SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X
- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
------------------
or
-- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8483
UNOCAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3825062
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2141 Rosecrans Avenue, Suite 4000, El Segundo, California 90245
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 726-7600
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, 1996: 250,414,750
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
--------------------------------------------------
Dollars in millions except per share amounts 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues (a) ................................... $2,531 $1,933 $7,272 $5,997
Interest, dividends and miscellaneous income ....................... 14 50 50 76
Equity in earnings of affiliated companies ......................... 30 20 78 65
Gain on sales of assets ............................................ 36 2 173 63
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Total revenues ............................................... 2,611 2,005 7,573 6,201
Costs and Other Deductions
Crude oil and product purchases .................................... 1,152 746 3,142 2,403
Operating expense .................................................. 442 417 1,315 1,302
Selling, administrative and general expense ........................ 112 108 341 318
Depreciation, depletion and amortization ........................... 228 237 724 704
Dry hole costs ..................................................... 53 31 72 50
Exploration expense ................................................ 33 30 83 85
Interest expense ................................................... 67 72 215 218
Excise, property and other operating taxes (a) ..................... 271 258 814 759
Distributions on convertible preferred securities
of subsidiary trust................................................ 2 -- 2 --
------------------------------------------------------
Total costs and other deductions ............................. 2,360 1,899 6,708 5,839
------------------------------------------------------
Earnings before income taxes ....................................... 251 106 865 362
Income taxes ....................................................... 80 47 332 151
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Net Earnings ....................................................... $ 171 $ 59 $ 533 $ 211
Dividends on preferred stock ....................................... -- 9 18 27
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Net earnings applicable to common stock ...................... $ 171 $ 50 $ 515 $ 184
======================================================
Earnings per share of common stock assuming
no dilution (b) ................................................... $ 0.69 $ 0.20 $ 2.08 $0.75
Earnings per share of common and equivalent
stock assuming full dilution (c) ................................... $ 0.65 $ 0.20 $ 2.03 $0.75
Cash dividends declared per share of common stock .................. $ 0.20 $ 0.20 $ 0.60 $0.60
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes consumer excise taxes of .................................. $ 249 $ 228 $ 735 $ 665
(b) Based on net earnings applicable to common stock divided
by weighted average shares outstanding (in thousands) ............ 248,668 246,666 248,211 245,754
(c) Based on net earnings applicable to common stock divided
by weighted average shares outstanding and common
stock equivalents (in thousands) .................................. 263,525 -- 262,823 --
See Notes to Consolidated Financial Statements.
1
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
(Unaudited)
September 30 December 31
----------------------------------
Millions of dollars 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents ..................................................................... $ 225 $ 94
Accounts and notes receivable ................................................................. 921 920
Inventories
Crude oil .................................................................................. 50 48
Refined products ........................................................................... 162 161
Agricultural products ...................................................................... 35 40
Minerals ................................................................................... 21 30
Supplies, merchandise and other ............................................................ 88 81
Deferred income taxes ......................................................................... 75 169
Other current assets .......................................................................... 35 33
------------------------
Total current assets ....................................................................... 1,612 1,576
Investments and long-term receivables ............................................................ 1,105 1,101
Properties (net of accumulated depreciation and other allowances
of $10,910 in 1996 and $11,431 in 1995) ......................................... 6,949 7,109
Deferred income taxes ............................................................................ 27 25
Other assets ..................................................................................... 116 80
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Total assets ............................................................................... $ 9,809 $ 9,891
-------------------------
Liabilities and Equity
Current liabilities
Accounts payable .............................................................................. $ 873 $ 804
Taxes payable ................................................................................. 242 193
Current portion of long-term debt and capital lease obligations ............................... 119 8
Interest payable .............................................................................. 46 92
Current portion of environmental liabilities .................................................. 83 83
Other current liabilities ..................................................................... 94 136
-------------------------
Total current liabilities .................................................................. 1,457 1,316
Long-term debt and capital lease obligations ..................................................... 2,951 3,698
Deferred income taxes ............................................................................ 678 722
Accrued abandonment, restoration and environmental liabilities ................................... 661 607
Other deferred credits and liabilities ........................................................... 729 618
Company-obligated mandatorily redeemable convertible preferred securities of a
subsidiary trust holding solely 6-1/4% convertible junior subordinated
debentures of Unocal ........................................................................... 522 --
Stockholders' Equity
Preferred stock ($0.10 par value; stated at liquidation
value of $50 per share) ..................................................................... 13 513
Common stock ($1 par value) ................................................................... 250 247
Capital in excess of par value ................................................................ 389 319
Foreign currency translation adjustment ....................................................... (12) (10)
Unearned portion of restricted stock issued ................................................... (15) (13)
Retained earnings ............................................................................. 2,186 1,874
-------------------------
Total stockholders' equity ................................................................. 2,811 2,930
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Total liabilities and equity ............................................................ $ 9,809 $ 9,891
-------------------------
See Notes to the Consolidated Financial Statements.
2
CONSOLIDATED CASH FLOWS UNOCAL CORPORATION
(Unaudited)
For the Nine Months
Ended September 30
-------------------------------
Millions of dollars 1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ..................................................................................... $ 533 $ 211
Adjustment to reconcile net earnings to
net cash provided by operating activities
Depreciation, depletion and amortization ................................................... 724 704
Dry hole costs ............................................................................. 72 50
Deferred income taxes ...................................................................... 48 (21)
Gain on sales of assets (before-tax) ....................................................... (173) (63)
Other ...................................................................................... 96 (19)
Working capital and other changes related to operations
Accounts and notes receivable ........................................................... (23) (18)
Inventories ............................................................................. 4 18
Accounts payable ........................................................................ 69 (53)
Taxes payable ........................................................................... 49 (19)
Other ................................................................................... (200) (114)
-----------------------
Net cash provided by operating activities ............................................ 1,199 676
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (includes dry hole costs) ................................................ (940) (967)
Proceeds from sales of assets ................................................................. 585 130
-----------------------
Net cash used in investing activities ................................................ (355) (837)
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term borrowings .......................................................................... 130 949
Reduction of long-term debt and capital lease obligations ..................................... (690) (644)
Dividends paid on preferred stock ............................................................. (27) (27)
Dividends paid on common stock ................................................................ (149) (147)
Other ......................................................................................... 23 50
-----------------------
Net cash provided by (used in) financing activities ..................................... (713) 181
Increase in cash and cash equivalents ............................................................ 131 20
Cash and cash equivalents at beginning of year ................................................... 94 148
-----------------------
Cash and cash equivalents at end of period ....................................................... $ 225 $ 168
-----------------------
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest (net of amount capitalized) ....................................................... $ 243 $ 225
Income taxes (net of refunds) .............................................................. $ 239 $ 192
See Notes to the Consolidated Financial Statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated financial statements included herein are unaudited and, in
the opinion of management, include all adjustments necessary for a fair
presentation of financial position and results of operations. All
adjustments are of a normal recurring nature. Such financial statements are
presented in accordance with the Securities and Exchange Commission's
(Commission) disclosure requirements for Form 10-Q.
These interim consolidated financial statements should be read in
conjunction with the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements filed with the Commission in Unocal
Corporation's 1995 Annual Report on Form 10-K.
Results for the nine months ended September 30, 1996, are not necessarily
indicative of future financial results.
Certain items in the prior year financial statements have been reclassified
to conform to the 1996 presentation.
(2) For the purpose of this report, Unocal Corporation and its consolidated
subsidiary, Union Oil Company of California (Union Oil), together with the
consolidated subsidiaries of Union Oil, will be referred to as "Unocal" or
"the company".
(3) Earnings per share of common stock assuming no dilution are based on net
earnings less preferred stock dividend requirements, divided by the
weighted average shares of common stock outstanding during each period. The
computation of fully diluted earnings per share assumes the dilutive effect
of common stock equivalents and conversion of the Unocal's outstanding
convertible preferred stock and the outstanding Convertible Preferred
Securities of a subsidiary trust (see Note 12). When the computation of
fully diluted earnings per share is antidilutive for any given period
presented, the amounts reported for primary and fully diluted are the same.
(4) As a result of the corporate staff reduction program initiated during the
fourth quarter of 1994, the company recorded in 1994 a pretax charge of $34
million in administrative and general expense for estimated benefits,
primarily termination allowance, to be paid to employees affected by the
program. At September 30, 1996, the amount of unpaid benefits remaining on
the consolidated balance sheet was $7 million. Approximately 30 employees
were terminated during the third quarter of 1996, bringing the total number
of terminated employees to approximately 650.
(5) Capitalized interest totaled $3 million and $9 million for the third
quarters of 1996 and 1995, respectively. For the first nine months of 1996
and 1995 capitalized interest totaled $9 million and $25 million,
respectively.
(6) Cash Flow Information:
UNOCAL SAVINGS PLAN
During the first nine months of 1996 and 1995, shares of Unocal common
stock were purchased by the trustee of the Unocal Savings Plan (the "Plan")
either from Unocal or on the open market as directed by Unocal. The trustee
used Unocal's matching contributions to the Plan to purchase the shares.
The total matching contributions were expensed in Unocal's consolidated
earnings statement. In the consolidated cash flow statements, the portions
of the matching contributions resulting in the issuance of Unocal common
stock, as detailed below, were treated as a noncash transactions since the
resulting effect on cash flow was zero.
For the Nine Months
Ended September 30
-----------------------------
1996 1995
- --------------------------------------------------------------------------------
Shares of Unocal common stock issued (in thousands) 252 700
Fair value of common stock (in millions of dollars) $8 $20
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
CONVERTIBLE PREFERRED SECURITIES
See Note 12 for discussion of Unocal's third quarter 1996 exchange of 6-1/4
percent Trust Convertible Preferred Securities of a subsidiary trust for
outstanding shares of Unocal's $3.50 Convertible Preferred Stock. The exchange
was treated as a noncash transaction since the resulting effect on cash flow was
zero.
(7) Income Taxes:
The components of pre-tax earnings and the provision for income taxes were
as follows:
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------------------------------------------------------------------------
Millions of dollars 1996 1995 1996 1995
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Earnings (loss) before income taxes:
United States (a) ............................ $ 87 $ (7) $ 438 $ (2)
Foreign ...................................... 164 113 427 364
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Total ..................................... $ 251 $ 106 $ 865 $ 362
Income Taxes:
Current
Federal ................................... $ (4) $ (1) $ 100 $ 15
State ..................................... 1 -- 3 5
Foreign ................................... 70 45 182 152
--------------------------------------------------------------------
Total current ........................... $ 67 $ 44 $ 285 $ 172
Deferred
Federal ................................... $ 7 $ 1 $ 12 $ (18)
State ..................................... 5 (7) 19 (24)
Foreign ................................... 1 9 16 21
--------------------------------------------------------------------
Total deferred .......................... $ 13 $ 3 $ 47 $ (21)
--------------------------------------------------------------------
Total income taxes .............................. $ 80 $ 47 $ 332 $ 151
(a) Includes corporate and unallocated expenses.
Reconciliation of income taxes at the federal statutory rate of 35% to tax
provision:
For the Three Months For the Nine Months
Ended September 30 Ended September 30
--------------------------------------------------------
Millions of dollars 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes ................................... $ 251 $ 106 $ 865 $ 362
Tax at federal statutory rate .................................. $ 88 $ 37 $ 303 $ 126
Taxes on foreign earnings in excess of
(less than) statutory rate ................................. (5) 18 36 52
Dividend exclusion ............................................. (3) (4) (11) (11)
Deferred California business tax credits,
net of federal tax effect ................................... -- (5) -- (16)
Other .......................................................... -- 1 4 --
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Total provision ........................................... $ 80 $ 47 $ 332 $ 151
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(8) LONG TERM DEBT AND CREDIT AGREEMENTS:
During the first quarter of 1996, the company issued $100 million of
medium-term notes with interest rates ranging from 5.94 percent to 6.23
percent and maturity dates ranging from February 2003 to February 2006. The
company also increased its commercial paper borrowings by $44 million.
During the second quarter of 1996, the company reduced long-term debt by
approximately $610 million, primarily with the proceeds from the sale of
its California oil and gas producing properties. Financing activities for
the second quarter of 1996 primarily consisted of: retirement at maturity
of the $110 million Swiss Franc bond issue and the corresponding $65
million currency swap agreement; and the early redemption of seven
pollution control bond issues totaling $49 million with interest rates
ranging from 6-1/8 percent to 7-7/8 percent. The company also reduced its
commercial paper balance by $377 million and terminated its $45 million
Netherlands revolving credit facility.
Third-quarter 1996 financing activities primarily consisted of an
additional borrowing of $20 million on the $250 million Thailand revolving
credit facility and payment of $80 million on the $1.2 billion credit
facility. In addition, the company further reduced its commercial paper
balance by $104 million, bringing the outstanding balance to $213 million
at September 30, 1996 and terminated its $25 million revolving credit
facility with a Canadian bank.
(9) FINANCIAL INSTRUMENTS
The fair value of the financial instruments described below are based on
the company's outstanding balances at September 30, 1996:
The Deutsche Mark currency swap agreement had a notional value of $110
million and a fair value of approximately $57 million based on dealer
quotes.
There were 17 outstanding currency forward contracts to purchase 26 million
Pounds Sterling for $40 million to hedge a series of known Pounds Sterling
requirements, and the fair market value of the contracts was approximately
$1.3 million in assets.
The floating interest rate on the swap agreement to hedge $25 million of
fixed rate medium-term notes was 5.6 percent, and the fair value was
insignificant, based on quoted market prices of comparable instruments.
The company had outstanding commodity futures contracts covering the sale
of 550 thousand barrels of crude oil and 7 billion cubic feet of natural
gas with notional amounts of $11 million and $14 million, respectively. The
fair value of the contracts, based on quoted market prices, was
insignificant.
The estimated fair value of the company's long-term debt and capital lease
obligations was $3,140 million. The estimated fair value of the company's
obligated mandatorily redeemable Convertible Preferred Securities was $553
million.
(10) ACCRUED ABANDONMENT, RESTORATION AND ENVIRONMENTAL LIABILITIES:
At September 30, 1996, the company had accrued $500 million for the
estimated future costs to abandon and remove wells and production
facilities. The total costs for abandonments are estimated to be $640
million to $780 million, of which the lower end of the range is used to
calculate the amount to be amortized.
At September 30, 1996, the company's reserve for environmental remediation
obligations totaled $245 million, of which $83 million was included
in current liabilities. The reserve included estimated probable future
costs of $29 million for federal Superfund and comparable state-managed
multiparty disposal sites; $30 million for formerly-operated sites for
which the company has remediation obligations; $67 million for sites
related to businesses or operations that have been sold with contractual
remediation or indemnification obligations; $67 million for company-owned
or controlled sites where facilities have been closed or operations shut
down; and $52 million for sites owned and/or controlled by the company and
utilized in its ongoing operations.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(11) CONTINGENT LIABILITIES:
The company has certain contingent liabilities with respect to material
existing or potential claims, lawsuits and other proceedings, including
those involving environmental, tax and other matters, certain of which are
discussed more specifically below. The company accrues liabilities when it
is probable that future costs will be incurred and such costs can be
reasonably estimated. Such accruals are based on developments to date, the
company's estimates of the outcomes of these matters and its experience in
contesting, litigating and settling other matters. As the scope of the
liabilities becomes better defined, there will be changes in the estimates
of future costs, which could have a material effect on the company's future
results of operations and financial condition or liquidity.
ENVIRONMENTAL MATTERS
The company is subject to loss contingencies pursuant to federal, state and
local environmental laws and regulations. These include existing and
possible future obligations to investigate the effects of the release or
disposal of certain petroleum, chemical and mineral substances at various
sites; to remediate or restore these sites; to compensate others for damage
to property and natural resources, for remediation and restoration costs
and for personal injuries; and to pay civil penalties and, in some cases,
criminal penalties and punitive damages. These obligations relate to sites
owned by the company or others and are associated with past and present
operations, including sites at which the company has been identified as a
potentially responsible party (PRP) under the federal Superfund laws and
comparable state laws. Liabilities are accrued when it is probable that
future costs will be incurred and such costs can be reasonably estimated.
However, in many cases, investigations are not yet at a stage where the
company is able to determine whether it is liable or, if liability is
probable, to quantify the liability or estimate a range of possible
exposure. In such cases, the amounts of the company's liabilities are
indeterminate due to the potentially large number of claimants for any
given site or exposure, the unknown magnitude of possible contamination,
the imprecise and conflicting engineering evaluations and estimates of
proper cleanup methods and costs, the unknown timing and extent of the
corrective actions that may be required, the uncertainty attendant to the
possible award of punitive damages, the recent judicial recognition of new
causes of action, the present state of the law, which often imposes joint
and several and retroactive liabilities on PRPs, and the fact that the
company is usually just one of a number of companies identified as a PRP.
As disclosed in Note 10, at September 30, 1996, the company had accrued
$245 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 additional remediation
costs aggregating approximately $180 million.
Between August 22 and September 6, 1994, a chemical known as "Catacarb" was
released into the environment at the company's San Francisco Refinery near
Rodeo, California. Persons in the surrounding area have claimed that they
were exposed to the chemical in varying degrees. Since September 22, 1994,
forty-eight lawsuits have been filed by or on behalf of all persons,
alleged to be several thousand, claiming that they or their property were
adversely affected by the releases. Forty-four of the lawsuits have been
consolidated in the Superior Court for Contra Costa County. The First
Amended Model Complaint in this consolidated action, filed February 1,
1995, on behalf of individual plaintiffs and purported classes of
plaintiffs, alleges personal injury, emotional distress and increased risk
of future illness on behalf of the named plaintiffs and all persons present
in and around or downwind from the San Francisco Refinery, and property
damage and loss or diminution of property value on behalf of all owners of
real and personal property in the vicinity of the Refinery, resulting from
the release of Catacarb by the Refinery. Certain individual plaintiffs
allege injury from alleged subsequent releases at the Refinery of hydrogen
sulfide and other chemicals. The Model Complaint seeks compensatory and
punitive damages in unspecified amounts, equitable relief including the
creation of a fund for medical monitoring and treatment of plaintiffs and
members of the purported classes, statutory penalties and other relief. The
company has reached agreement with plaintiffs to certify a mandatory
non-opt out punitive damages class. Plaintiffs have withdrawn their class
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
claims for personal injury and property damage. In early November, the
trial court issued an order declining to certify a medical monitoring
class. The court indicated its tentative intention to commence a trial with
an undetermined number of test plaintiffs in June 1997.
TAX MATTERS
In December 1994, the company received a Notice of Proposed Deficiency from
the Internal Revenue Service (IRS) related to the years 1985 through 1987.
In February 1995, the company filed a protest of the proposed tax
deficiency with the Appeals section of the IRS. Discussions with the
Appeals Officer are ongoing, but it appears that two substantial issues may
proceed to litigation. In an effort to resolve these issues without
litigation, in October 1996, the company and the IRS entered into an
Agreement to Mediate. While the parties have selected a mediator, no date
for the mediation has been set.
The most significant issue relates to an IRS challenge of a $341 million
deduction taken by the company in its 1985 tax return for amounts paid
under a settlement agreement with Mesa Petroleum, T. Boone Pickens and
Drexel Burnham Lambert, Incorporated, and certain others which ended a
hostile takeover attempt by that group. The IRS contends that the deduction
is not allowable because the payment was related solely to the purchase of
the company's common stock. Although the company did purchase shares under
the settlement agreement, it properly reflected the purchase in its records
at the fair market value of the shares purchased. The deduction at issue
relates to that portion of the payment made under the settlement agreement
that exceeded the value of the shares purchased. The company intends to
vigorously dispute the IRS' assertions in court. If the IRS were ultimately
to prevail, the company would owe $157 million of tax for 1985 plus tax
deductible interest estimated at $295 million as of September 30, 1996. As
this matter is not yet before a court, final resolution of this matter is
likely to be several years away.
The second issue relates to an IRS challenge of a continued deferral of
intercompany gains which arose from sales of property between subsidiaries
in 1982 and 1983. The IRS contends that the $201 million balance of
deferred gain must be recognized in the company's taxable income for 1985
when the subsidiaries contributed the property to a wholly owned master
limited partnership. The company intends to vigorously dispute the IRS'
assertions in court. If the IRS were ultimately to prevail, the company
would owe $92 million in tax for 1985, but would receive credits or refunds
for offsetting deductions in later years. For 1986 and 1987 the credits or
refunds would total $35 million. In addition to tax, the company would owe
tax deductible interest estimated at $120 million as of September 30, 1996.
As this matter is not yet before a court, final resolution of this matter
is likely to be several years away.
The total amount of tax and interest that the company would be required to
pay if the IRS were ultimately to prevail on both of the issues described
in the two preceding paragraphs is substantially less than the sum of the
amounts. As a result of the interplay of these issues, application of
foreign tax credits and overpayments related to other issues, the total
amount of tax and interest is estimated at $378 million as of September 30,
1996.
The company believes it has adequately provided in its accounts for items
and issues not yet resolved. In the opinion of management, a successful
outcome of the litigation is reasonably likely. However, substantial
adverse decisions could have a material effect on the company's financial
condition, operating results and liquidity in a given quarter and year when
such matters are resolved.
OTHER MATTERS
The company also has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary
course of business. Although these contingencies could result in expenses
or judgments that could be material to the company's results of operations
for a given reporting period, on the basis of management's best assessment
of the ultimate amount and timing of these events, such expenses or
judgments are not expected to have a material adverse effect on the
company's consolidated financial condition or liquidity.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(12) CONVERTIBLE PREFERRED SECURITIES AND PREFERRED STOCK
On September 11, 1996, pursuant to an offer which expired on September 5, 1996,
Unocal exchanged 10,437,873 new 6-1/4 percent Trust Convertible Preferred
Securities (the "Preferred Securities") of Unocal Capital Trust, a Delaware
business trust (the "Trust"), for 9,352,962 shares of Unocal's $3.50 Convertible
Preferred Stock (the "Preferred Stock") which were tendered in response to the
offer. Unocal acquired the Preferred Securities, which have an aggregate
liquidation value of $522 million, from the Trust, together with 322,821 common
securities of the Trust, which have an aggregate liquidation value of $16
million, in exchange for $538 million principal amount of 6-1/4 percent
Convertible Junior Subordinated Debentures (the "Debentures") of Unocal. The
Preferred Securities and common securities of the Trust represent undivided
beneficial interests in the Debentures, which are the sole assets of the Trust.
The Preferred Securities have a liquidation value of $50 per security and will
be convertible on and after December 10, 1996, into shares of Unocal common
stock at a conversion price of $42.56 per share, subject to adjustment upon the
occurrence of certain events. Distributions on the Preferred Securities are
cumulative from September 5, 1996, at an annual rate of 6-1/4 percent of their
liquidation amount and are payable quarterly in arrears on March 1, June 1,
September 1 and December 1 of each year, commencing on December 1, 1996, to the
extent that the Trust receives interest payments on the Debentures, which
payments are subject to deferral by Unocal under certain circumstances.
Upon repayment of the Debentures by Unocal, whether at maturity, upon redemption
or otherwise, the proceeds thereof must immediately be applied to redeem a
corresponding amount of the Preferred Securities and the common securities of
the Trust. The Debentures mature on September 1, 2026, and may be redeemed, in
whole or in part, at the option of Unocal, at any time on or after September 3,
2000, at a redemption price initially equal to 103.75 percent of the principal
amount redeemed, declining annually to 100 percent of the principal amount
redeemed in 2006, plus accrued and unpaid interest thereon to the redemption
date. The Debentures, and hence the Preferred Securities, may become redeemable
at the option of Unocal upon the occurrence of certain special events or
restructuring transactions.
The Trust is accounted for as a consolidated subsidiary of Unocal, with the
Debentures and payments thereon by Unocal to the Trust eliminated in the
consolidated financial statements. The payment obligations of the Trust under
the Preferred Securities are unconditionally guaranteed by Unocal (the
"Guarantee"). The Guarantee, when taken together with Unocal's obligations under
the Debentures and the indenture pursuant to which the Debentures were issued
and Unocal's obligations under the amended and restated declaration of trust
governing the Trust, provides a full and unconditional guarantee of the Trust's
obligations under the Preferred Securities.
On September 11, 1996, Unocal called the unexchanged 897,038 shares of the
Preferred Stock for redemption on October 11, 1996. Of these, 632,263 shares
were converted into 1,028,058 shares of Unocal common stock in September and the
remaining 264,775 shares were converted into 430,517 shares of common stock in
October prior to the redemption date.
(13) Unocal guarantees certain indebtedness of Union Oil. Summarized below is
financial information for Union Oil and its consolidated subsidiaries:
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1996 1995 * 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
Total revenues ................................................................. $2,611 $2,005 $7,573 $6,201
Total costs and other deductions, including income taxes ....................... 2,438 1,945 7,037 5,989
---------------------------------------------
Net earnings ................................................................... $ 173 $ 60 $ 536 $ 212
- -------------------------------------------------------------------------------- ---------------------------------------------
At September 30 At December 31
Millions of dollars 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
Current assets ............................................................................... $1,604 $1,576
Noncurrent assets ............................................................................ $8,213 $8,328
Current liabilities .......................................................................... $1,464 $1,309
Noncurrent liabilities ....................................................................... $5,020 $5,645
Shareholder's equity ......................................................................... $3,333 $2,950
- -----------------------------------------------------------------------------------------------------------------------------------=
9
OPERATING HIGHLIGHTS UNOCAL CORPORATION
(Unaudited)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------------------------------------
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
NET DAILY PRODUCTION
Crude oil and condensate (thousand barrels):
United States (a) 86.1 123.6 98.9 126.4
Foreign:
Far East (b) 82.2 81.9 82.4 84.6
Other 27.2 29.6 27.6 30.3
--------------------------------------------------
Total foreign 109.4 111.5 110.0 114.9
Worldwide 195.5 235.1 208.9 241.3
--------------------------------------------------
Natural gas (million cubic feet):
United States (a) 1,099 1,077 1,091 1,109
Foreign:
Far East (b) 667 577 626 597
Other 63 55 71 48
--------------------------------------------------
Total foreign 730 632 697 645
Worldwide 1,829 1,709 1,788 1,754
Natural gas liquids (thousand barrels) (a) 19.3 20.2 19.6 21.4
Geothermal (million kilowatt-hours) 21.0 17.7 17.3 16.0
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE SALES PRICES
Crude oil and condensate (per barrel):
United States $20.01 $14.83 $18.31 $15.17
Foreign:
Far East $18.89 $15.26 $18.32 $16.11
Other $19.89 $15.12 $18.53 $15.84
Total foreign $19.21 $15.21 $18.39 $16.01
Worldwide $19.62 $14.98 $18.34 $15.51
Natural gas (per thousand cubic feet):
United States $ 2.09 $ 1.43 $ 2.20 $ 1.49
Foreign:
Far East $ 2.27 $ 2.05 $ 2.23 $ 2.00
Other $ 2.05 $ 1.21 $ 1.82 $ 1.14
Total foreign $ 2.25 $ 1.97 $ 2.18 $ 1.94
Worldwide $ 2.15 $ 1.64 $ 2.20 $ 1.66
(a) Includes production from California upstream properties of:
Crude oil and condensate 1.0 28.7 10.9 29.4
Natural gas - 58 17 64
Natural gas liquids - 0.7 0.2 1.1
(b) Includes host country share in Indonesia of:
Crude oil and condensate 26.4 33.0 26.8 31.7
Natural gas 29 20 26 23
10
OPERATING HIGHLIGHTS (continued) UNOCAL CORPORATION
(Unaudited)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
INPUT TO CRUDE OIL PROCESSING UNITS (thousand barrels daily) ...................... 229 220 231 207
REFINERY PRODUCTION (thousand barrels daily)
EPA Gasoline ................................................................. 31 120 52 107
CARB gasoline ................................................................ 90 -- 64 --
Jet fuel, kerosene and heating oil ........................................... 33 29 36 21
Diesel fuel .................................................................. 19 14 21 12
CARB diesel .................................................................. 27 27 24 24
Other products (lubricants, gas oils , etc.) ................................. 58 53 61 62
----------------------------------------
Total ................................................................... 258 243 258 226
PETROLEUM PRODUCT SALES (thousand barrels daily)
Primarily sold through retail channels
EPA Gasoline ................................................................. 27 116 67 116
CARB gasoline ................................................................ 103 -- 64 --
Diesel fuel .................................................................. 15 12 14 12
CARB diesel .................................................................. 20 17 16 15
Other products ( includes lube oil, kerosene and fuel oil) ................... 7 7 7 7
----------------------------------------
Total ................................................................... 172 152 168 150
Primarily sold through wholesale or commercial channels
EPA Gasoline ................................................................. 4 31 9 23
CARB gasoline ................................................................ 21 -- 12 --
Jet fuel ..................................................................... 38 32 40 29
Diesel fuel .................................................................. 14 14 14 10
CARB diesel .................................................................. 15 11 12 6
Other products (includes petroleum products, gas oils , etc.) ................ 34 35 36 42
----------------------------------------
Total ................................................................... 126 123 123 110
----------------------------------------
Total petroleum products sales ....................................... 298 275 291 260
AGRICULTURAL PRODUCTS PRODUCTION VOLUMES (thousand tons)
Ammonia ......................................................................... 360 296 1,089 988
Urea ............................................................................ 275 242 845 806
Other products .................................................................. 149 169 494 583
AGRICULTURAL PRODUCTS SALES VOLUMES (thousand tons)
Ammonia ......................................................................... 206 106 574 500
Urea ............................................................................ 198 247 779 773
Other products .................................................................. 302 255 971 962
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED RESULTS
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------------- ---------------------------
Millions of dollars 1996 1995 * 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
Net earnings excluding special items: .............................. $ 153 $ 50 $ 478 $ 205
Special items:
Sale of California oil and gas properties * .................... -- -- 70 --
Florida and Alaska OCS settlement .............................. -- 18 -- 18
Other asset sales .............................................. 49 1 63 38
Environmental provision ........................................ (12) (1) (38) (19)
Litigation provision ........................................... (22) (5) (34) (17)
Write-down of assets ........................................... -- -- (4) (10)
Other .......................................................... 3 (4) (2) (4)
------------------------------------------------------
Net earnings including special items ........................ $ 171 $ 59 $ 533 $ 211
* Net of provision for environmental remediation of $10 million
During the third quarter and first nine months of 1996, operating earnings
continued to improve over the prior year results primarily due to higher
worldwide crude oil and natural gas sales prices; improved refined product
margins; improved foreign natural gas production and increased production and
sales volumes of agricultural products. Partially offsetting these positive
factors were decreased worldwide crude oil production, primarily due to asset
sales and increased exploration costs. During the third quarter of 1996, other
asset sales consisted of the sale of exploration blocks in the North sea and
miscellaneous real estate assets. Year-to-date 1996 other asset sales primarily
consisted of the sale of miscellaneous oil and gas properties and miscellaneous
real estate assets. Year-to-date 1995 other asset sales primarily consisted of
the sale of miscellaneous oil and gas properties and the company's Process
Technology and Licensing business.
Consolidated sales and operating revenues for the third quarter of 1996
increased by $598 million, or 31 percent, compared with the third quarter of
1995, and consolidated sales and operating revenues for the first nine months of
1996 increased by $1,275 million, or 21 percent, compared with the first nine
months of 1995. The increased sales and operating revenues were primarily the
result of higher crude oil, natural gas and gasoline sales prices.
OIL AND GAS EXPLORATION AND PRODUCTION
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1996 1995 * 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
Net earnings excluding special items: ............................ $ 137 $ 82 $ 459 $ 290
Special items:
Sale of California oil and gas properties * .................. -- -- 68 --
Other asset sales ............................................ 40 (1) 46 8
Florida and Alaska OCS settlement ............................ -- 18 -- 18
Write-down of assets ......................................... -- -- -- (8)
-------------------------------------------------------
Net earnings including special items ...................... $ 177 $ 99 $ 573 $ 308
* Net of provision for environmental remediation of $10 million
During the third quarter and first nine months of 1996, average worldwide sales
prices for crude oil and natural gas and foreign natural gas production were
higher than the 1995 levels. Partially offsetting these positive factors were
declining worldwide crude oil production and increased exploration costs.
Worldwide crude oil production decreased principally due to the sale of the
California properties and other oil and gas assets and natural decline. Another
factor offsetting improved earnings was increased dry hole costs, which were the
result of increased exploratory drilling in the United States.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Oil and Gas Exploration and Production sales and operating revenues (including
intercompany) for the third quarter and first nine months of 1996 were $664
million and $2,000 million, respectively, compared with $543 million and $1,701
million for the corresponding periods in 1995.
Average worldwide crude oil sales prices increased during the third quarter of
1996 by $4.64 per barrel, or 31 percent, and worldwide natural gas sales prices
increased by $.51 per thousand cubic feet, or 31 percent, compared with the
third quarter of 1995. During the first nine months of 1996, worldwide crude oil
sales prices increased by $2.83 per barrel, or 18 percent, and worldwide natural
gas sales prices increased by $.54 per thousand cubic feet, or 33 percent,
compared with the first nine months of 1995.
During the third quarter and first nine months of 1996, foreign natural gas
production increased by 16 percent and 8 percent, respectively, over the same
periods a year ago. The increase was primarily due to activities in Thailand and
the Netherlands.
REFINING, MARKETING AND TRANSPORTATION - 76 PRODUCTS COMPANY
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------------
Millions of dollars 1996 1995 * 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) excluding special items: ................................ $ 35 $ 12 $ 76 $ (5)
Special items:
Sale of California oil and gas properties (pipelines) ................... -- -- 2 --
Other asset sales ....................................................... 1 -- 1 --
Litigation provision .................................................... (2) -- (2) --
Write-down of assets .................................................... -- -- (4) --
Other ................................................................... 3 -- 7 --
----------------------------------------------
Net earnings (loss) including special items .......................... $ 37 $ 12 $ 80 $ (5)
The 76 Products Company's increased earnings during the third quarter and first
nine months of 1996 reflected significantly improved product margins, higher
product sales volumes and increased refinery production of light oil products as
compared to the same periods in 1995.
76 Products Company's sales and operating revenues (including intercompany and
excise taxes) for the third quarter and first nine months of 1996 were $1,243
million and $3,536 million, respectively, compared with $977 million and $2,899
million (including intercompany and excise taxes) for the corresponding periods
in 1995.
During the third quarter and first nine months of 1996, product sales volumes
through retail channels increased by 13 percent and 12 percent, respectively,
compared with the corresponding periods in 1995. Compared with the third quarter
and first nine months of 1995, refinery production increased by 6 percent and 14
percent, respectively.
GEOTHERMAL AND POWER OPERATIONS
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1996 1995 * 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
Net earnings excluding special items: .............................. $ 6 $ 4 $15 $14
Special items:
Sale of assets ................................................. -- 2 -- 7
---------------------------------------------------
Net earnings including special items ........................ $ 6 $ 6 $15 $21
The 1995 gain was from the sale of a small interest in the Indonesian geothermal
operations.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Diversified Businesses
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------------
Millions of dollars 1996 1995 * 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
Net earnings excluding special items:
Agricultural Products .......................................... $ 20 $ 3 $ 73 $ 51
Carbon and Minerals ............................................ 13 13 40 40
Pipelines ...................................................... 14 15 44 50
Other .......................................................... 2 2 5 8
----------------------------------------------------
Total ..................................................... $ 49 $ 33 $162 $149
Special items:
Asset sales
Agricultural Products ....................................... -- -- -- 4
Pipeline .................................................... -- -- 7 --
Miscellaneous (Other) ....................................... 8 -- 8 1
----------------------------------------------------
Net earnings including special items ........................ $ 57 $ 33 $177 $154
Increased earnings for Diversified Businesses were primarily due to increased
production and sales volumes for agricultural products. During the third quarter
and first nine months of 1996, ammonia production volumes increased 22 percent
and 10 percent, respectively, compared with the same periods in 1995. Ammonia
sales volumes increased by 94 percent and 15 percent during the third-quarter
and first nine-months of 1996, respectively, compared with the corresponding
periods in 1995.
CORPORATE AND UNALLOCATED
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------------
Millions of dollars 1996 1995 * 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
Net earnings excluding special items:
Administrative and general expense ................................. $ (21) $ (22) $ (55) $ (57)
Net interest expense ............................................... (37) (50) (135) (140)
Environmental and litigation expense ............................... (5) (4) (14) (21)
Other .............................................................. (11) (5) (30) (25)
------------------------------------------------------
Total ......................................................... (74) (81) (234) (243)
Special items:
Environmental and litigation provisions ......................... (32) (6) (70) (36)
Asset sales (Other) ............................................. -- -- 1 18
Write-down of assets (Other) .................................... -- -- -- (2)
Other ........................................................... -- (4) (9) (4)
------------------------------------------------------
Net earnings effect including special items .................. $(106) $ (91) $(312) $(267)
Asset sales for 1995 consisted primarily of the sale of the company's Process,
Technology and Licensing business.
FINANCIAL CONDITION AND CAPITAL EXPENDITURES
For the first nine months of 1996, cash flow from operating activities,
including working capital changes, was $1,199 million, compared with $676
million in 1995. This increase was principally due to higher commodity prices.
Proceeds from asset sales were $585 million for the first nine months of 1996.
The total principally included: $490 million from the sale of oil and gas
producing properties, which included $480 million from the sale of the
California properties; $20 million from the 1995 sale of geothermal assets; $12
million from the sale of the company's interest in the Platte Pipeline; $23
million from the sale of exploration blocks in the North Sea; and $30 million
from the sale of miscellaneous real estate assets. The company used most of the
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
proceeds from these sales to repay long-term debt. Proceeds from asset sales for
the first nine months of 1995 were $130 million, mainly from the sale of
nonstrategic oil and gas properties and the Process, Technology and Licensing
business.
Consolidated working capital at September 30, 1996 was $155 million, a decrease
of $105 million from the year-end 1995 level of $260 million. The company's
total debt was $3,070 million at September 30, 1996, a decrease of $636 million
from the year-end 1995 level. The debt-to-total capitalization ratio dropped to
48 percent from 55.8 percent at year-end 1995. See Notes 8 and 9 to the
Consolidated Financial Statements for additional information.
Capital expenditures for the first nine months of 1996 totaled $940 million, a
decrease of $27 million from the 1995 level of $967 million. Estimated
expenditures for the full year 1996 are expected to reach $1.3 billion.
ENVIRONMENTAL MATTERS
At September 30, 1996, the company's reserves for environmental remediation
obligations totaled $245 million, of which $83 million was included in current
liabilities. During the first nine months of 1996, cash payments of $49 million
were charged against reserves and an additional $80 million in liabilities were
added to the reserve account, primarily due to changes in estimated future
remediation costs for numerous sites. The company estimates that it could incur
additional remediation costs aggregating approximately $180 million as discussed
in Note 11 to the Consolidated Financial Statements.
The company is subject to federal, state and local environmental laws and
regulations, including the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, and the Resource Conservation and
Recovery Act (RCRA). Under these laws, the company is subject to possible
obligations to remove or mitigate the environmental effects of the disposal or
release of certain chemical and petroleum substances at various sites.
At year-end 1995, the company had received notification from the Federal
Environmental Protection Agency that the company may be a potentially
responsible party (PRP) at 40 Superfund sites. In addition, various state
agencies and private parties had identified 30 other similar PRP sites that may
require investigation and remediation. During the first nine months of 1996, 12
sites were added and five sites were removed resulting in a total of 77 sites.
Of the total, the company has denied responsibility at four sites and at another
14 sites the company's liability, although unquantified, appears to be de
minimis. At another four sites, the company is in the process of resolving its
liability. The total also includes 28 sites which are under investigation or in
litigation, for which the company's potential liability is not determinable. Of
the remaining 27 sites, where probable costs can be reasonably estimated, a
reserve of $29 million was included in the total environmental remediation
reserve as of September 30, 1996.
Unocal does not consider the number of sites for which it has been named a PRP
as a relevant measure of liability. Although the liability of a PRP is generally
joint and several, the company is usually only one of several companies
designated as a PRP. The company's ultimate share of the remediation costs at
those sites often is not determinable due to many unknown factors as discussed
in Note 11 to the Consolidated Financial Statements. The solvency of other
responsible parties and disputes regarding responsibilities may also impact the
company's ultimate costs.
Corrective investigations and actions pursuant to RCRA are being performed at
the San Francisco and Los Angeles refineries, Beaumont facility and at the
company's closed shale oil project and Molycorp Inc., Washington, Pennsylvania,
facility. The company also must provide financial assurance for future closure
and post-closure costs of its RCRA permitted facilities. Because these costs
will be incurred at different times and over a period of many years, the company
believes that these obligations are not likely to have a material adverse effect
on the company's results of operations or financial condition.
In the third quarter of 1996, the company added $18 million to the reserve for
estimated costs associated with the remediation of retail marketing sites. Some
of the remediation is being performed as the company replaces underground
storage tank (UST) systems at its service stations. Federal regulations require
all UST systems to meet new standards by December 1998. The addition also
includes remediation to be performed in conjunction with the company's program
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
to upgrade its service stations. Estimates for possible additional expenses are
included in the $180 million total of future estimated remediation costs
disclosed in Note 11 to the consolidated financial statements.
In November 1996, the company submitted a remedial action plan to the Regional
Water Quality Control Board (RWQCB) for the remediation of petroleum hydrocarbon
contamination from the beach area in Avilia Beach, California. Interim beach
protection measures will continue until the remedial action plan is evaluated as
part of the Environmental Impact Report process and approved by the RWQCB. Cost
estimates for the implementation of the plan are approximately $9 million. The
company expects to incur additional costs related to this site. These costs
however, cannot be determined at this time.
OTHER MATTERS
In the Philippines, the company's subsidiary, Philippine Geothermal, Inc.,
reached provisional agreement with Philippine National Power Corporation to
continue operating and maintaining two geothermal fields in the northern
Philippines until a legal dispute over the extension of the service contract for
an additional 25 years is settled. The original 25-year service contract expired
on September 30, 1996. The interim contract is for six months and is renewable
for another three months. Both parties will continue to observe the rights and
obligations under the original contract except for the terms of payment. Under
the interim agreement, 60 percent of the company's revenue from the steam fee is
being held in escrow until the courts reach a decision.
FUTURE ACCOUNTING CHANGE
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". This Statement is to be
applied prospectively to transactions occuring after December 31, 1996. The
company is reviewing the potential financial impact of adopting the new
accounting standard.
OUTLOOK
Certain of the statements in this discussion, as well as other forward-looking
statements within this document, contain estimates and projections of amounts of
or increases in future revenues, earnings, cash flows, capital expenditures,
assets, liabilities and other financial items and of future levels of or
increases in reserves, production, sales including related costs and prices, and
other statistical items; plans and objectives of management regarding the
company's future operations, products and services; and certain assumptions
underlying such estimates, projection plans and objectives. While these
forward-looking statements are made in good faith, future operating, market,
competitive, legal, economic, political, environmental, and other conditions and
events could cause actual results to differ materially from those in the
forward-looking statements.
While third quarter 1996 refined product margins were above 1995 levels, they
were significantly below the levels of the second quarter of 1996. This decline
has continued into the fourth quarter of 1996 due to the competitive conditions
that have developed in the California market. Crude oil and natural gas prices
are expected to remain strong; however, crude oil prices could be adversely
impacted if the United Nations Resolution 986 on the limited sale of Iraq oil is
implemented. The company will continue to be affected by the uncertainty and
volatility of prices.
During the fourth quarter of 1996, gross natural gas production in Thailand is
expected to increase by 35 percent to an average of approximately 990 mmcfd.
Gross natural gas production for the first nine months averaged 735 mmcfd.
Associated condensate is expected to average about 32,500 barrels per day during
the fourth quarter compared to 26,482 barrels per day for the first nine months.
The increased production was in response to Petroleum Authority of Thailand's
(PTT) requirement for additional gas to meet customer demand. In order to
continue to respond to increased demand, the company expects average gross
production to be at or above one billion cubic feet per day by the second
quarter of 1997 when PTT's second offshore pipeline and related onshore
pipelines and processing facilities are fully operational. Unocal has a 65
percent average net interest in the nine fields it operates in the Gulf of
Thailand. On November 11, 1996, the company announced the outcome of 11
successful wells drilled in the Gulf of Thailand, which resulted in the
discovery of one new field and extensions and/or delineations of five existing
fields.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The company's subsidiary, Unocal Yangtze, Ltd., joined an equity joint venture
that plans to construct and operate a liquefied petroleum gas (LPG) terminal in
the People's Republic of China. The terminal construction is expected to be
completed by December 1997, with LPG available for delivery to customers by
January 1998. The initial planned annual throughput capacity for the terminal is
500,000 metric tons. The company has a 30 percent interest in thejoint venture.
On November 12, 1996, the company entered into an agreement to sell 80 percent
of the stock of its wholly owned subsidiary, NEC Acquisition Company (NEC), for
a sales price of $28 million. The company's after-tax loss is expected to be
approximately $57 million. NEC has a 25 percent interest in The Geysers
geothermal operations located in Northern California. It is contemplated that
the sale will be effective on November 30, 1996.
On October 29, 1996, the company announced its intention to establish 76
Products Company as a wholly owned subsidiary and transfer its West Coast
downstream refining, marketing and transportation assets to the subsidiary by
the end of 1996.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is incorporated by reference the information regarding environmental
remediation reserves in Note 10 to the consolidated financial statements in Item
1 of Part I, the discussion thereof in the Environmental Matters section of
Management's' Discussion and Analysis in Item 2 of Part I, and the information
regarding contingent liabilities in Note 11 to the consolidated financial
Statements in Item 1 of Part I.
(1) In Citizens for a Better Environment, et al. v. Union Oil Company of
California (No. C94-0712, U.S.D.C., N.D. California) regarding allegations
of NPDES violations from selenium discharges, the Ninth Circuit Court of
Appeals denied the request for a rehearing en banc. The company is now
evaluating whether to file a Petition for Writ of Certiorari with the U. S.
Supreme Court.
(2) In People v. Union Oil Company of California, Superior Court of San Luis
Obispo County (Civil No. 75194), trial settings have been vacated on motion
of the California Attorney General. The next status conference is scheduled
for November 15, 1996.
(3) The company has been served with a lawsuit which is purportedly brought by
unidentified representatives on behalf of an alleged class of plaintiffs
consisting of all residents of the Tenasserim region of Myanmar who are
affected by the defendants' alleged acts of mistreatment and forced labor,
and by a California resident, Louisa Benson, who claims that the defendants
have engaged in unfair business practices (John Doe, et al. and Louisa
Benson v. Unocal Corp., et al., U.S.D.C, C.D. Calif., Civil No 96-6959-LGB,
filed October 3, 1996). Defendants include Total S.A., Myanma Oil and Gas
Enterprise, the State Law and Order Restoration Council (SLORC), John Imle
and Roger C. Beach.
Plaintiffs' claims are based on the company's joint-venture activities in
Myanmar for the exploration and production of natural gas in the Andaman
Sea and shipment of that gas to Thailand through a pipeline crossing
Myanmar (the Yadana Project). The complaint contains numerous counts and
alleged violations of several U.S. and California laws and U.S. treaties.
Plaintiffs seek compensatory and punitive damages on behalf of the
purported class, and Louisa Benson seeks disgorgement of profits.
Injunctive and declaratory relief is also requested to direct defendants
to cease payments to SLORC and to cease participation in the Yadana
Project.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 Bylaws of Unocal Corporation, as amended September 30, 1996, and currently
in effect.
11 Unocal Corporation statement regarding computation of earnings per common
share for the three months ended September 30, 1996 and 1995 and for the
nine-month periods ended September 30, 1996 and 1995.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
12.1 Unocal Corporation statement regarding computation of ratio of earnings to
fixed charges for the nine months ended September 30, 1996 and 1995.
12.2 Unocal Corporation statement regarding computation of ratio of earnings to
combined fixed charges and preferred stock dividends for the nine months
ended September 30, 1996 and 1995.
12.3 Union Oil Company of California statement regarding computation of ratio of
earnings to fixed charges for the nine months ended September 30, 1996 and
1995.
27 Financial data schedule for the quarter ended September 30, 1996 (included
only in the copy of this report filed electronically with the Commission).
99 Bylaws of Union Oil Company of California, as amended September 30, 1996,
and currently in effect.
(b) Reports on Form 8-K
During the third quarter of 1996:
1. Current Report on Form 8-K dated and filed July 25, 1996, for the
purpose of reporting, under Item 5, Unocal's second quarter and first
six months 1996 earnings.
2. Current Report on Form 8-K dated and filed September 3, 1996, for the
purpose of reporting, under Item 5, the exchange and conversion ratios
for the new 6-1/4 percent Trust Convertible Preferred Securities of
Unocal Capital Trust offered by Unocal in exchange for all of the
outstanding shares of its $3.50 Convertible Preferred Stock.
3. Current Report on Form 8-K dated and filed September 6, 1996, for the
purpose of reporting, under Item 5, the acceptance by Unocal of all
shares of its $3.50 Convertible Preferred Stock tendered in its
exchange offer.
4. Current Report on Form 8-K dated and filed September 11, 1996, for the
purpose of reporting, under Item 5, the completion of Unocal's
exchange offer and its call for redemption of the remaining shares of
its $3.50 Convertible Preferred Stock.
During the fourth quarter of 1996 to the date hereof:
1. Current Report on Form 8-K dated and filed October 23, 1996, for the
purpose of reporting, under Item 5, Unocal's third quarter and first
nine months 1996 earnings.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNOCAL CORPORATION
(Registrant)
Dated: November 13, 1996 By: /s/ CHARLES S. MCDOWELL
-----------------------
Charles S. McDowell
Vice President and Comptroller
(Duly Authorized Officer and
Principal Accounting Officer)
19