's operations
are conducted by Union Oil and its subsidiaries.
CONDENSED CONSOLIDATED EARNINGS STATEMENT
For the three months ended September 30, 2001
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues $ - $ - $ 360 $ 1,479 $ (266) $ 1,573
Interest, dividends and miscellaneous income 1 8 - 8 (9) 8
Gain (loss)on sales of assets - - (3) 1 - (2)
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 1 8 357 1,488 (275) 1,579
Costs and other deductions
Purchases, operating and other expenses 1 - 253 1,068 (272) 1,050
Depreciation, depletion and amortization - - 102 168 - 270
Dry hole costs - - 15 38 - 53
Interest expense 8 - 39 10 (9) 48
Distributions on convertible preferred securities - 8 - - - 8
- -----------------------------------------------------------------------------------------------------------------------------
Total costs and other deductions 9 8 409 1,284 (281) 1,429
Equity in earnings of subsidiaries 107 - 147 - (254) -
Earnings from equity investments - - 2 35 - 37
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes and minority interests 99 - 97 239 (248) 187
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes (3) - (10) 90 - 77
Minority interests - - - 2 6 8
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 102 - 107 147 (254) 102
Earnings from discontinued operations - - - - - -
Cumulative effect of accounting change - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 102 $ - $ 107 $ 147 $ (254) $ 102
=============================================================================================================================
-13-
CONDENSED CONSOLIDATED EARNINGS STATEMENT
For the three months ended September 30, 2000
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues $ - $ - $ 486 $ 2,227 $ (380) $ 2,333
Interest, dividends and miscellaneous income - 8 5 5 (9) 9
Gain on sales of assets - - 1 4 - 5
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues - 8 492 2,236 (389) 2,347
Costs and other deductions
Purchases, operating and other expenses 1 - 299 1,877 (389) 1,788
Depreciation, depletion and amortization - - 94 145 - 239
Dry hole costs - - 26 21 - 47
Interest expense 8 - 50 4 (9) 53
Distributions on convertible preferred securities - 8 - - - 8
- -----------------------------------------------------------------------------------------------------------------------------
Total costs and other deductions 9 8 469 2,047 (398) 2,135
Equity in earnings of subsidiaries 197 - 215 - (412) -
Earnings from equity investments - - 11 33 - 44
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes and minority interests 188 - 249 222 (403) 256
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes (3) - 54 16 - 67
Minority interests - - (2) 5 10 13
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 191 - 197 201 (413) 176
Earnings from discontinued operations - - - 14 - 14
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 191 $ - $ 197 $ 215 $ (413) $ 190
=============================================================================================================================
-14-
CONDENSED CONSOLIDATED EARNINGS STATEMENT
For the nine months ended September 30, 2001
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues $ - $ - $ 1,540 $ 5,165 $ (1,242) $ 5,463
Interest, dividends and miscellaneous income 6 25 3 21 (28) 27
Gain (loss) on sales of assets - - (2) 1 - (1)
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 6 25 1,541 5,187 (1,270) 5,489
Costs and other deductions
Purchases, operating and other expenses 3 - 898 3,779 (1,269) 3,411
Depreciation, depletion and amortization - - 301 482 - 783
Dry hole costs - - 49 91 - 140
Interest expense 25 1 124 23 (28) 145
Distributions on convertible preferred securities - 24 - - - 24
- -----------------------------------------------------------------------------------------------------------------------------
Total costs and other deductions 28 25 1,372 4,375 (1,297) 4,503
Equity in earnings of subsidiaries 658 - 560 - (1,218) -
Earnings from equity investments - - 10 118 - 128
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes and minority interests 636 - 739 930 (1,191) 1,114
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes (8) - 96 359 - 447
Minority interests - - - 11 27 38
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 644 - 643 560 (1,218) 629
Earnings from discontinued operations - - 16 - - 16
Cumulative effect of accounting change - - (1) - - (1)
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 644 $ - $ 658 $ 560 $ (1,218) $ 644
=============================================================================================================================
-15-
CONDENSED CONSOLIDATED EARNINGS STATEMENT
For the nine months ended September 30, 2000
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues $ - $ - $ 1,496 $ 5,766 $ (1,063) $ 6,199
Interest, dividends and miscellaneous income 10 25 131 14 (28) 152
Gain on sales of assets - - 64 4 - 68
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 10 25 1,691 5,784 (1,091) 6,419
Costs and other deductions
Purchases, operating and other expenses 2 - 1,021 4,758 (1,073) 4,708
Depreciation, depletion and amortization - - 273 396 - 669
Dry hole costs - - 39 59 - 98
Interest expense 25 1 155 6 (28) 159
Distributions on convertible preferred securities - 24 - - - 24
- -----------------------------------------------------------------------------------------------------------------------------
Total costs and other deductions 27 25 1,488 5,219 (1,101) 5,658
Equity in earnings of subsidiaries 598 - 507 - (1,105) -
Earnings from equity investments - - 32 69 - 101
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes and minority interests 581 - 742 634 (1,095) 862
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes (6) - 146 169 - 309
Minority interests - - (2) (5) 10 3
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 587 - 598 470 (1,105) 550
Earnings from discontinued operations - - - 37 - 37
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 587 $ - $ 598 $ 507 $ (1,105) $ 587
=============================================================================================================================
-16-
CONDENSED CONSOLIDATED BALANCE SHEET
Period ended September 30, 2001
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 1 $ - $ 195 $ 175 $ - $ 371
Accounts and notes receivable - - 100 853 - 953
Inventories - - 4 88 - 92
Other current assets - - 144 42 - 186
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 1 - 443 1,158 - 1,602
Investments and long-term receivables 4,097 - 4,214 964 (7,829) 1,446
Properties - net - - 2,094 5,250 - 7,344
Other assets 53 541 284 1,727 (2,301) 304
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $4,151 $ 541 $ 7,035 $ 9,099 $ (10,130) $ 10,696
=============================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ - $ - $ 232 $ 662 $ - $ 894
Current portion of long-term debt and capital leases - - - 9 - 9
Other current liabilities 41 3 208 374 - 626
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 41 3 440 1,045 - 1,529
Long-term debt and capital leases - - 2,181 669 - 2,850
Deferred income taxes - - (16) 679 - 663
Accrued abandonment, restoration
and environmental liabilities - - 293 302 - 595
Other deferred credits and liabilities 541 - 383 2,275 (2,306) 893
Minority interests - - - 296 147 443
Company-obligated mandatorily redeemable
convertible preferred securities of a
subsidiary trust holding solely parent debentures - 522 - - - 522
Stockholders' equity 3,569 16 3,754 3,833 (7,971) 3,201
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $4,151 $ 541 $ 7,035 $ 9,099 $ (10,130) $ 10,696
=============================================================================================================================
-17-
CONDENSED CONSOLIDATED BALANCE SHEET
Year ended December 31, 2000
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 1 $ - $ 84 $ 150 $ - $ 235
Accounts and notes receivable - - 165 1,134 - 1,299
Inventories - - 13 75 - 88
Other current assets - - 127 53 - 180
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 1 - 389 1,412 - 1,802
Investments and long-term receivables 3,620 - 3,765 781 (6,787) 1,379
Properties - net - - 1,988 4,445 - 6,433
Other assets 56 541 646 1,153 (2,000) 396
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $3,677 $ 541 $ 6,788 $ 7,791 $ (8,787) $ 10,010
=============================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ - $ - $ 283 $ 739 $ - $ 1,022
Current portion of long-term debt and capital leases - - 105 9 - 114
Other current liabilities 42 3 233 431 - 709
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 42 3 621 1,179 - 1,845
Long-term debt and capital leases - - 2,181 211 - 2,392
Deferred income taxes - - (10) 628 - 618
Accrued abandonment, restoration
and environmental liabilities - - 254 300 - 554
Other deferred credits and liabilities 541 - 467 1,952 (1,992) 968
Minority interests - - - 287 105 392
Company-obligated mandatorily redeemable
convertible preferred securities of a
subsidiary trust holding solely parent debentures - 522 - - - 522
Stockholders' equity 3,094 16 3,275 3,234 (6,900) 2,719
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,677 $ 541 $ 6,788 $ 7,791 $ (8,787) $ 10,010
=============================================================================================================================
-18-
CONDENSED CONSOLIDATED CASH FLOWS
Period ended September 30, 2001
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities $132 $ - $ 694 $ 954 $ - $1,780
Cash Flows from Investing Activities
Capital expenditures and major acquisitions
(includes dry hole costs) - - (526) (1,267) - (1,793)
Proceeds from sales of assets
and discontinued operations - - 47 4 - 51
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities - - (479) (1,263) - (1,742)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Change in long-term debt and capital leases - - (105) 351 - 246
Dividends paid on common stock (146) - - - - (146)
Minority interests - - - (17) - (17)
Other 14 - 1 - - 15
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (132) - (104) 334 - 98
- -----------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents - - 111 25 - 136
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1 - 84 150 - 235
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1 $ - $ 195 $ 175 $ - $ 371
=============================================================================================================================
CONDENSED CONSOLIDATED CASH FLOWS
Period ended September 30, 2000
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities $174 $ - $ 273 $ 810 $ - $1,257
Cash Flows from Investing Activities
Capital expenditures and major acquisitions
(includes dry hole costs) - - (361) (672) - (1,033)
Proceeds from sales of assets
and discontinued operations - - 352 12 - 364
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities - - ( 9) (660) - (669)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Change in long-term debt and capital leases - - (180) (41) - (221)
Dividends paid on common stock (146) - - - - (146)
Minority interests - - - (19) - (19)
Other (28) - 1 - - (27)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (174) - (179) (60) - (413)
- -----------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents - - 85 90 - 175
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1 - 162 169 - 332
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1 $ - $ 247 $ 259 $ - $ 507
=============================================================================================================================
-19-
(15) Segment Data
The Company has made changes in the reporting of its segments from the reporting
utilized in the 2000 Annual Report on Form 10-K. The Company's reportable
segments are now: Exploration and Production, Trade, Midstream, and Geothermal
and Power Operations. General corporate overhead, unallocated costs and other
miscellaneous operations, including real estate, carbon and minerals and those
businesses that were sold, are included under the Corporate and Other heading.
See also Management`s Discussion and Analysis in Item 2 for further descriptions
of the new segments.
-----------------------------------------------------------------------
Segment Information Exploration & Production Trade
For the Three Months North America International
ended September 30, 2001
Millions of dollars Lower 48 Alaska Canada Far East Other
-----------------------------------------------------------------------
Sales & operating revenues $ 158 $ 86 $ 59 $ 254 $ 35 $ 861
Other income (loss) (a) - - (2) (3) 7 -
Inter-segment revenues 265 - - 45 23 -
-----------------------------------------------------------------------
Total 423 86 57 296 65 861
Earnings (loss) from equity investments (2) - - 10 2 -
Earnings from continuing operations 51 17 6 109 2 3
Earnings from discontinued operations - - - - - -
Cumulative effect of accounting change - - - - - -
-----------------------------------------------------------------------
Net earnings 51 17 6 109 2 3
Assets (at September 30, 2001) 3,337 333 1,025 2,433 768 325
-----------------------------------------------------------------------
-----------------------------------------------------------------------------------
Midstream Geothermal Corporate & Other Total
& Power Admin Net Environmental
Operations & Interest &
General Expense Litigation Other (b)
-----------------------------------------------------------------------------------
Sales & operating revenues $ 48 $ 46 $ - $ - $ - $ 26 $ 1,573
Other income (loss) (a) - 6 - 6 - (8) 6
Inter-segment revenues 2 - - - - (335) -
-----------------------------------------------------------------------------------
Total 50 52 - 6 - (317) 1,579
Earnings (loss) from equity investments 17 (2) - - - 12 37
Earnings (loss) from continuing operations 13 2 (19) (31) (28) (23) 102
Earnings from discontinued operations - - - - - - -
Cumulative effect of accounting change - - - - - - -
-----------------------------------------------------------------------------------
Net earnings (loss) 13 2 (19) (31) (28) (23) 102
Assets (at September 30, 2001) 455 629 - - - 1,391 10,696
-----------------------------------------------------------------------------------
<FN>
(a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets.
(b) Includes eliminations and consolidation adjustments.
</FN>
-20-
-----------------------------------------------------------------------
Segment Information Exploration & Production Trade
For the Three Months North America International
ended September 30, 2000
Millions of dollars Lower 48 Alaska Canada Far East Other
-----------------------------------------------------------------------
Sales & operating revenues $ 102 $ 60 $ 9 $ 272 $ 39 $ 1,758
Other income (loss) (a) - - 1 1 4 (4)
Inter-segment revenues 378 15 - 56 28 5
-----------------------------------------------------------------------
Total 480 75 10 329 71 1,759
Earnings (loss) from equity investments 10 - - 8 (1) -
Earnings (loss) from continuing operations 104 22 16 120 15 (1)
Earnings from discontinued operations - - - - - -
-----------------------------------------------------------------------
Net earnings (loss) 104 22 16 120 15 (1)
Assets (at December 31, 2000) 2,701 315 1,019 2,251 603 655
-----------------------------------------------------------------------
-----------------------------------------------------------------------------------
Midstream Geothermal Corporate & Other Total
& Power Admin Net Environmental
Operations & Interest &
General Expense Litigation Other (b)
-----------------------------------------------------------------------------------
Sales & operating revenues $ 13 $ 36 $ - $ - $ - $ 44 $ 2,333
Other income (a) 1 4 - 7 - - 14
Inter-segment revenues 2 - - - - (484) -
-----------------------------------------------------------------------------------
Total 16 40 - 7 - (440) 2,347
Earnings from equity investments 16 - - - - 11 44
Earnings (loss) from continuing operations 16 4 (19) (36) (17) (48) 176
Earnings from discontinued operations - - - - - 14 14
-----------------------------------------------------------------------------------
Net earnings (loss) 16 4 (19) (36) (17) (34) 190
Assets (at December 31, 2000) 416 574 - - - 1,476 10,010
-----------------------------------------------------------------------------------
<FN>
(a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets.
(b) Includes eliminations and consolidation adjustments.
</FN>
-21-
-----------------------------------------------------------------------
Segment Information Exploration & Production Trade
For the Nine Months North America International
ended September 30, 2001
Millions of dollars Lower 48 Alaska Canada Far East Other
-----------------------------------------------------------------------
Sales & operating revenues $ 486 $ 221 $ 188 $ 755 $ 109 $ 3,289
Other income (loss) (a) 1 - (1) (9) 6 (1)
Inter-segment revenues 1,237 - - 155 84 1
-----------------------------------------------------------------------
Total 1,724 221 187 901 199 3,289
Earnings from equity investments 12 - - 29 2 -
Earnings from continuing operations 434 49 17 328 29 10
Earnings from discontinued operations - - - - - -
Cumulative effect of accounting change - - - - - -
-----------------------------------------------------------------------
Net earnings 434 49 17 328 29 10
Assets (at September 30, 2001) 3,337 333 1,025 2,433 768 325
-----------------------------------------------------------------------
-----------------------------------------------------------------------------------
Midstream Geothermal Corporate & Other Total
& Power Admin Net Environmental
Operations & Interest &
General Expense Litigation Other (b)
-----------------------------------------------------------------------------------
Sales & operating revenues $ 187 $ 135 $ - $ - $ - $ 93 $ 5,463
Other income (loss) (a) 2 13 - 19 - (4) 26
Inter-segment revenues 6 - - - - (1,483) -
-----------------------------------------------------------------------------------
Total 195 148 - 19 - (1,394) 5,489
Earnings (loss) from equity investments 45 (2) - - - 42 128
Earnings (loss) from continuing operations 40 5 (63) (96) (78) (46) 629
Earnings from discontinued operations - - - - - 16 16
Cumulative effect of accounting change - - - - - (1) (1)
-----------------------------------------------------------------------------------
Net earnings (loss) 40 5 (63) (96) (78) (31) 644
Assets (at September 30, 2001) 455 629 - - - 1,391 10,696
-----------------------------------------------------------------------------------
<FN>
(a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets.
(b) Includes eliminations and consolidation adjustments.
</FN>
-22-
-----------------------------------------------------------------------
Segment Information Exploration & Production Trade
For the Nine Months North America International
ended September 30, 2000
Millions of dollars Lower 48 Alaska Canada Far East Other
-----------------------------------------------------------------------
Sales & operating revenues $ 159 $ 180 $ 73 $ 727 $ 105 $ 4,663
Other income (loss) (a) 65 - - (3) 3 (4)
Inter-segment revenues 1,051 48 - 168 83 7
-----------------------------------------------------------------------
Total 1,275 228 73 892 191 4,666
Earnings from equity investments 13 - - 8 - -
Earnings from continuing operations 301 69 8 290 32 3
Earnings from discontinued operations - - - - - -
-----------------------------------------------------------------------
Net earnings 301 69 8 290 32 3
Assets (at December 31, 2000) 2,701 315 1,019 2,251 603 655
-----------------------------------------------------------------------
-----------------------------------------------------------------------------------
Midstream Geothermal Corporate & Other Total
& Power Admin Net Environmental
Operations & Interest &
General Expense Litigation Other (b)
-----------------------------------------------------------------------------------
Sales & operating revenues $ 39 $ 119 $ - $ - $ - $ 134 $ 6,199
Other income (a) 2 6 - 21 - 130 220
Inter-segment revenues 8 - - - - (1,365) -
-----------------------------------------------------------------------------------
Total 49 125 - 21 - (1,101) 6,419
Earnings (loss) from equity investments 48 (1) - - - 33 101
Earnings (loss) from continuing operations 47 18 (62) (109) (55) 8 550
Earnings from discontinued operations - - - - - 37 37
-----------------------------------------------------------------------------------
Net earnings (loss) 47 18 (62) (109) (55) 45 587
Assets (at December 31, 2000) 416 574 - - - 1,476 10,010
-----------------------------------------------------------------------------------
<FN>
(a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets.
(b) Includes eliminations and consolidation adjustments.
</FN>
OPERATING HIGHLIGHTS
Effective with the first quarter of 2001, the Company began reporting all
production pursuant to production sharing contracts on the net-economic
interests basis, which excludes host country shares. In previous reporting,
production had included host country shares in Indonesia and the Democratic
Republic of Congo. The Company also began reporting natural gas production on a
dry basis, with natural gas liquids now included with crude oil and condensate
production volumes. The production and price data in the table on the following
page reflect these reclassifications:
-23-
OPERATING HIGHLIGHTS
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------
North America Net Daily Production
Crude oil, condensate and natural gas liquids (thousand barrels)
Lower 48 (a) 60 53 58 53
Alaska 26 25 25 26
Canada (a) 16 16 15 17
- -------------------------------------------------------------------------------------------------------------
Total crude oil, condensate and natural gas liquids 102 94 98 96
Natural gas - dry basis (million cubic feet)
Lower 48 (a) 939 777 922 740
Alaska 83 128 104 138
Canada (a) 92 96 105 98
- -------------------------------------------------------------------------------------------------------------
Total natural gas 1,114 1,001 1,131 976
North America Average Prices (b)
Crude oil, condensate and natural gas liquids (per barrel)
Lower 48 $ 23.11 $ 28.45 $ 24.63 $ 26.27
Alaska $ 21.58 $ 25.70 $ 22.18 $ 24.02
Canada $ 20.89 $ 26.89 $ 20.74 $ 22.43
Average $ 22.37 $ 27.45 $ 23.39 $ 24.97
Natural gas (per mcf)
Lower 48 $ 2.97 $ 4.26 $ 4.76 $ 3.42
Alaska $ 1.57 $ 1.20 $ 1.30 $ 1.20
Canada $ 2.76 $ 2.66 $ 3.40 $ 1.98
Average $ 2.85 $ 3.69 $ 4.29 $ 2.94
- -------------------------------------------------------------------------------------------------------------
International Net Daily Production
Crude oil, condensate and natural gas liquids (thousand barrels)
Far East 49 47 49 47
Other 19 18 19 18
- -------------------------------------------------------------------------------------------------------------
Total crude oil, condensate and natural gas liquids 68 65 68 65
Natural gas - dry basis (million cubic feet)
Far East 833 816 845 799
Other 66 52 64 56
- -------------------------------------------------------------------------------------------------------------
Total natural gas 899 868 909 855
International Average Prices (b)
Crude oil, condensate and natural gas liquids (per barrel)
Far East $ 23.04 $ 28.30 $ 24.02 $ 25.45
Other $ 25.27 $ 29.24 $ 26.04 $ 27.24
Average $ 23.65 $ 28.57 $ 24.60 $ 25.96
Natural gas (per mcf)
Far East $ 2.62 $ 2.44 $ 2.54 $ 2.37
Other $ 2.80 $ 2.86 $ 2.90 $ 2.79
Average $ 2.63 $ 2.47 $ 2.57 $ 2.40
- -------------------------------------------------------------------------------------------------------------
Worldwide Net Daily Production (a)
Crude oil, condensate and natural gas liquids (thousand barrels) 170 159 166 161
Natural gas - dry basis (million cubic feet) 2,013 1,869 2,040 1,831
Barrels oil equivalent (thousands) 506 470 506 466
Worldwide Average Prices (b)
Crude oil, condensate and natural gas liquids (per barrel) $ 22.87 $ 27.90 $ 23.89 $ 25.37
Natural gas (per mcf) $ 2.75 $ 3.11 $ 3.51 $ 2.68
- -------------------------------------------------------------------------------------------------------------
<FN>
(a) Production includes 100 percent of production of consolidated subsidiaries and proportional
shares of production of equity investees.
(b) Average prices include hedging gains and losses but exclude gains or losses on derivative
positions not accounted for as hedges, the ineffective portion of hedges and other Trade margins.
</FN>
-24-
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 2000 Annual
Report on Form 10-K and in Item 2 of Part I of the Company's First Quarter and
Second Quarter 2001 Quarterly Reports on Form 10-Q.
Effective with the first quarter of 2001, the Pipelines business segment was
combined with certain activities of the Company's gas storage businesses in
Canada, which were previously reported in the Exploration and Production
segment, into a new segment called Midstream. The Carbon and Minerals businesses
are no longer disclosed as a separate segment and are now reported in the
Corporate and Other heading. See note 15 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 Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
Millions of dollars 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Earnings from continuing operations $ 102 $ 176 $ 629 $ 550
Earnings from discontinued operations - 14 16 37
Cumulative effect of accounting change - - (1) -
- ------------------------------------------------------------------------------------------------------------
Net earnings $ 102 $ 190 $ 644 $ 587
============================================================================================================
Earnings from continuing operations totaled $102 million in the third quarter of
2001, which was a decrease of $74 million from the same period a year ago. The
decrease was primarily due to lower worldwide average prices for natural gas and
crude oil, condensate and natural gas liquids (liquids), a higher effective tax
rate due to a change in the Thai baht/U.S. dollar exchange rate and higher
receivable provisions related to geothermal operations in Indonesia. These
negative factors were partially offset by higher worldwide natural gas
production. The Company's worldwide average price for natural gas, including
realized hedging activities, was $2.75 per thousand cubic feet (mcf) in the
third quarter of 2001, which was a decrease of 36 cents per mcf, or 12 percent,
from the same period a year ago. The Company's worldwide average price for
liquids, including realized hedging activities, was $22.87 per barrel in the
third quarter of 2001, which was a decrease of $5.03 per barrel, or 18 percent,
from the same period a year ago. The Company's worldwide natural gas production
was 2,013 million cubic feet per day (mmcf/d) in the third quarter of 2001,
which was an increase of 8 percent from the same period a year ago. The increase
was primarily due to higher natural gas production from U.S. Lower 48
operations. In the third quarter of 2001, earnings from continuing operations
included $25 million in special item charges, primarily relating to
environmental and litigation provisions, while the third quarter of 2000
included $52 million in special item charges. The special items recorded in the
third quarter of 2000 consisted of losses of $40 million related to commodity
derivative positions not accounted for as hedges and $38 million in
environmental and litigation charges, which were partially offset by $26 million
in net benefits related to foreign and U.S. deferred tax adjustments.
Sales and operating revenues were $1,573 million for the third quarter of 2001,
which was a decrease of $760 million from the same period a year ago. This
decrease was primarily due to lower marketing and trading activities in crude
oil and condensate by the Company's Trade segment, as well as lower overall
hydrocarbon commodity prices.
-25-
Earnings from continuing operations totaled $629 million for the nine months
period of 2001, which was an increase of $79 million from the same period a year
ago. This increase was primarily due to higher worldwide average natural gas
prices and increased worldwide natural gas and liquids production. The Company's
worldwide average natural gas price, including realized hedging activities, was
$3.51 per mcf for the nine months period of 2001, which was an increase of 83
cents per mcf, or 31 percent, from the same period a year ago. The Company's
worldwide natural gas production increased by 11 percent from the same period a
year ago, primarily due to higher natural gas production from U.S. Lower 48 and
Far East operations. The Company's worldwide liquids production increased by 3
percent from the same period a year ago primarily from U.S. Lower 48 operations.
These positive results were partially offset by lower worldwide average liquids
prices, higher depreciation, depletion and amortization expense, higher
receivable provisions related to geothermal operations in Indonesia, higher dry
hole costs and a higher effective tax rate due to a change in the Thai baht/U.S.
dollar exchange rate. The Company's worldwide average liquids price, including
realized hedging activities, was $23.89 per barrel for the nine months period of
2001, which was a decrease of $1.48 per barrel, or 6 percent, from the same
period a year ago. In the nine months period of 2001, earnings from continuing
operations included $66 million in special item charges, primarily relating to
environmental and litigation provisions, while the nine months period of 2000
included $13 million in special item benefits, detailed in the table on page 27.
Earnings from discontinued operations were $16 million in the nine months period
of 2001 compared with $37 million in the same period a year ago. The Company
recorded pre-tax gains of $25 million ($16 million after-tax) in the nine months
period of 2001 related to a participation agreement tied to its former West
Coast refining, marketing and transportation assets, which were sold in 1997.
The participation agreement covers price differences between California Air
Resources Board Phase 2 gasoline and conventional gasoline. The maximum
potential payments under this participation agreement are capped at $100 million
and extend to 2003. The results for the third quarter and nine months periods of
2000 reflected the Company's former agricultural products business, which was
sold later in that year.
In 2001, the Company recorded a one-time non-cash $1 million after-tax charge
consisting of the cumulative effect of a change in accounting principle related
to the initial adoption of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative instruments and Hedging Activities".
-26-
Special items represent certain significant transactions, presented in net
earnings, that management determines to be unrelated to or not representative of
the Company's ongoing operations. The following table is a reconciliation of
consolidated adjusted (excluding special items) after-tax earnings to net
earnings for the quarterly and nine months periods ended September 30:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
Millions of dollars 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings (a) $ 127 $ 228 $ 695 $ 537
Special items:
Continuing operations
Gain on asset sales - - - 42
Deferred tax adjustment - 46 - 46
Environmental and litigation provisions/settlements (26) (38) (71) (71)
Executive stock purchase program - - - (9)
Insurance benefits related to environmental issues - - - 21
Trading derivatives -- non-hedging (Northrock) 1 (40) 5 (40)
Provision for prior years income tax issues (Other) - (20) - (20)
Reformulated gasoline patent case - - - 55
Restructuring costs - - - (11)
- ------------------------------------------------------------------------------------------------------------
Total special items from continuing operations (25) (52) (66) 13
Discontinued operations
Gain on disposal - Agricultural products - 14 - 37
Gain on disposal - Refining and marketing - - 16 -
- ------------------------------------------------------------------------------------------------------------
Total special items from discontinued operations - 14 16 37
Cumulative effect of accounting change - - (1) -
- ------------------------------------------------------------------------------------------------------------
Net earnings (a) $ 102 $ 190 $ 644 $ 587
============================================================================================================
<FN>
(a) Includes minority interests of: $ (8) $ (13) $ (38) $ (3)
</FN>
-27-
EXPLORATION AND PRODUCTION
The Company engages in oil and gas exploration, development and production
worldwide.
North America - Included in this category are oil and gas operations in the U.S.
Lower 48, Alaska and 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.
The U.S. Lower 48 also includes the consolidated results of Pure Resources, Inc.
(Pure), a 65-percent owned subsidiary, which operates primarily in the Permian
and San Juan Basins in West Texas and New Mexico, the Gulf Coast and the
continental shelf area of the Gulf of Mexico. A substantial portion of the crude
oil and natural gas produced in the U.S. Lower 48 operations, excluding those of
Pure, is sold to the Company's Trade business segment. The remainder of North
America production, including the production of Pure and the Company's Northrock
Resources Ltd. (Northrock) Canadian subsidiary, is sold to third parties. In
Alaska, natural gas production, pursuant to agreements with Agrium, Inc.
(Agrium), is sold to Agrium's fertilizer plant in Kenai. In addition, Northrock
and Pure take pricing positions in hydrocarbon derivative instruments in support
of their oil and gas operations.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
Millions of dollars 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings (loss) (before special items)
Lower 48 (a) $ 51 $ 104 $ 434 $ 259
Alaska 17 22 49 69
Canada (b) 5 10 12 2
- ------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings (before special items) (a) (b) 73 136 495 330
Special items:
Gain on asset sales (Lower 48) - - - 42
Deferred tax adjustment (Canada) - 46 - 46
Trading derivatives- non-hedging (Northrock) 1 (40) 5 (40)
- ------------------------------------------------------------------------------------------------------------
Total special items 1 6 5 48
- ------------------------------------------------------------------------------------------------------------
After-tax earnings (a) (b) $ 74 $ 142 $ 500 $ 378
============================================================================================================
<FN>
(a) Includes minority interests of: $ (10) $ (14) $ (42) $ (25)
(b) Includes minority interests of: $ - $ (1) $ - $ 19
</FN>
After-tax earnings totaled $74 million in the third quarter of 2001, which was a
decrease of $68 million from the same period a year ago. This decrease was
primarily due to the Company's lower North America average prices for natural
gas and liquids, the effect of which was partially offset by higher natural gas
production. The Company's average North America natural gas price, including
realized hedging activities, was $2.85 per mcf in the third quarter of 2001,
which was a decrease of 84 cents per mcf, or 23 percent, from the same period a
year ago. The Company's average North America liquids price, including realized
hedging activities, was $22.37 per barrel in the third quarter of 2001, which
was a decrease of $5.08 per barrel, or 19 percent, from the same period a year
ago. North America average net daily natural gas production was 1,114 mmcf/d in
the third quarter of 2001, compared to 1,001 mmcf/d in the same period a year
ago, which was an increase of 11 percent, primarily from the Lower 48
operations. The increase in the Lower 48 was primarily from higher Pure
production and from the Company's production on Ship Shoal 295 Block (Muni
field) in the Gulf of Mexico, which began production in the fourth quarter of
2000, as well as newly acquired properties in Mobile Bay and other Gulf of
Mexico shelf areas. The third quarter 2001 results were also impacted by higher
depreciation, depletion and amortization expense. The third quarter of 2000
results benefited from a $46 million deferred tax adjustment in Canada, which
was partially offset by losses of $40 million related to Northrock's commodity
derivative positions not accounted for as hedges.
-28-
After-tax earnings totaled $500 million for the nine months period of 2001,
which was an increase of $122 million from the same period a year ago. This
increase was primarily due to the Company's higher North America average natural
gas prices and higher natural gas production. The Company's average North
America natural gas price, including realized hedging activities, was $4.29 per
mcf in the nine months period of 2001, which was an increase of $1.35 per mcf,
or 46 percent, from the same period a year ago. North America average net daily
natural gas production was 1,131 mmcf/d for the nine months period of 2001
compared to 976 mmcf/d in the same period a year ago, which was an increase of
16 percent, primarily from the Lower 48 operations. The nine months period of
2001 also benefited from small gains related to non-hedging commodity derivative
positions of Northrock in Canada versus losses in the same period a year ago.
These positive results were partially offset by higher depreciation, depletion
and amortization expense in the Lower 48 operations, lower North America average
liquids prices, and higher dry hole costs primarily from the Gulf of Mexico
shelf also in the Lower 48 operations. The Company's average North America
liquids price, including realized hedging activities, was $23.39 per barrel in
the nine months period of 2001, which was a decrease of $1.58 per barrel, or 6
percent, from the same period a year ago. The results of the nine months period
of 2000 included the $46 million deferred tax adjustment in Canada and a $42
million after-tax gain related to the formation of Pure.
International - Unocal's International operations encompass oil and gas
exploration and production activities outside of North America. The Company
operates or participates in production operations in Thailand, Indonesia,
Myanmar, Bangladesh, the Netherlands, Azerbaijan, the Democratic Republic of
Congo and Brazil. 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 Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
Millions of dollars 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Far East $ 109 $ 120 $ 328 $ 290
Other 2 15 29 32
- ------------------------------------------------------------------------------------------------------------
After-tax earnings $ 111 $ 135 $ 357 $ 322
============================================================================================================
After-tax earnings totaled $111 million in the third quarter of 2001, which was
a decrease of $24 million from the same period a year ago. The decrease was
primarily due to lower average liquids prices, higher dry hole costs and a
higher effective tax rate due to changes in the Thai baht/U.S. dollar exchange
rate, the effects of which were partially offset by higher natural gas prices.
The average liquids price for International operations was $23.65 per barrel in
the third quarter of 2001, which was a decrease of $4.92 per barrel, or 17
percent, from the same period a year ago. The average natural gas price for
International operations was $2.63 per mcf in the third quarter of 2001, which
was an increase of 16 cents per mcf, or 6 percent, from the same period a year
ago.
After-tax earnings totaled $357 million for the nine months period of 2001,
which was an increase of $35 million from the same period a year ago. The
increase was primarily due to higher natural gas prices and natural gas
production volumes in the Far East. The average natural gas price for
International operations was $2.57 per mcf for the nine months period of 2001,
which was an increase of 17 cents per mcf, or 7 percent, from the same period a
year ago. Natural gas production increased 6 percent for the nine months period
of 2001 compared to the same period a year ago, primarily in the Far East. The
average net daily natural gas production was 909 mmcf/d in the nine months
period of 2001 compared to 855 mmcf/d for the same period a year ago. These
positive results were partially offset by lower liquids prices and higher
effective tax rates, primarily due to changes in the Thai baht/U.S. dollar
exchange rate. The average liquids price for International operations was $24.60
per barrel for the nine months period of 2001, which was a decrease of $1.36 per
barrel, or 5 percent, from the same period a year ago.
-29-
TRADE
The Trade segment conducts most of the Company's worldwide crude oil,
condensate, natural gas and refined products trading and marketing activities,
excluding those of Pure and Northrock. It is also responsible for
commodity-specific risk management activities on behalf of most of the Company's
Exploration and Production segment, excluding Pure. The Trade segment also
purchases crude oil, condensate and natural gas from certain of the Company's
royalty owners, joint venture partners and other unaffiliated oil and gas
producing and trading companies for resale. In addition, the segment takes
pricing positions in hydrocarbon derivative instruments.
After-tax results totaled $3 million in the third quarter of 2001 compared to a
loss of $1 million in the same period a year ago. The increase in the third
quarter of 2001 was primarily due to higher results from non-hedging commodity
derivative positions related to domestic crude oil.
For the nine months ended September 30, 2001, after-tax results totaled $10
million compared to $3 million in the same period a year ago. The increase was
primarily due to higher results from non-hedging commodity derivative positions
related to crude oil and natural gas.
MIDSTREAM
The Midstream segment is comprised of the Pipelines business, which principally
encompasses the Company's equity interests in affiliated petroleum pipeline
companies and wholly-owned pipeline systems throughout the U.S., and the
Company's North America gas storage business.
After-tax earnings totaled $13 million for the third quarter of 2001 compared to
$16 million in the same period a year ago. The decrease was primarily due to
lower results from the Company's North America gas storage business.
For the nine months ended September 30, 2001, after-tax earnings totaled $40
million compared to $47 million in the same period a year ago. The decrease was
primarily due to a $6 million asset write-down related to a Colonial Pipeline
Company investment.
GEOTHERMAL AND POWER OPERATIONS
The Geothermal and Power Operations segment produces geothermal steam for power
generation, with operations in the Philippines and Indonesia. The segment's
activities also include the operation of power plants in Indonesia and equity
interests in gas-fired power plants in Thailand. The Company's non-exploration
and production business development activities, primarily power-related, are
also included in this segment.
After-tax earnings totaled $2 million and $5 million in the third quarter and
nine months periods of 2001, respectively, which compared to $4 million and $18
million, respectively, for the same periods a year ago. The lower results in
both the third quarter and nine months periods of 2001 were primarily due to
higher receivable provisions related to geothermal operations in Indonesia. The
receivable provisions were partially offset in both the third quarter and nine
months periods by higher electricity generation and steam sales in Indonesia.
-30-
CORPORATE AND OTHER
Corporate and Other includes general corporate overhead, miscellaneous
operations (including real estate activities, carbon and minerals) and other
corporate unallocated costs. Net interest expense represents interest expense,
net of interest income and capitalized interest.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
Millions of dollars 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings effect (before special items)
Administrative and general expense $ (19) $ (19) $ (63) $ (62)
Net interest expense (a) (31) (36) (96) (109)
Environmental and litigation expense (4) (5) (9) (11)
Other (a) (21) (2) (44) (1)
- ------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings effect (before special items) (a) (75) (62) (212) (183)
Special items:
Asset sales (Other) - - - -
Environmental and litigation provisions (26) (38) (71) (71)
Other
Executive stock purchase program - - - (9)
Insurance benefits related to environmental issues - - - 21
Provision for prior year income tax issues - (20) - (20)
Reformulated gasoline patent case - - - 55
Restructuring costs - - - (11)
- ------------------------------------------------------------------------------------------------------------
Total special items (26) (58) (71) (35)
- ------------------------------------------------------------------------------------------------------------
After-tax earnings effect (a) $ (101) $ (120) $ (283) $ (218)
============================================================================================================
<FN>
(a) Includes minority interests of: $ 2 $ 2 $ 4 $ 3
</FN>
The after-tax earnings effect in the third quarter of 2001 was a loss of $101
million compared to a loss of $120 million in the same period a year ago.
Environmental and litigation provisions in the third quarter of 2001 were lower
than in the third quarter of 2000. Net interest expense was also lower in the
third quarter of 2001 versus the same period a year ago primarily due to higher
capitalized interest on development projects. The third quarter 2001 results
also included a decrease in earnings from the Company's minerals businesses and
higher employee benefit-related accruals, both reflected in the Other category.
The third quarter 2000 results included a $20 million provision for U.S.
deferred taxes related to prior year income tax matters.
The after-tax earnings effect for the nine months period of 2001 was a loss of
$283 million compared to a loss of $218 million in the same period a year ago.
The results of the nine months period in 2000 benefited from a $55 million
after-tax gain related to payments received in the Company's reformulated
gasoline patent infringement case and a $21 million after-tax insurance
recovery. In addition, the nine months 2001 period results were also lower due
to higher employee benefit-related accruals and lower earnings from the minerals
businesses. The Company also made a $10 million pre-tax cash contribution in
2001, included in the Other category, to a charitable foundation. Net interest
expense was lower for the nine months period of 2001, compared to the same
period a year ago, primarily due to higher capitalized interest on development
projects.
-31-
FINANCIAL CONDITION AND CAPITAL EXPENDITURES
At At At
September 30, December 31, September 30,
-------------------------------------------------
Millions of dollars 2001 2000 2000
- -------------------------------------------------------------------------------------------------
Current ratio 1.0:1 1.0:1 1.1:1
Total debt and capital leases $ 2,859 $ 2,506 $ 2,738
Trust convertible preferred securities 522 522 522
Stockholders' equity 3,201 2,719 2,593
-------------------------------------------------
Total capitalization $ 6,582 $ 5,747 $ 5,853
=================================================
Total debt/total capitalization 43% 44% 47%
Floating-rate debt/total debt 6% 3% 7%
- -------------------------------------------------------------------------------------------------
For the nine months period of 2001, net cash flow provided by operating
activities was $1,780 million compared with $1,257 million in the same period a
year ago. This increase primarily reflected the effects of higher worldwide
average natural gas prices and higher worldwide natural gas production. Positive
cash flow generated from reduced working capital was a reflection of a
continuous decrease in crude oil prices during the first nine months of the
year, lower crude oil trading activity by the Company's Trade business segment
and the collection, in June 2001, of $73 million from the Petroleum Authority of
Thailand in settlement of its "take-or-pay" obligation for natural gas purchases
from the Company's Yadana project in Myanmar.
Pre-tax proceeds from asset sales, including those classified as discontinued
operations, were $51 million for the nine months period of 2001. The proceeds
included a $25 million payment associated with a participation agreement
involving certain gasoline margins realized by the Company's former West Coast
refining, marketing and transportation assets, which were sold in 1997, $14
million from the sale of certain oil and gas properties and $12 million from the
sale of miscellaneous assets.
Capital expenditures for the nine months period of 2001 were $1,257 million,
compared with $872 million in the same period a year ago. The higher capital
expenditures in 2001 were primarily due to higher exploratory expenditures and
property acquisitions in the Gulf of Mexico and Brazil and higher development
expenditures in Indonesia. The capital expenditures amount for the nine months
period of 2001 excluded Pure's acquisition of properties from International
Paper Company for $271 million, Pure's cash outlay of $172 million for the
acquisition of all the shares of Hallwood Energy Corporation and Northrock's
cash outlay of $93 million for the acquisition of all the shares of Tethys
Energy Inc. (see note 3 to the consolidated financial statements in Item 1 of
this report). Capital expenditures for the nine months period of 2000 excluded
$161 million related to the acquisition of the remaining shares of Northrock.
For the full year 2001, total capital expenditures, excluding major
acquisitions, are currently expected to be approximately $1.7 billion. Of this
total, about 58 percent is expected to be spent in support of North American
exploration and development (E&P) programs, including the Company's Gulf of
Mexico deepwater drilling program, and about 35 percent is expected to be spent
for International E&P projects, with the remainder of the capital for non-E&P
and Corporate-related expenditures.
-32-
Cash on hand plus cash generated from operating activities and asset sales have
been and are expected to remain sufficient to cover the Company's operating
expenses, ongoing capital expenditure program (exclusive of major acquisitions),
anticipated dividend payments and repayment of maturing debt during the
remainder of 2001.
The Company's long-term debt, including the current portion, was $2.86 billion
at September 30, 2001, compared with $2.51 billion at year-end 2000. This
increase reflected the borrowings made by Pure to fund its acquisition of
properties from International Paper Company and the purchase of Hallwood Energy
Corporation.
The Company has substantial borrowing capacity to meet unanticipated cash
requirements. At the end of October 2001, the Company replaced its $1 billion
bank credit agreement with two new revolving credit facilities totaling $1
billion. One of these credit facilities is a $400 million 364-day credit
agreement and the other credit facility is a $600 million 5-year credit
agreement. The credit facilities provide for the termination of their loan
commitments and require the prepayment of all outstanding borrowings in the
event that (1) any person or group becomes the beneficial owner of more than 30
percent of the then outstanding voting stock of Unocal other than in a
transaction having the approval of the Company's board of directors, at least a
majority of which are continuing directors, or (2) if continuing directors shall
cease to constitute at least a majority of the board.
ENVIRONMENTAL MATTERS
At September 30, 2001, the Company's reserves for environmental remediation
obligations totaled $236 million, of which $117 million was included in current
liabilities. During the nine months period of 2001, cash payments of $69 million
were applied against the reserve and $92 million in provisions were added to the
reserve balance. The increase in the reserve provisions was primarily for the
anticipated cleanup at former Company operated facilities, facilities sold with
retained liabilities and closed Company facilities. The Company also estimated
that it possibly could incur additional remediation costs aggregating
approximately $250 million (as discussed in note 12 to the consolidated
financial statements in Item 1 of this report). The Company's total
environmental reserve amount is grouped into the following four categories.
Reserve Summary
At
September 30,
Millions of dollars 2001
- -----------------------------------------------------------------------------
Superfund and similar sites $ 16
Active company facilities 47
Company facilities sold with retained liabilities
and former company-operated sites 73
Inactive or closed company facilities 100
- -----------------------------------------------------------------------------
Total reserves $ 236
=============================================================================
-33-
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, drilling activities 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 47
through 49 of Management's Discussion and Analysis in Item 7 of the Company's
2000 Annual Report on Form 10-K for a discussion of certain of such conditions
and events.
Volatile energy prices continue to impact financial results in the year 2001.
The Company expects energy prices to remain volatile due to changes in climate
conditions, worldwide demand, crude oil and natural gas inventory levels,
production quotas set by OPEC, current and future worldwide political
instability and security and other factors.
The Company expects adjusted (excluding special items) after-tax earnings to be
between 25 and 35 cents per share for the fourth quarter of 2001, assuming
average NYMEX benchmark commodity prices of $22.25 per barrel of crude oil and
$2.55 per MMBtu for Lower 48 natural gas. The fourth quarter forecast is also
dependent on the Company's drilling results and other factors. The Company
expects net daily worldwide production for the fourth quarter of 2001 to average
between 500,000 and 510,000 Barrels of Oil Equivalent (BOE).
The Discoverer Spirit drillship completed drilling of a delineation well on the
discovery at the Mad Dog prospect on Green Canyon Block 826. The well was
successful in proving the commerciality of the prospect, and the Company
anticipates the development plan for Mad Dog to be approved by the end of this
year or early next year. The Discoverer Spirit drillship is currently drilling
the first appraisal well on the Trident prospect as a follow-up to the discovery
made earlier this year. The Trident #2 well is located 1.25-miles northeast of
the Trident discovery in 9,727 feet of water. The Company expects to complete
the first appraisal well in about 60 to 75 days. The Company anticipates
drilling a second Trident appraisal well in late 2002.
In August 2001, the Company signed a sublease agreement with a third party for
the Discoverer Spirit drillship for a minimum period of 200 days. The third
party will be responsible for making the lease payments directly to the lessor
during the sublease period. The subleasing will give the Company the additional
time necessary to incorporate its recent drilling activities into the overall
evaluation of its deepwater portfolio. The Company anticipates the subleasing to
commence in early 2002 after it has completed its drilling of the Trident #2
appraisal well.
In November 2001, the Company signed a memorandum of understanding with Forest
Oil Corporation (Forest) to jointly explore and develop certain properties in
the central Gulf of Mexico Shelf. Under the proposed transaction, the Company
would acquire a portion of Forest's proved reserves and current production for
$120 million in cash. The Company would become the operator of the jointly owned
properties. The two companies are currently negotiating the details of the
transaction, which is expected to close by the end of 2001.
-34-
In the Cook Inlet of Alaska, the Company drilled four development oil wells from
the King Salmon platform in the McArthur River field. One of the wells, the
K-13, came on production in early July and is producing about 7,100 b/d. The
Company expects to drill a follow-up to the K-13 well in late 2001. The Company
holds a 56 percent working interest in this production zone in the McArthur
River field.
The Company expects its Thailand operations to continue to perform strongly. In
October 2001, the Company reached agreement with the Petroleum Authority of
Thailand (PTT) to provide an incentive for it to take incremental natural gas
quantities above contract production minimums from certain fields in the Gulf of
Thailand over a 15-month period. The Company and its partners paid PTT $15
million as an incentive for PTT to purchase 18 billion cubic feet of gas above
the contract minimums between July 2001 and September 2002. At the end of the
incentive period, if PTT fails to take any of the incremental volume, it shall
refund to the Company and its partners the advance incentive amount paid on a
pro-rata basis for any purchase volume short of the agreed incremental volume.
The current contract pricing mechanism will continue for all quantities of
gas taken under the contracts.
The Company also continues to develop its first oil fields in the Gulf of
Thailand. The Company began crude oil production in July from its Plamuk field
and is working on the development of the neighboring Yala field. The two fields
are expected to produce a combined 15,000 b/d by early next year. The Company
has a 71.25 percent working interest in these fields.
In Myanmar, average daily gas production is expected to exceed the daily
contract quantity of 525 mmcf/d for the rest of 2001. The Company does not
expect PTT to incur a "take-or-pay" obligation in 2001.
In September 2001, the Company announced that its Unocal Rapak, Ltd., subsidiary
had drilled two successful exploration appraisal wells on the Ranggas prospect
in the southern portion of the Rapak Production-Sharing Contract (PSC) area,
offshore East Kalimantan, Indonesia. These two wells were a follow-up to the
initial discovery well. Unocal Rapak, Ltd. is operator of the Rapak PSC area and
holds an 80-percent working interest. The Ranggas-2 well was drilled to a total
depth of 13,661 feet in 5,192 feet of water. The well encountered 155 feet of
net oil pay and 118 feet of net gas pay. The well is located in the southern
portion of the Ranggas structure, nearly a mile southwest of the discovery well.
The Ranggas-3 well was drilled to a total depth of 13,248 feet in 5,368 feet of
water. The well encountered 306 feet of net oil pay and 123 feet of net gas pay.
The well is located 3.4 miles north of the discovery well in the central portion
of the Ranggas structure.
In the next phase of drilling, Unocal Rapak, Ltd. expects to drill four to eight
wells beginning late in 2001 or early 2002 to further delineate the Ranggas
discovery and test at least two adjacent prospects. The Company expects to
determine commerciality and the size of production facilities by the end of this
second drilling phase.
In the third quarter of 2001 the Azerbaijan International Operating Company
(AIOC) consortium approved development of the "Phase 1" portion of offshore oil
reserves in the Caspian Sea. This phase of the project will develop 1.5 billion
barrels of crude oil reserves. Phase 1 production is scheduled to commence in
early 2005 and is expected to peak at approximately 360,000 b/d. The company
holds an approximate 10 percent working interest in AIOC.
In Gabon, the Company is participating in a multi-well program. The first two
wells were drilled on the Astrid Block, the Renee #1 and the Judy #1 prospects,
and did not encounter commercial quantities of hydrocarbons. The Company
anticipates the drilling of two more wells starting in late 2001.
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As of September 30, 2001, the Company had a gross receivable balance of
approximately $375 million related to its geothermal operations in Indonesia.
Approximately $156 million was related to Gunung Salak electric generating Units
1, 2, and 3, of which $154 million represented past due amounts and accrued
interest resulting from partial payments for March 1998 through September 2001.
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 $219 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.
The Company has entered into eight licensing agreements that grant motor
gasoline refiners, blenders and importers (including CITGO Petroleum
Corporation, Tesoro Petroleum Corporation and units of The Williams Companies,
Inc.) the right to make cleaner-burning gasolines using formulations patented by
the Company. The terms of the licensing agreements are confidential. The Company
continues to negotiate with other refiners, blenders and importers on licensing
agreements for the Company's cleaner-burning gasoline patents.
In February and March 2001, petitions were filed with the U.S. Patent and
Trademark Office (PTO) by Washington, D.C., law firms, acting on behalf of
unnamed parties, requesting reexamination of two of the Company's patents (the
`126 and `393 patents, respectively). In May, the PTO denied the request for
reexamination of the `126 patent and granted the petition to reexamine the `393
patent.
The Company anticipates that the PTO will initially reject all or some of the
claims of the `393 patent, as such rejections occur in the overwhelming majority
of cases where reexamination is granted. Subsequently, the Company will be able
to present information and arguments in support of the validity of its patent
claims. The reexamination process is expected to take several months, but the
Company believes the `393 patent claims are valid and non-obvious and expects
the patent to be sustained by the PTO.
In March 2001, ExxonMobil Corporation requested the U.S. Federal Trade
Commission (FTC) to conduct an investigation into certain alleged unfair
competition practices allegedly engaged in by the Company in connection with its
patents. ExxonMobil alleges that the Company engaged in anticompetitive conduct
in the regulatory processes that established California and federal standards
for reformulated gasolines (RFG) and thus gained "monopoly profits" in the RFG
market. ExxonMobil requests that the FTC use its authority to fashion an
appropriate remedy. In August 2001, the Company received notice that the FTC is
conducting an investigation in conjunction with this matter. The Company has
been cooperating with the FTC in its inquiry.
In October 2001, the Company was informed that the U.S. District Court in Los
Angeles granted the Company's motion for summary judgement requesting an
accounting of infringement of the `393 patent from August 1996 through December
2000 by the five defendants. The Company had requested that the court apply the
5.75 cents per gallon awarded in the original 1997 trial to the defendants'
infringing volumes produced since August 1996. The court did not make findings
of the specific amount owed to the Company in its order. The court also denied
the defendants' motions that these damage proceedings be stayed pending the
outcome of the `393 patent reexamination or, alternatively, that the defendants
be granted a new trial as to damages. The Company is awaiting a definitive
order.
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Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," SFAS
No. 142 "Goodwill and Other Intangible Assets," and SFAS No. 143 "Accounting for
Asset Retirement Obligations". SFAS No. 141 eliminates the pooling method of
accounting for a business combination, except for qualifying business
combinations that were initiated prior to July 1, 2001, and requires that all
combinations be accounted for using the purchase method. SFAS No. 142, which is
effective for fiscal years beginning after December 15, 2001, addresses
accounting for identifiable intangible assets, eliminates the amortization of
goodwill and provides specific steps for testing the impairment of goodwill.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. SFAS No. 143, which is
effective for fiscal years beginning after June 15, 2002, requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred as a capitalized cost of the long-lived asset and
to depreciate it over its useful life. The Company is currently in the process
of evaluating the impact that SFAS No. 142 and 143 will have on its financial
position and results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 supersedes SFAS No. 121 and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company is
currently in the process of evaluating the impact that SFAS No. 144 will have on
its financial position and results of operations.
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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 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 in securities of any one
financial institution. Due to the short time the investments are outstanding and
their general liquidity, these instruments are classified as cash equivalents in
the consolidated balance sheet and do not represent a material interest rate
risk to the Company. The Company's primary market risk exposure for changes in
interest rates relates to the Company's long-term debt obligations. The Company
manages its exposure to changing interest rates principally through the use of a
combination of fixed and floating rate debt. Interest rate risk sensitive
derivative financial instruments, such as swaps 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 September 30, 2001. Assuming a ten percent decrease in
the Company's weighted average borrowing costs at September 30, 2001, 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 $111 million at
September 30, 2001.
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 September
30, 2001, the Company had various foreign currency swaps and foreign currency
forward contracts outstanding to hedge its 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 September 30, 2001, 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 $7
million at September 30, 2001.
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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 refined products and is subject to the associated price risks. The Company
uses hydrocarbon price-sensitive derivative instruments (hydrocarbon
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 hydrocarbon derivatives to hedge contractual delivery
commitments and future crude oil and natural gas production against price
exposure. The Company also actively trades hydrocarbon 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 derivatives. Value at risk represents the potential loss
in fair value the Company would experience on its hydrocarbon 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 97.5-percent confidence level. The
model includes offsetting physical positions for hydrocarbon derivatives related
to the Company's fixed price 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 hydrocarbon derivatives and forward sales contracts. Based
upon the Company's risk model, the value at risk related to hydrocarbon
derivatives held for purposes other than trading was approximately $8 million at
September 30, 2001. The value at risk related to hydrocarbon derivatives held
for trading purposes was approximately $5 million at September 30, 2001.
-39-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There is incorporated by reference: the information with respect to certain
legal proceedings pending or threatened against the Company previously reported
in Item 3 of Unocal's Annual Report on Form 10-K for the year ended December 31,
2000 (2000 Form 10-K), and in Item 1 of Part II of Unocal's Quarterly Reports on
Form 10-Q for the quarters ended March 31(First Quarter 2001 Form 10-Q), and
June 30, 2001; the information regarding environmental remediation reserves in
note 11 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 12
to the consolidated financial statements. Information with respect to recent
developments in certain of such proceedings is set forth below:
1. In September 2001, the California Superior Court denied the Company's
demurrers which sought to have the court dismiss the complaints in the
matters pending in that court captioned John Roe III, et al. v.
Unocal Corp., et al. and John Doe I, et al. v. Unocal Corp., et al.,
which were described in Paragraph 4 of Item 3 of the 2000 Form 10-K.
Subsequently, the Company filed its answers denying the allegations
in the complaints.
The plaintiffs' appeals from the dismissals of their prior lawsuits in the
U.S. District Court for the Central District of California are scheduled to
be heard by the U.S. Court of Appeals for the Ninth Circuit in December
2001.
Certain Environmental Matters Involving Civil Penalties
2. In October 2001, the Company reached an agreement with the U.S. Department
of Justice and the U.S. Environmental Protection Agency to settle the
action in the U.S. District Court for the Central District of California
that alleged violations of the federal Clean Air Act at the Company's
former Los Angeles refinery marine terminal, which action was described in
Paragraph 10 of Item 3 of the 2000 Form 10-K and in Paragraph 1 of Item I
of Part II of the First Quarter 2001 Form 10-Q. The settlement provides for
the payment by the Company of civil penalties aggregating $1,750,000, for
which the Company had previously established a reserve.
ITEM 5. OTHER INFORMATION.
On October 31, 2001, the Company's board of directors elected Charles R.
Williamson as chairman of the board effective on that date. Mr. Williamson
will also continue as the Company's chief executive officer. Mr. Williamson
succeeded John W. Creighton, Jr., who resigned as a non-executive chairman but
will continue as a director of the Company.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The Exhibit Index on page 43 of this report lists
the exhibits that are filed as part of this report.
(b) Reports on Form 8-K:
Filed during the third quarter of 2001:
(1) Current Report on Form 8-K, dated August 22, 2001, and
filed September 6, 2001, for the purpose of reporting,
under Item 5, the Company's drilling results in Gulf of
Mexico and Indonesia and the Company's forecasts for
production and reserves.
Filed during the fourth quarter of 2001 to the date hereof:
(1) Current Report on Form 8-K, dated October 24, 2001, and
filed October 30, 2001, for the purpose of reporting,
under Item 5, the Company's third quarter and nine
months 2001 results and the Company's earnings forecast
for the fourth quarter of 2001.
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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: November 14, 2001 By: /s/JOE D. CECIL
---------------------------------
Joe D. Cecil
Vice President and Comptroller
(Duly Authorized Officer
Principal Accounting Officer)
-42-
EXHIBIT INDEX
3 Bylaws of Unocal, as amended through October 31, 2001 and currently
in effect.
10.1 Amendment to the Revised Incentive Compensation Plan, effective
December 5, 2000.
10.2 Form of Nonqualified Stock Option Grant under the Long-Term Incentive
Plan of 1998, effective August 20, 2001 (subject to stockholders
approval), between Unocal and Terry G. Dallas as to 240,000 shares of
Unocal Common Stock with an exercise price of $36.22.
12.1 Statement regarding computation of ratio of earnings to fixed
charges of Unocal Corporation for the nine months ended
September 30, 2001 and 2000.
12.2 Statement regarding computation of ratio of earnings to fixed
charges of Union Oil Company of California for the nine months
ended September 30, 2001 and 2000.
99 Summary of change-of-control provisions in certain stock-based
compensation plans.
Copies of exhibits will be furnished upon request. Requests should be addressed
to the Corporate Secretary.
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