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, 1997
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,
1997: 246,527,276
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 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues .................................................... $ 1,370 $ 1,265 $ 4,272 $ 3,668
Gain on sales of assets and other revenues ...................................... 27 72 235 275
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues ............................................................ 1,397 1,337 4,507 3,943
Costs and Other Deductions
Crude oil and product purchases ................................................. 524 421 1,616 1,096
Operating expense ............................................................... 423 325 1,076 960
Selling, administrative and general expense ..................................... 26 36 81 104
Depreciation, depletion and amortization ........................................ 300 192 755 617
Dry hole costs .................................................................. 8 53 51 72
Exploration expense ............................................................. 50 33 114 83
Interest expense ................................................................ 37 67 147 215
Property and other operating taxes .............................................. 18 16 54 57
Distributions on convertible preferred
securities of subsidiary trust ............................................... 8 2 24 2
- ---------------------------------------------------------------------------------------------------------------------------------
Total costs and other deductions .......................................... 1,394 1,145 3,918 3,206
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes .......................................................... 3 192 589 737
Income taxes (benefit) .......................................................... (174) 58 68 284
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before discontinued
operations and extraordinary item ............................................ $ 177 $ 134 $ 521 $ 453
Discontinued operations
Earnings from operations (net of tax of $22 million and $48 million, respectively) -- 37 -- 80
Loss on disposal (net of tax benefit of $27 million) ......................... -- -- (44) --
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from discontinued operations .............................. -- 37 (44) 80
---------------------------------------------
Extraordinary item
Early extinguishment of debt (net of tax benefit of $14 million) .............. -- -- (38) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Earnings .................................................................... $ 177 $ 171 $ 439 $ 533
Dividends on preferred stock .................................................... -- -- -- 18
Non-cash charge related to exchange of preferred stock .......................... -- 54 -- 54
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock ................................... $ 177 $ 117 $ 439 $ 461
=============================================
Earnings (loss) per share of common stock assuming no dilution (a)
Continuing operations ........................................................ $ 0.71 $ 0.32 $ 2.09 $ 1.54
Discontinued operations ...................................................... -- 0.15 (0.18) 0.32
Extraordinary item ........................................................... -- -- (0.15) --
---------------------------------------------
Net earnings per common share assuming no dilution ........................ $ 0.71 $ 0.47 $ 1.76 $ 1.86
Earnings (loss) per share of common stock assuming full dilution (b)
Continuing operations ........................................................ $ 0.70 $ 0.31 $ 2.04 $ 1.52
Discontinued operations ...................................................... -- 0.14 (0.17) 0.31
Extraordinary item ........................................................... -- -- (0.14) --
---------------------------------------------
Net earnings per common share assuming full dilution ...................... $ 0.70 $ 0.45 $ 1.73 $ 1.83
Cash dividends declared per share of common stock ............................... $ 0.20 $ 0.20 $ 0.60 $ 0.60
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Weighted average shares outstanding assuming no dilution (in thousands) .... 247,367 248,668 249,153 248,211
(b) Weighted average shares outstanding assuming full dilution (in thousands) .. 262,073 263,525 263,757 262,823
See notes to the consolidated financial statements
1
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
September 30 December 31
-------------------------
Millions of dollars 1997 (a) 1996
- --------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 516 $ 217
Accounts and notes receivable 813 1,027
Net assets of discontinued operations -- 1,774
Inventories 154 125
Deferred income taxes 54 57
Other current assets 24 28
- --------------------------------------------------------------------------------------------
Total current assets 1,561 3,228
Investments and long-term receivables 1,081 1,206
Properties (b) 4,688 4,590
Deferred income taxes 19 21
Other assets 108 78
- --------------------------------------------------------------------------------------------
Total assets $ 7,457 $ 9,123
- --------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 664 $ 1,012
Taxes payable 123 231
Current portion of long-term debt and capital lease obligations -- 118
Interest payable 32 70
Current portion of environmental liabilities 73 73
Other current liabilities 83 118
- --------------------------------------------------------------------------------------------
Total current liabilities 975 1,622
Long-term debt 2,078 2,940
Deferred income taxes 166 348
Accrued abandonment, restoration and environmental liabilities 704 677
Other deferred credits and liabilities 607 739
Company-obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust holding solely 6-1/4%
convertible junior subordinated debentures of Unocal 522 522
Common stock ($1 par value) 252 251
Capital in excess of par value 444 412
Foreign currency translation adjustment (13) (13)
Unearned portion of restricted stock issued (34) (14)
Retained earnings 1,929 1,639
Treasury stock - at cost (c) (173) --
- --------------------------------------------------------------------------------------------
Total stockholders' equity 2,405 2,275
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 7,457 $ 9,123
- --------------------------------------------------------------------------------------------
(a) Unaudited
(b) Net of accumulated depreciation and other of: $ 9,863 $ 9,502
(c) Number of shares (in thousands): 4,485 --
See notes to the consolidated financial statements
2
CONSOLIDATED CASH FLOWS UNOCAL CORPORATION
(Unaudited)
For the Nine Months
Ended September 30
----------------------
Millions of dollars 1997 1996
- ------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net earnings $ 439 $ 533
Adjustments to reconcile net earnings to
net cash provided by operating activities
Loss on disposal of discontinued operations (before-tax 71 --
Depreciation, depletion and amortization 755 724
Dry hole costs 51 72
Deferred income taxes (226) 48
Gain on sales of assets (before-tax) (59) (173)
Other (83) 96
Working capital and other changes related to operations
Accounts and notes receivable 221 (23)
Inventories (41) 4
Accounts payable (351) 69
Taxes payable (110) 49
Other 69 (200)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 736 1,199
Cash Flows from Investing Activities
Capital expenditures (includes dry hole costs) (953) (940)
Proceeds from sale of discontinued operations 1,789 --
Proceeds from sales of assets 55 585
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activiti 891 (355)
Cash Flows from Financing Activities
Long-term borrowings 370 130
Reduction of long-term debt and capital lease obligations (1,329) (690)
Dividends paid on preferred stock -- (27)
Dividends paid on common stock (150) (149)
Repurchases of common stock (173) --
Other (46) 23
- ------------------------------------------------------------------------------------------
Net cash used in financing activities (1,328) (713)
Increase in cash and cash equivalents 299 131
Cash and cash equivalents at beginning of year 217 94
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 516 $ 225
- ------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 178 $ 243
Income taxes (net of refunds) $ 265 $ 239
See notes to consolidatefinancial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated financial statements included herein are unaudited and, in
the opinion of management, include all adjustments necessary for a fair
presentation of financial position and results of operations. All
adjustments are of a normal recurring nature. Such financial statements are
presented in accordance with the Securities and Exchange Commission's
(Commission) disclosure requirements for Form 10-Q.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto filed with the Commission in Unocal Corporation's 1996 Annual
Report on Form 10-K (as amended).
Results for the nine months ended September 30, 1997, are not necessarily
indicative of future financial results.
Certain items in the prior year financial statements have been reclassified
to conform to the 1997 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, are referred to as "Unocal" or "the
company".
(3) Discontinued Operations
On March 31, 1997, the company sold its West Coast refining, marketing and
transportation assets to Tosco Corporation (Tosco). In addition to cash
proceeds of $1.4 billion, the company received 14,092,482 shares of Tosco
common stock valued at $397 million. The value of the stock was based on
the average of the high and low market prices of the Tosco stock for the
last 10 trading days prior to the sale. On May 8, 1997, the company sold
the stock back to Tosco for $394 million (net of expenses).
During the first nine months of 1997, the company recorded an additional
loss on disposal of $44 million (net of a $27 million tax benefit). The
additional provision was primarily due to adjustments in closing inventory
amounts and higher than anticipated termination costs. Included in the $44
million amount is a favorable adjustment of $6 million (net of $4 million
tax) related to a lower than expected first quarter operating loss.
The consolidated earnings statement reflects the results for the refining,
marketing and transportation operations as discontinued operations for the
quarters and nine months ended September 30, 1997 and 1996. At December 31,
1996, the assets had been reclassified in the consolidated balance sheet
from their historical classifications to separately reflect them as net
assets of discontinued operations. Cash flows related to discontinued
operations have not been segregated in the consolidated statement of cash
flows for the 1996 and 1997 periods. Consequently, amounts on the
consolidated earnings statement may not agree with certain captions on the
consolidated statement of cash flows for the 1996 and 1997 periods.
(4) Extraordinary Item
In May 1997, the company purchased approximately $507 million in aggregate
principal amount of three of its outstanding issues of debt securities. The
debt securities consisted of $161 million in debentures with an interest
rate of 9-1/4 percent and $346 million in notes with interest rates of
8-3/4 percent and 9-3/4 percent. The debt securities were purchased for an
aggregate price of $555 million, including a pre-tax premium of
approximately $48 million over their aggregate carrying value. The premium,
together with related costs, was recorded as a extraordinary item on the
company's consolidated statement of earnings.
(5) Other Financial Information
Sales and operating revenues are principally derived from the sale of crude
oil, natural gas, natural gas liquids, geothermal steam, specialty minerals
and nitrogen-based agricultural products produced by the company. Sales and
operating revenues also include amounts received from the sale of purchased
crude oil, natural gas and products. During the third quarters of 1997 and
1996, approximately 29 percent and 30 percent, respectively, of total sales
and operating revenues were attributed to sales of purchased crude oil,
natural gas and products. For the first nine months of 1997 and 1996,
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
approximately 28 percent and 29 percent, respectively, of total sales and
operating revenues were attributed to sales of purchased crude oil, natural
gas and products. Earnings attributable to the sale of purchased crude oil,
natural gas and products were immaterial for the third quarters and first
nine months of 1997 and 1996. Related purchase costs are classified as
expense in the crude oil and product purchases category of the consolidated
earnings statement.
Capitalized interest totaled $10 million and $3 million for the third
quarters of 1997 and 1996, respectively. For the first nine months of 1997
and 1996, capitalized interest was $26 million and $9 million,
respectively.
(6) Income Taxes:
The components of earnings from continuing operations and the provision for
income taxes were as follows:
For Three Months For the Nine Months
Ended September 30 Ended September 30
--------------------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations
before income taxes
United States (a) ........................................ $(116) $ 28 $ 204 $ 310
Foreign .................................................. 119 164 385 427
--------------------------------------------------------
Total .............................................. 3 192 589 737
Income Taxes
Current
Federal ................................................... 2 (22) 76 65
State ..................................................... 2 (1) 13 1
Foreign ................................................... 77 70 243 182
--------------------------------------------------------
Total .............................................. 81 47 332 248
Deferred
Federal ................................................... (167) 3 (178) 2
State ..................................................... (7) 7 (5) 18
Foreign ................................................... (81) 1 (81) 16
--------------------------------------------------------
Total .............................................. (255) 11 (264) 36
--------------------------------------------------------
Total income taxes (benefit) ..................... $(174) $ 58 $ 68 $ 284
--------------------------------------------------------
<FN>
(a) Includes corporate and unallocated expenses.
</FN>
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following is a reconciliation of income taxes calculated at the federal
statutory income tax rate to income taxes (benefits) reported in the
consolidated earnings statement:
For Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Federal statutory rate: 35% 35% 35% 35%
Earnings from continuing operations
before income taxes ..................................................... $ 3 $ 192 $ 589 $ 737
Tax at federal statutory rate .............................................. 1 67 206 258
Foreign taxes in excess of (less than) statutory rate (b) .................. (53) (5) (8) 36
Dividend exclusion ......................................................... (3) (3) (10) (11)
U.S. deferred tax adjustment ............................................... (114) -- (114) --
Other ...................................................................... (5) (1) (6) 1
Total ......................................................... $(174) $ 58 $ 68 $ 284
------------------------------------------------
<FN>
(b) The third quarter and first nine months of 1997 included a $68 million reduction in deferred taxes for Thailand.
</FN>
(7) Inventories
September 30 December 31
-----------------------------------------------------
Millions of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Crude oil and other petroleum products ............................................. $ 28 $ 12
Agricultural products .............................................................. 33 31
Carbon and Minerals ................................................................ 54 31
Materials, supplies and other ...................................................... 39 51
- ------------------------------------------------------------------------------------------------------------------------------------
Total ....................................................................... $154 $125
- ------------------------------------------------------------------------------------------------------------------------------------
(8) Long Term Debt and Credit Agreements:
Third quarter 1997 financing activities primarily consisted of: the
borrowing of an additional $10 million under the $250 million Thailand
revolving credit facility, increasing the outstanding balance to $160
million, and a payment of $250 million on the $1.2 billion Bank Credit
Agreement, reducing the balance to zero. On October 10, 1997 the company
signed a new Bank Credit Agreement providing a revolving credit facility of
$1 billion through October 2002, at interest rates based on LIBOR and
requiring a facility fee on undrawn commitments. The $1.2 billion Bank
Credit Agreement available on September 30, 1997, which had availability
through June 2000, and the $200 million 364-day credit facility established
in 1995, which had a March 1998 maturity, were both canceled on October 10,
1997.
(9) Financial Instruments
The fair values of the company's financial instruments at September 30,
1997 are described below:
The Deutsche Mark currency swap agreement had a notional value of $110
million and a fair value of approximately $32 million based on dealer
quotes.
The company had outstanding commodity futures contracts covering the sale
of 1,853 thousand barrels of crude oil with a notional amount of $38
million and 8 billion cubic feet of natural gas with a notional amount of
$18 million. The fair values of the contracts, based on quoted market
prices, were insignificant.
The estimated fair value of the company's long-term debt and capital lease
obligations was $2,173 million. The fair values of debt instruments were
based on the discounted amount of future cash outflows using the rates
offered to the company for debt with similar remaining maturities. The
estimated fair value of the mandatorily redeemable convertible
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
preferred securities of the company's subsidiary trust was $638 million,
based on dealer quotes.
(10) Accrued Abandonment, Restoration And Environmental Liabilities:
At September 30, 1997, the company had accrued $495 million for the
estimated future costs to abandon and remove wells and production
facilities. The total costs for abandonments are accrued predominately on a
units-of-production basis and are estimated to be $675 million. This
estimate was derived in large part from abandonment cost studies performed
by an independent firm and is used to calculate the amount to be amortized.
At September 30, 1997, the company's reserve for environmental remediation
obligations totaled $282 million, of which $73 million was included in
current liabilities. The reserve included estimated probable future costs
of $25 million for federal Superfund and comparable state-managed
multiparty disposal sites; $28 million for formerly-operated sites for
which the company has remediation obligations; $81 million for sites
related to businesses or operations that have been sold with contractual
remediation or indemnification obligations; $119 million for company-owned
or controlled sites where facilities have been closed or operations shut
down; and $29 million for sites owned and/or controlled by the company and
utilized in its ongoing operations.
(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 may 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, 1997, the company had accrued
$282 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 $190 million.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
TAX MATTERS
In December 1994, the company received a Notice of Proposed Deficiency
(Notice) 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 is possible that the most substantial
issues raised in the Notice will 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 raised in the Notice 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 purchased
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 second largest issue raised in the Notice 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 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, after application of foreign tax credits
and overpayments related to other issues, and assuming a full disallowance
of the claim for refund discussed below, is estimated at $422 million as of
September 30, 1997.
During the first quarter of 1997, the IRS examination team completed its
review of a claim for refund recently filed by the company relating to its
1985 tax liability. If the company ultimately prevails in its claim for
refund, the liability for the issues described above would be eliminated
and the company would be entitled to a refund for overpayment of tax.
Although the IRS has not formally disallowed the claim, the company has
been informed that the IRS examination team believes the claim should be
disallowed. In April 1997, the IRS examination team sent the issue raised
by the claim to the IRS National Office for technical advice. In September
1997, the IRS examination team withdrew the technical advice request and
returned the claim to the IRS Appeals Officer for further consideration.
The company intends to vigorously defend the claim and dispute the proposed
deficiency and hopes to resolve these matters during 1997. Should that
effort fail, final resolution of these matters is likely to be several
years away as they are not yet before a court.
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 these matters 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) Unocal guarantees certain indebtedness of Union Oil. Summarized below is
financial information for Union Oil and its consolidated subsidiaries:
SUMMARIZED FINANCIAL DATA OF UNION OIL
For the Three Months For the Nine Months
Ended September 30 Ended September 30
--------------------------------------------------------
Millions of dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues ............................................ $ 1,397 $ 1,337 $ 4,507 $ 3,944
Total costs and other deductions
(including income taxes) ............................... 1,211 1,201 3,959 3,488
--------------------------------------------------------------
Earnings from continuing operations ....................... 186 136 548 456
Discontinued operations
Earnings from operations (a) ........................... -- 37 -- 80
Loss on disposal (b) ................................... -- -- (44) --
Extraordinary Item
Early extinguishment of debt (c) ...................... -- -- (38) --
--------------------------------------------------------------
Net earnings .............................................. $ 186 $ 173 $ 466 $ 536
--------------------------------------------------------------
<FN>
(a) Net of tax of: ....................................... $ -- $ 22 $ -- $ 48
(b) Net of tax benefit of: ............................... $ -- $ -- $ (27) $ --
(c) Net of tax benefit of: ............................... $ -- $ -- $ (14) $ --
</FN>
At September 30 At December 31
-------------------------------------------
Millions of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Current assets ........................................................... $1,559 $3,228
Noncurrent assets ........................................................ 5,925 5,905
Current liabilities ...................................................... 979 1,622
Noncurrent liabilities ................................................... 3,555 4,704
Shareholder's equity ..................................................... 2,950 2,807
------
9
OPERATING HIGHLIGHTS UNOCAL CORPORATION
(Unaudited)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
NET DAILY PRODUCTION
Crude oil and condensate (thousand barrels daily)
United States
Spirit Energy 76 .......................................... 40.8 51.4 45.0 51.7
Other (a) ................................................. 29.8 34.7 31.5 47.2
----------------------------------------------
Total United States ..................................... 70.6 86.1 76.5 98.9
International
Far East (b) .............................................. 96.2 82.2 94.9 82.4
Other ..................................................... 24.9 27.2 25.9 27.6
----------------------------------------------
Total International ..................................... 121.1 109.4 120.8 110.0
Worldwide .................................................... 191.7 195.5 197.3 208.9
----------------------------------------------
Natural gas (million cubic feet daily)
United States
Spirit Energy 76 .......................................... 844.5 928.4 875.7 917.0
Other (a) ................................................. 109.6 146.8 130.8 164.5
----------------------------------------------
Total United States ..................................... 954.1 1,075.2 1,006.5 1,081.5
International
Far East (b) .............................................. 790.0 666.5 789.5 625.7
Other ..................................................... 54.8 63.0 61.7 71.1
----------------------------------------------
Total International ..................................... 844.8 729.5 851.2 696.8
Worldwide .................................................... 1,798.9 1,804.7 1,857.7 1,778.3
----------------------------------------------
Natural gas liquids (thousand barrels daily) (a) ................ 17.8 19.3 18.7 19.6
Geothermal (million kilowatt-hours daily) ....................... 18.7 21.0 17.2 17.3
----------------------------------------------
(a) Includes production from California upstream properties of:
Crude oil and condensate ..................................... -- 1.0 -- 10.9
Natural gas .................................................. -- -- -- 17.2
Natural gas liquids .......................................... -- -- -- 0.2
(b) Includes host country share in Indonesia of:
Crude oil and condensate ..................................... 27.9 26.4 29.2 26.8
Natural gas .................................................. 21.9 29.1 26.6 26.2
10
OPERATING HIGHLIGHTS (continued) UNOCAL CORPORATION
(Unaudited)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
AVERAGE SALES PRICES
Crude oil and condensate (per barrel)
United States
Spirit Energy 76 ......................... $ 18.27 $ 21.80 $ 20.01 $ 20.33
Other .................................... 13.36 17.37 15.39 16.52
Total United States .................... 16.13 20.01 18.09 18.31
International
Far East ................................. $ 17.45 $ 18.89 $ 18.72 $ 18.32
Other .................................... 16.58 19.89 17.58 18.53
Total International .................... 17.23 19.21 18.41 18.39
Worldwide ................................... $ 16.73 $ 19.62 $ 18.26 $ 18.34
- -----------------------------------------------------------------------------------------------------
Natural gas (per thousand cubic feet)
United States
Spirit Energy 76 ......................... $ 2.31 $ 2.23 $ 2.42 $ 2.34
Other .................................... 1.47 1.36 1.39 1.42
Total United States .................... 2.21 2.09 2.29 2.20
International
Far East ................................. $ 2.39 $ 2.27 $ 2.35 $ 2.23
Other .................................... 2.40 2.05 2.23 1.82
Total International .................... 2.39 2.25 2.34 2.18
Worldwide ................................... $ 2.29 $ 2.15 $ 2.31 $ 2.20
- -----------------------------------------------------------------------------------------------------
AGRICULTURAL PRODUCTS PRODUCTION VOLUMES
(thousand tons)
Ammonia ........................................ 314 360 1,072 1,089
Urea ........................................... 188 275 696 845
Other products ................................. 146 149 494 494
AGRICULTURAL PRODUCTS SALES VOLUMES (thousand tons)
Ammonia ........................................ 187 206 590 574
Urea ........................................... 191 198 690 779
Other products ................................. 200 302 907 971
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and nine month periods ended September 30, 1997 should
be read in conjunction with Unocal's Management's Discussion and Analysis
reported in the 1996 Annual Report on Form 10-K (as amended).
Unocal explores for, develops, produces and markets crude oil and natural gas
resources around the world. The company's largest operations are in the Gulf
Coast region of the United States and in Southeast Asia. In addition, Unocal is
the world's leading geothermal energy producer and manufactures and markets
nitrogen-based fertilizers, petroleum coke, graphites, and specialty minerals.
CONSOLIDATED RESULTS
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of Dollars ` 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Reported net earnings .............................................. $ 177 $ 171 $ 439 $ 533
Special items:
Bangladesh well blowout ........................................ -- -- (7) --
UNO-VEN restructuring .......................................... -- -- 39 --
Deferred tax adjustments ....................................... 185 -- 192 --
Impairment of long-lived assets (SFAS No. 121) ................. (39) -- (39) --
Litigation provisions .......................................... (20) (20) (25) (32)
Environmental remediation provisions ........................... (41) (12) (50) (38)
Asset sales .................................................... (2) 48 30 130
Other .......................................................... -- -- -- (9)
Discontinued operations:
Loss on disposal ............................................ -- -- (44) --
Asset sales and miscellaneous ............................... -- 2 -- 4
Extraordinary item ............................................. -- -- (38) --
------------------------------------------------------
Total special items ............................................. 83 18 58 55
------------------------------------------------------
Adjusted net earnings .............................................. $ 94 $ 153 $ 381 $ 478
------------------------------------------------------
For the third quarter and first nine months of 1997, adjusted net earnings
reflected lower domestic crude oil and natural gas production, lower average
worldwide crude oil sales prices and higher depreciation, depletion and
amortization (DD&A) expense. Partially offsetting these negative factors were
improved international natural gas and crude oil production, primarily in
Thailand and Indonesia, higher average worldwide natural gas sales prices and
lower interest expense.
EXPLORATION AND PRODUCTION
For the Three Months For the Nine Months
Ended September 30 Ended September 30
---------------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Reported net earnings
United States
Spirit Energy 76 ............................................... $ 6 $ 55 $ 144 $ 215
Other .......................................................... 10 22 42 126
International ..................................................... 128 107 259 245
----------------------------------------------------
Total .......................................................... 144 184 445 586
Special items:
Impairment of long-lived assets (SFAS No. 121) ................... (39) -- (39) --
Deferred tax adjustment .......................................... 68 -- 68 --
Bangladesh well blowout .......................................... -- -- (7) --
Asset sales ...................................................... (1) 40 (15) 114
----------------------------------------------------
Total special items ......................................... 28 40 7 114
----------------------------------------------------
Adjusted net earnings ................................................ $ 116 $ 144 $ 438 $ 472
----------------------------------------------------
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Compared with the third quarter and first nine months of 1996, adjusted net
earnings for 1997 decreased $28 million, or 19 percent, and $34 million, or 7
percent, respectively. These decreases were due primarily to lower domestic
crude oil and natural gas production, higher worldwide DD&A expense and lower
average worldwide crude oil sales prices. Partially offsetting these negative
factors were increased natural gas and crude oil production in the Far East and
higher average worldwide natural gas sales prices.
During the third quarter and first nine months of 1997, domestic crude oil
production decreased 18 percent and 23 percent, respectively, and domestic
natural gas production decreased 11 percent and 7 percent, respectively. These
decreases were due primarily to natural declines, hurricane related shut-ins,
mechanical problems in some high output wells and delays in the drilling
program. Higher international production, principally from Thailand and
Indonesia, partially offset the domestic production declines. During the third
quarter and first nine months of 1997, international crude oil production
increased 11 percent and 10 percent, respectively, and international natural gas
production increased 16 percent and 22 percent, respectively.
Adjusted worldwide DD&A expense for the third quarter and first nine months of
1997 increased 26 percent and 17 percent, respectively, due primarily to
negative reserve adjustments in the United States and Thailand, increased
production from higher rate fields in the United States, higher production in
Thailand and higher capital spending in Indonesia.
Compared with the third quarter of 1996, average worldwide crude oil sales
prices decreased from $19.62 to $16.73 per barrel, a 15 percent decrease.
Average worldwide crude oil sales prices for the first nine months of 1997 were
essentially unchanged from the same period in 1996. For the third quarter of
1997, average worldwide natural gas sales prices increased from $2.15 to $2.29
per thousand cubic feet (mcf), and for the first nine months of 1997, average
worldwide natural gas sales prices increased from $2.20 to $2.31 per mcf.
Special items for the third quarter of 1997 primarily consisted of a $39 million
write-down for the impairment of long-lived assets and a $68 million reduction
in deferred taxes for Thailand related to recent currency devaluations. Special
items for the first nine months of 1997 also included a $7 million charge
related to a gas-ignited exploration well blowout in northeast Bangladesh and a
$17 million loss on the sale of the company's United Kingdom operations.
GEOTHERMAL OPERATIONS
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Reported net earnings ...................................... $ 6 $ 6 $25 $15
Special items:
Deferred tax adjustments ................................ 3 -- 10 --
---------------------------------------------------------
Adjusted net earnings ...................................... $ 3 $ 6 $15 $15
---------------------------------------------------------
Compared with the third quarter of 1996, the decrease in adjusted net earnings
were the result of decreased revenues in the Philippines due to the deferral of
60 percent of the revenues and related earnings pending the settlement of a
dispute regarding extension of the company's service contract and foreign
exchange losses, primarily in Indonesia. Partially offsetting these negative
factors was higher steam generation in Indonesia. During the first nine months
of 1997, adjusted net earnings reflected higher steam generation in all areas of
operation, decreased dry hole expense in Indonesia and lower depreciation
expense due to the sale of domestic geothermal assets in 1996. Offsetting these
positive factors were the negative factors previously discussed for the third
quarter of 1997.
During the third quarter and first nine months of 1997, the company recorded a
$3 million deferred tax benefit for exploration expenses incurred for a project
in Japan. In 1997, the company also recorded a $7 million deferred tax benefit
related to prior year exploration expenses incurred for the Sarulla project in
Indonesia.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
DIVERSIFIED BUSINESS GROUP
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Reported net earnings
Agricultural Products ....................................... $ 4 $ 20 $ 50 $ 73
Carbon and Minerals ......................................... 10 13 76 40
Pipelines ................................................... 16 14 46 51
Other ....................................................... -- 3 37 9
-------------------------------------------------------
Total ....................................................... 30 50 209 173
Special items:
UNO-VEN restructuring (Other) ............................... -- -- 39 --
Carbon and Minerals (asset sales) ........................... -- -- 41 --
Pipelines (asset sales) ..................................... -- -- -- 7
-------------------------------------------------------
Total special items ......................................... -- -- 80 7
-------------------------------------------------------
Adjusted net earnings .......................................... $ 30 $ 50 $129 $166
-------------------------------------------------------
Compared to the third quarter and first nine months of 1996, adjusted net
earnings decreased 40 percent and 22 percent, respectively, principally due to
lower agricultural products sales prices, sales volumes and production.
Agricultural products production was lower as a result of maintenance at the
Kenai, Alaska facility, mechanical problems and market related urea production
cuts. Decreased demand in China for nitrogen fertilizers, particularly urea,
impacted both agricultural products sales volumes and sales prices beyond normal
seasonal declines. Lower lanthanide margins, primarily due to price cutting by
China, and the elimination of earnings attributable to the UNO-VEN restructuring
and the sale of the Unocal Hydrocarbon Sales business also impacted the
Diversified Business Group's results.
CORPORATE AND UNALLOCATED
For the Three Months For the Nine Months
Ended September 30 Ended September 30
---------------------------------------------------------
Millions of Dollars 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Reported net earnings effect
Administrative and general expense .......................... $ (13) $ (21) $ (40) $ (55)
Net interest expense ........................................ (19) (37) (84) (135)
Environmental and litigation expense ........................ (65) (37) (86) (84)
New Ventures ................................................ (1) (7) (23) (13)
Other ....................................................... 95 (4) 75 (34)
---------------------------------------------------------
Total ....................................................... (3) (106) (158) (321)
Special items:
Environmental and litigation provisions ................... (61) (32) (75) (70)
Asset sales (Other) ....................................... (1) 8 4 9
Deferred tax adjustment (Other) .......................... 114 -- 114 --
Miscellaneous (Other) ..................................... -- -- -- (9)
---------------------------------------------------------
Total special items ......................................... 52 (24) 43 (70)
---------------------------------------------------------
Adjusted net earning effect .................................... $ (55) $ (82) $(201) $(251)
---------------------------------------------------------
Compared with the third quarter and first nine months of 1996, net interest
expense decreased 49 percent and 38 percent, respectively, as a result of
increased capitalized interest and a decreased debt level. Included in the
Corporate and Unallocated Other category for the third quarter and first nine
months of 1997 was a $7 million charge for a reinsurance obligation that was the
result of a platform fire in Indonesia. For the third quarter and first nine
months of 1997, the company reported a special item of $114 million for a
reduction of deferred taxes related to the reassessment of the company's
exposure for pending federal income tax appeals.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
DISCONTINUED OPERATIONS
During the first nine months of 1997, the company recorded an additional loss on
disposal of its West Coast refining, marketing and transportation operations of
$44 million (net of a $27 million tax benefit). See Note 3 to the consolidated
financial statements for additional information.
FINANCIAL CONDITION AND CAPITAL EXPENDITURES
For the first nine months of 1997, cash flow from operating activities,
including working capital changes, was $736 million, compared with $1,199
million in 1996. During the first nine months of 1997, the discontinued
refining, marketing and transportation operations had a negative cash flow of
$20 million, compared with a positive cash flow of $244 million for the same
period in 1996. The 1997 cash flow from operations also reflected an $81 million
escrow payment related to the settlement of the "Catacarb" litigation and $27
million for the company's buy-out of environmental liabilities related to the
UNO-VEN partnership restructuring. Also impacting cash flow from operations were
lower domestic crude oil and natural gas production, higher international
exploration expense and lower agricultural products prices. Partially offsetting
these negative factors were higher international crude oil and natural gas
production, higher average worldwide natural gas sales prices, and lower net
interest expense.
Proceeds from asset sales were $1,844 million for the first nine months of 1997.
The amount consisted of: $1,789 million from the sale of the West Coast
refining, marketing and transportation assets; $25 million for Unocal
Hydrocarbon Sales, $6 million from the sale of one of the company's airplanes,
$12 million for miscellaneous real estate properties and $12 million from the
sale of miscellaneous assets including various oil and gas properties.
Capital expenditures for the first nine months of 1997 totaled $953 million, an
increase of $13 million from the 1996 level of $940 million, due primarily to
increased international oil and gas activity. The company's preliminary capital
expenditure plan for 1998 could be as much as $1.5 billion, up from an estimated
$1.4 billion in 1997. The exploration capital spending program for 1998 is $568
million, up more than 50 percent from the estimated 1997 level. During 1998, the
company expects to drill more than 189 exploration wells.
Consolidated working capital at September 30, 1997 was $586 million, a decrease
of $1,020 million from the year-end 1996 level of $1,606 million. Included in
the 1996 amount was $1,774 million in net assets of discontinued operations. The
decline in working capital reflects primarily the application of proceeds from
the sale of these assets to the debt reduction described below, as well as the
company's repurchase of the $200 million undivided interest in pool trade
receivables, which it had previously sold.
The company's total debt was $2,078 million at September 30, 1997, a decrease of
$980 million from the year-end 1996 level of $3,058 million. The debt-to-total
capitalization ratio decreased to 42 percent from 52 percent at year-end 1996.
The company used a portion of the proceeds from the sale of its West Coast
refining, marketing and transportation assets to reduce long term debt. See
Notes 8 and 9 to the consolidated financial statements for related information.
Through September 30, 1997, the company had repurchased approximately 4.5
million shares of common stock for a total cost of approximately $173 million.
As of November 7, 1997, the company repurchased approximately 1.6 million
additional shares of common stock for a cost of approximately $65 million.
ENVIRONMENTAL MATTERS
At September 30, 1997, the company's reserves for environmental remediation
obligations totaled $282 million, of which $73 million was included in current
liabilities. During the third quarter, cash payments of $19 million were applied
against the reserve and an additional $67 million in liabilities were recorded
to the reserve account, primarily due to changes in estimated future remediation
costs as discussed below. The company also estimates that it could incur
additional remediation costs aggregating approximately $190 million, as
discussed in Note 11 to the consolidated financial statements. The company's
total environmental reserve is grouped into the following five categories:
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESERVE SUMMARY
September 30,
Millions of Dollars 1997
- --------------------------------------------------------------------------------
Superfund and similar sites ................................. $ 25
Former company-operated sites ............................... 28
Company facilities sold with
retained liabilities ...................................... 81
Inactive or closed company facilities ....................... 119
Active company facilities ................................... 29
----
Total reserves ........................................... $282
----
At year-end 1996, Unocal had received notification from the U.S. Environmental
Protection Agency that the company may be a potentially responsible party (PRP)
at 39 sites and may share certain liabilities at these sites. In addition,
various state agencies and private parties had identified 37 other similar PRP
sites that may require investigation and remediation. During the first nine
months of 1997, 10 sites were added and four sites were resolved resulting in a
total of 82 sites. Of the total, the company has denied responsibility at 6
sites and at another 8 sites the company's liability, although unquantified,
appears to be de minimis. The total also includes 27 sites which are under
investigation or in litigation, for which the company's potential liability is
not presently determinable. At another two sites, the company has made
settlement payments and is in the final process of resolving its liabilities. Of
the remaining 39 sites, where probable costs can be estimated, reserves of $25
million have been established for future remediation and settlement costs. These
82 sites exclude 60 sites where the company's liability has been settled, or
where the company has both no evidence of liability and there has been no
further indication of liability by government agencies or third parties for at
least a 12-month period.
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 just 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. The solvency of other responsible parties and disputes regarding
responsibilities may also impact the company's ultimate costs.
The company is subject to a number of 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.
Corrective investigations and actions pursuant to RCRA are being performed at
the company's Beaumont, Texas, facility, its closed Colorado shale oil project,
and its 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.
On May 14, 1997, a draft environmental impact report (EIR) prepared by a
consultant to the County of San Luis Obispo, California, was issued for use by
the County, the Regional Water Quality Board -- Central Coast Region and others
in evaluating the company's proposed remedial action plan, as well as
alternative courses of action, for remediation of the underground petroleum
hydrocarbon contamination at Avila Beach, California, resulting from former
company operations. The company reviewed the alternatives addressed therein
versus the expected environmental benefits, and issued comments in this regard
as well as comments on other procedural and substantive issues subject to
appeal. The county accepted public comments on the draft EIR for a 60-day period
through July 14, 1997. These comments will be used to determine the final EIR.
On August 25, 1997, the County of San Luis Obispo issued a draft EIR on the
company's remediation and abandonment plans for the Guadalupe Oil Field located
on the central coast of California. The field is contaminated with diluent, a
kerosene-like additive used in the company's former operations at the site. The
draft EIR will allow the company, the general public, the county and other
regulatory agencies to evaluate the company's proposed remediation and
abandonment plan, as well as
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
alternative courses of action, for the field. Certain of the alternatives
addressed in the draft EIR would, if implemented, result in significantly higher
remediation costs than the costs for the company's proposed plan. The company
has completed its review of the draft EIR and issued extensive comments to the
county on November 4, 1997.
In the third quarter of 1997, the company added approximately $55 million to the
remediation reserve for the estimated costs of the company's clean-up plans for
Avila Beach, Guadalupe and associated projects. The costs for Avila Beach
include expenses for excavation of the affected sections of the beach;
bioremediation of the town area; development of mitigation projects that will
benefit the community; and decommissioning and dismantlement of storage tanks
that overlook the town. There is a reasonable possibility that the company may
incur additional, but presently indeterminate, expenses for these sites. The
ultimate clean-up costs will be affected by the EIR's, which are expected to be
finalized in early 1998.
See Notes 10 and 11 for related information.
OUTLOOK
Certain of the statements in this discussion, as well as other forward-looking
statements within this document, contain estimates and projections of future
revenues, earnings, cash flows, capital expenditures, assets, liabilities and
other financial items and of future levels of 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.
During the fourth quarter of 1997, the company expects increased operating
earnings due to higher natural gas prices in the United States, improved
agricultural products sales volumes and production and expansion of the Salak
geothermal resource and power plant project in Indonesia.
In 1998, the company expects net worldwide oil and gas production to average
more than 560,000 barrels of oil equivalent (boe) per day, up seven percent from
an estimated 525,000 boe per day in 1997. The company is targeting growth to
more than 700,000 boe per day by 2001.
ASIAN ECONOMIC DOWNTURN
While the economic downturn in Southeast Asia is significant, the company has
experienced no material negative impact as a result of these recent events and
continues to expect no significant financial impact. The company believes the
steps being taken by the affected governments in the region and by international
financial institutions will alleviate the situation. In Thailand, the company's
gas sales contracts provide for adjustments in the event of a devaluation of
more than five percent of the baht in relation to the United States dollar. In
Indonesia and the Philippines, revenues from the company's operations are either
dollar-denominated or indexed to the United States dollar.
UNITED STATES EXPLORATION AND PRODUCTION
In an effort to increase domestic crude oil and natural gas production, the
company expects to increase the number of rigs it employs to 17 during the
fourth quarter of 1997. The company also signed a memorandum of understanding on
September 19, 1997, with Smedvig Offshore Limited for a deepwater drill ship
that can operate in 10,000 feet of water. The drill ship is designed for dual
activity and has capabilities for production testing. The ship is currently
under construction and is scheduled to start drilling operations in late 1998 or
early 1999.
On October 6, 1997, the company discovered oil in Terrebonne Parish, Louisiana.
The discovery well tested at an average daily rate of 1,068 barrels of oil and
3.3 million cubic feet of gas. Production is expected to begin in December 1997,
once the production facilities are completed. The company holds a 40 percent
working interest in the well.
In the Gulf of Mexico, the company recently tested a deepwater oil discovery in
Garden Banks 409 and is currently exploring development alternatives. A
production test on one of these wells drilled on the block wells yielded 7,266
barrels of oil and 3.7
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
million cubic feet of gas per day. The project, called Ladybug, is in close
proximity to existing infrastructure at Garden Banks 189, which will serve as
host facility. The company holds a 50 percent working interest in the project.
INTERNATIONAL EXPLORATION AND PRODUCTION
In Indonesia, the company successfully tested a stepout delineation well
offshore East Kalimantan that establishes significant natural gas and condensate
production potential in the deepwater area of the Mahakam Delta. The well tested
at a rate of 24.8 million cubic feet of gas and 860 barrels of condensate per
day. The company holds a 50 percent working interest in the project.
The company is currently considering the restructuring of certain Canadian oil
and gas assets held by its Unocal Canada, Ltd. subsidiary. The restructuring
could involve an exchange of assets for an equity interest in a publicly traded
Canadian oil and gas company or the formation of an alliance, joint venture or
operating partnership with a Canadian firm. The company's objective is to
enhance the long-term growth and value of its Canadian oil and gas properties.
The $1 billion Yadana natural gas development project remains on schedule for
its August 1, 1998 completion. The onshore Myanmar portion of the pipeline is
essentially completed. Efforts are now focused on the offshore infrastructure,
including a 215 mile pipeline and four platforms. Although the Thai side of the
project has faced challenges, approximately 118 miles of the pipeline has been
installed or is under construction. Construction of the remaining 32 miles
nearest the Myanmar border is expected to begin during the fourth quarter of
1997, with completion scheduled for June 1998. The company has a 28.26 percent
working interest in the project.
In Thailand, the company successfully tested two exploration wells. The wells
are part of a program to evaluate the new Maragot field offshore on Block
B12/26. The company is evaluating development options and expects to bring this
field on-stream following the start-up of production from the Pailin field,
which is scheduled to begin in late 1998. The company holds a 35 percent working
interest in the concession block, which includes the Pailin field.
GEOTHERMAL OPERATIONS
In Indonesia, at the Salak field on the Island of Java, the operation of a new
165-megawatt power plant began in the second week of October when the first of
three 55-megawatt Units came on-line. During the first week of November, Unit 5
began operations and Unit 6 is expected to come on-line in late November. The
company's fourth quarter results will benefit from the start-up of this
165-megawatt power plant.
DIVERSIFIED BUSINESS GROUP
Fourth quarter 1997 results for the Agricultural Products Group are expected to
improve as a result of seasonal increases in demand for agricultural products.
In addition, the company is restructuring its lanthanides business unit in
response to current lanthanides market conditions. This restructuring effort
should result in improved customer focus and product line profitability and
reduced overall operating costs. This restructuring will also result in a
manpower reduction at the company's Mountain Pass facility. The expected
completion of the restructuring is early 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is incorporated by reference the information previously reported in Item 3
of Unocal's Annual Report on Form 10-K (as amended) for the year ended December
31, 1996 (1996 Form 10-K (as amended)) and in Item 1 of Part II of Unocal's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 (First
Quarter 1997 Form 10-Q) and June 30, 1997 (Second Quarter 1997 Form 10-Q), 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.
18
PART II - OTHER INFORMATION (continued)
(1) With reference to the action entitled Atlantic Richfield Company, et
---------------------------------
al. v. Unocal Corporation, et al., involving the company's patent for
-------------------------------------
certain compositions of reformulated gasoline, described in Paragraph
(6) of Item 3 of the 1996 Form 10-K (as amended), on October 14, 1997,
following the first phase of a trial which commenced in July 1997, the
jury rendered a verdict upholding the validity of the patent and
finding that Atlantic Richfield Company and the other five oil
companies party to the action had infringed the patent with respect to
approximately 29 percent, or 1.2 billion gallons, of the gasoline
produced by them in California during the five-month period from March
through July 1996 at issue in the trial. On November 3, 1997, following
a second phase of the trial, the jury rendered a verdict awarding the
company damages of 5.75 cents per infringing gallon, or $69 million for
the five-month period. A third phase of the trial, relating to issues
of "inequitable conduct," is scheduled to be heard by the trial judge
commencing in early December 1997.
(2) With reference to the litigation arising from past underground
petroleum pipeline leaks at Avila Beach, California, described in
Paragraph (9) of Item 3 of the 1996 Form 10-K (as amended) and in
Paragraph (3) of Item 2 of Part II of the First Quarter 1997 Form 10-Q,
there are currently 14 lawsuits filed in the California Superior Court
for San Luis Obispo County that have been served on the company.
Thirteen of the suits are individually based, with a total of 107
plaintiffs. The other suit is a purported class action filed by owners
of a local time-share complex. In addition, the California Attorney
General's Office contacted Unocal and held a "pre-filing" meeting to
discuss remediation alternatives, mitigation, penalties and possible
claims for natural resource damages. The Attorney General's Office also
filed a notice of intent to sue based on Resource Conservation and
Recovery Act Section 7002 allegations.
In an effort to resolve property damage and business loss claims by the
local community and discourage additional lawsuits from being filed,
the company has announced a voluntary settlement program for property
and business owners in the town of Avila Beach.
(3) With reference to the litigation involving the Yadana gas project in
Myanmar, described in Paragraph (13) of Item 3 of the 1996 Form 10-K
(as amended), in Paragraph (5) of Item 1 of Part II of the First
Quarter 1997 Form 10-Q, and in Paragraph (2) of Item 1 of Part II of
the Second Quarter 1997 Form 10-Q, several developments have occurred
that may affect the course of the litigation:
In John Doe I, et al. v. Unocal Corp., et al., the court on September
---------------------------------------------
18, 1997, granted in part and denied in part the company's motion to
strike from the plaintiffs' complaint allegations concerning claims of
wrongful taking of property.
The hearing on the plaintiffs' motion for a preliminary injunction
(which seeks to enjoin the company from further participation in the
Yadana gas project) and on the plaintiffs' motion for class
certification is set for December 8, 1997.
Defendant Total's motion to dismiss for lack of personal jurisdiction
remains pending before the court.
In National Coalition Government of the Union of Burma, et al. v.
------------------------------------------------------------------
Unocal, Inc., et al., the company's motion to dismiss was granted in
---------------------
part and denied in part on October 30, 1997.
(4) With reference to the matter entitled Aguilar, et al. v. Atlantic
-----------------------------
Richfield, et al., alleging that the company and other oil company
-------------------
defendants conspired to fix the price of reformulated gasoline in
California in restraint of trade, described in Paragraph (7) of Item 1
of Part II of the First Quarter 1997 Form 10-Q, on October 17, 1997,
the court granted the defendants' motion for summary judgment. Counsel
for the plaintiffs has stated his intention to seek a reconsideration
of the court's decision.
ITEM 2. CHANGES IN SECURITIES
During the third quarter of 1997, the company awarded 5,156 restricted stock
units to certain nonemployee directors pursuant to the terms of the company's
Directors' Restricted Stock Plan. The units were not registered under the
Securities Act of 1933 (the Act) in reliance upon the exemption contained in
Section 4(2) of the Act for transactions by an issuer not involving any public
offering. The units were awarded (1) in consideration of the prior election by
each of the nonemployee directors to
19
PART II - OTHER INFORMATION (continued)
defer all or a portion of his or her cash fees and (2) upon the credit of
dividend equivalents upon units previously issued. The units are paid out in an
equal number of shares of Unocal common stock at the end of a restriction period
elected by each director, or upon his or her earlier termination of service as a
director.
During the third quarter of 1997, Unocal issued 727 shares of its common stock
upon the conversion of 620 of the 6-1/4 percent trust convertible preferred
securities of Unocal Capital Trust. The common shares were not registered under
the Act in reliance upon the exemption contained in Section 3(a)(9) of the Act
for securities exchanged by the issuer with its existing security-holders
exclusively where no commission or other remuneration is paid or given directly
or indirectly for soliciting such exchange.
ITEM 5. OTHER INFORMATION
Neal E. Schmale resigned as a director of Unocal Corporation effective as of
October 15, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The Exhibit Index on page 23 of this report lists the
exhibits that are filed as part of this report.
(b) Current Reports on Form 8-K
During the third quarter of 1997:
1. Report dated and filed July 23, 1997, for the purpose of
reporting, under Item 5, Unocal's second quarter and first
six months of 1997 earnings and related information.
2. Report dated September 16, 1997 and filed September 17,
1997, for the purpose of reporting, under Item 5, certain
hydrocarbon discoveries offshore Indonesia.
During the fourth quarter of 1997 to the date hereof:
1. Report dated and filed October 14, 1997, for the purpose of
reporting, under Item 5, Unocal's intent to consider the
restructuring of certain Canadian oil and gas assets held by
its Unocal Canada Limited, subsidiary.
2. Report dated and filed October 14, 1997, for the purpose of
reporting, under Item 5, the resignation of Neal E. Schmale
as Unocal's Chief Financial Officer and the appointment of
Timothy H. Ling as Chief Financial Officer, effective
October 15, 1997.
3. Report dated October 14, 1997 and filed October 15, 1997,
for the purpose of reporting, under Item 5, a jury's verdict
validating Unocal's reformulated gasoline patent.
4. Report dated and filed October 27, 1997, for the purpose of
reporting, under Item 5, Unocal's third quarter and first
nine months of 1997 earnings and related information.
5. Report dated November 3, 1997 and filed November 4, 1997,
for the purpose of reporting, under Item 5, damages awarded
to Unocal in the reformulated gasoline patent infringement
lawsuit.
20
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, 1997 By: /s/ JOSEPH A. HOUSEHOLDER
--------------------------
Joseph A. Householder
Vice President, Tax and Comptroller
(Duly Authorized Officer and
Principal Accounting Officer)
21
EXHIBIT INDEX
2.1 Sale and Purchase Agreement for 76 Products Company, dated
December 14, 1996, between Union Oil Company of California
and Tosco Corporation (without attachments or schedules)
(incorporated by reference to Exhibit 2.1 to Unocal's
Current Report on Form 8-K dated December 16, 1996 and filed
January 3, 1997, File No. 1-8483).
2.2 Stock Purchase and Shareholder Agreement, dated as of
January 15, 1997, by and between Tosco Corporation and Union
Oil Company of California, together with form of Supplement
No. 1 thereto (incorporated by reference to Exhibit 2.2 to
Unocal's Current Report on Form 8-K dated December 16, 1996
and filed January 3, 1997, File No. 1-8483).
2.3 Amendment No. 1 and Supplement, dated as of March 31, 1997,
to Stock Purchase and Shareholder Agreement, dated as of
January 15, 1997, by and between Tosco Corporation and Union
Oil Company of California (incorporated by reference to
Exhibit C to Unocal's and Union Oil Company of California's
statement on Schedule 13D relating to Tosco Corporation,
dated and filed April 10, 1997, File No. 1-7910).
2.4 Environmental Agreement, dated as of March 31, 1997, by and
between Union Oil Company of California and Tosco
Corporation (without schedules) (incorporated by reference
to Exhibit 2.3 to Unocal's Current Report on Form 8-K dated
December 16, 1996 and filed January 3, 1997, File No.
1-8483).
10 Termination and Employment Agreement and Release among Neal
E. Schmale, Union Oil Company of California and Unocal
Corporation.
11.1 Statement regarding computation of earnings per common share
assuming no dilution for the three months and nine months
ended September 30, 1997 and 1996.
11.2 Statement regarding computation of earnings per common share
assuming full dilution for the three months and nine months
ended September 30, 1997 and 1996.
12.1 Statement regarding computation of ratio of earnings to
fixed charges of Unocal for the nine months ended September
30, 1997 and 1996.
12.2 Statement regarding computation of ratio of earnings to
combined fixed charges and preferred stock dividends of
Unocal for the nine months ended September 30, 1997 and
1996.
12.3 Statement regarding computation of ratio of earnings to
fixed charges of Union Oil Company of California for the
nine months ended September 30, 1997 and 1996.
27 Financial data schedule for the period ended September 30,
1997 (included only in the copy of this report filed
electronically with the Commission).
22