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 March 31, 1998
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: 241,369,372
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS UNOCAL CORPORATION
CONSOLIDATED EARNINGS
(Unaudited)
For the Three Months
Ended March 31
----------------------
Millions of dollars except per share amounts 1998 1997
- --------------------------------------------------------------------------------
Revenues
Sales and operating revenues ................ $ 1,171 $ 1,408
Gain on sales of assets and other revenues .. 36 48
- --------------------------------------------------------------------------------
Total revenues ........................ 1,207 1,456
Costs and Other Deductions
Crude oil and product purchases ............. 416 459
Operating expense ........................... 331 288
Selling, administrative and general expense . 20 28
Depreciation, depletion and amortization .... 181 211
Dry hole costs .............................. 50 16
Exploration expense ......................... 47 28
Interest expense ............................ 41 61
Property and other operating taxes .......... 16 20
Distributions on convertible preferred
securities of subsidiary trust ........... 8 8
- --------------------------------------------------------------------------------
Total costs and other deductions ...... 1,110 1,119
- --------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes ...................... 97 337
Income taxes ................................ 79 149
- --------------------------------------------------------------------------------
Earnings from continuing operations
before discontinued operations ........... $ 18 $ 188
Loss from discontinued operations .......... -- (44)
- --------------------------------------------------------------------------------
Net earnings applicable to common stock $ 18 $ 144
- --------------------------------------------------------------------------------
Basic earnings per share of common stock (a)
Continuing operations .......................... $ 0.07 $0.75
Net earnings ................................... $ 0.07 $0.57
Diluted earnings per share of common stock (b) (c)
Continuing operations .......................... $ 0.07 $0.73
Net earnings ................................... $ 0.07 $0.56
Cash dividends declared per share of common stock . $ 0.20 $0.20
- --------------------------------------------------------------------------------
(a) Basic weighted average shares outstanding
(in thousands) 241,430 250,510
(b) Diluted weighted average shares outstanding
(in thousands) 242,861 264,773
(c) Distributions on preferred securities (net of tax)
excluded in numerator. In 1998, $ - $ 6
the effect of assumed conversion of preferred
securities on earnings per share is antidilutive.
See notes to the consolidated financial statements.
1
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
March 31 December 31
----------------------
Millions of dollars 1998 (a) 1997
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents ............................. $ 275 $ 338
Accounts and notes receivable ......................... 848 897
Inventories ........................................... 165 172
Deferred income taxes ................................. 54 71
Other current assets .................................. 31 23
- --------------------------------------------------------------------------------
Total current assets ............................... 1,373 1,501
Investments and long-term receivables .................... 1,128 1,113
Properties (b) ........................................... 4,882 4,816
Deferred income taxes .................................... 14 7
Other assets ............................................. 181 93
- --------------------------------------------------------------------------------
Total assets ....................................... $ 7,578 $ 7,530
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ...................................... $ 655 $ 785
Taxes payable ......................................... 112 126
Interest payable ...................................... 34 54
Current portion of environmental liabilities .......... 99 100
Other current liabilities ............................. 82 95
-------------------------------------------------------------------------------
Total current liabilities .......................... 982 1,160
Long-term debt ........................................... 2,427 2,169
Deferred income taxes .................................... 132 137
Accrued abandonment, restoration
and environmental liabilities ........................ 640 627
Other deferred credits and liabilities ................... 629 601
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) .............................. 252 252
Capital in excess of par value ........................... 460 452
Foreign currency translation adjustment .................. (17) (18)
Unearned portion of restricted stock issued .............. (31) (31)
Retained earnings ........................................ 1,992 2,021
Treasury stock - at cost (c) ............................ (410) (362)
- --------------------------------------------------------------------------------
Total stockholders' equity ......................... 2,246 2,314
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity ...... $ 7,578 $ 7,530
- --------------------------------------------------------------------------------
(a) Unaudited
(b) Net of accumulated depreciation: $ 10,040 $ 9,896
(c) Number of shares (in thousands): 10,595 9,262
See notes to the consolidated financial statements.
2
CONSOLIDATED CASH FLOWS UNOCAL CORPORATION
(Unaudited)
For the Three Months
Ended March 31
---------------------
Millions of dollars 1998 1997
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net earnings ............................................. $ 18 $ 144
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 ........... 181 211
Dry hole costs ..................................... 50 16
Deferred income taxes .............................. 13 10
Gain on sales of assets (before-tax) ............... -- (10)
Other .............................................. 20 (27)
Working capital and other changes
related to operations
Accounts and notes receivable ................... 69 (87)
Inventories ..................................... 7 (33)
Accounts payable ................................ (131) 105
Taxes payable ................................... (14) 48
Other ........................................... (119) (114)
- --------------------------------------------------------------------------------
Net cash provided by operating activities .... 94 334
Cash Flows from Investing Activities
Capital expenditures
(includes dry hole costs) ........................... (326) (286)
Proceeds from sale of
discontinued operations ............................. -- 1,390
Proceeds from sales of assets ......................... 4 16
- --------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities ...................... (322) 1,120
Cash Flows from Financing Activities
Long-term borrowings .................................. 395 341
Reduction of long-term debt ........................... (133) (166)
Dividends paid on common stock ........................ (48) (50)
Repurchases of common stock ........................... (48) (46)
Other ................................................. (1) (1)
- --------------------------------------------------------------------------------
Net cash provided by financing activities ....... 165 78
Increase (decrease) in cash and cash equivalents ......... (63) 1,532
Cash and cash equivalents at beginning of year ........... 338 217
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period ............... $ 275 $ 1,749
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 60 $ 86
Income taxes (net of refunds) $ 92 $ 62
See notes to the consolidated financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated financial statements included herein are unaudited and, in
the opinion of management, include all adjustments necessary for a fair
presentation of financial position and results of operations. All
adjustments are of a normal recurring nature. Such financial statements are
presented in accordance with the Securities and Exchange Commission's
(Commission) disclosure requirements for Form 10-Q.
These interim consolidated financial statements should be read in
conjunction with the Consolidated financial statements and the Notes
thereto filed with the Commission in Unocal Corporation's 1997 Annual
Report on Form 10-K.
Results for the three months ended March 31, 1998, are not necessarily
indicative of future financial results.
Certain items in the prior year financial statements have been reclassified
to conform to the 1998 presentation.
(2) For the purpose of this report, Unocal Corporation (Unocal) and its
consolidated subsidiaries, Union Oil Company of California (Union Oil) and
its consolidated subsidiaries and Unocal Capital Trust, will be referred to
as the company.
(3) Other Financial Information
Sales and operating revenues are derived from the sale of crude oil,
natural gas, natural gas liquids, geothermal steam, electricity, specialty
minerals and nitrogen-based agricultural products produced by the company.
During the first quarters of 1998 and 1997, approximately 31 percent and 32
percent, respectively, of total sales and operating revenues were
attributed to the resale of purchased crude oil, natural gas and natural
gas liquids produced by others, that the company purchased in connection
with its trading and marketing activities. Related purchase costs are
classified as expense in the crude oil and product purchases category of
the consolidated earnings statement.
Capitalized interest totaled $8 million and $5 million for the first
quarters of 1998 and 1997, respectively.
During the first quarter of 1998, the company recorded after-tax foreign
exchange losses of approximately $6 million. These losses were primarily
due to foreign currency forward contracts which locked in U.S. dollar
exchange rates for the Thai baht.
(4) Income Taxes
Taxes on earnings from continuing operations for the first quarter of 1998
were $79 million compared with $149 million for the first quarter of 1997.
The effective tax rates for the first quarters of 1998 and 1997 were 81
percent and 44 percent, respectively. The increase in the effective tax
rate for 1998 was primarily due to adjustments totaling $21 million for
deferred taxes and $11 million for current taxes related to appreciation of
the baht in Thailand.
(5) Comprehensive Income
Effective March 31, 1998, the company adopted Financial Accounting Standard
No. 130, "Reporting Comprehensive Income", which establishes standards for
reporting and displaying comprehensive income and its components in a full
set of financial statements. The company's comprehensive earnings were as
follows:
For the Three Months
Ended March 31
--------------------------
Millions of dollars 1998 1997
- ------------------------------------------------------------------------------
Net earnings ................................. $ 18 $ 144
Change in equity due to foreign
currency translation adjustments ............. 1 (1)
- --------------------------------------------------------------------------------
Comprehensive earnings ................. $ 19 $ 143
- --------------------------------------------------------------------------------
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(6) Earnings Per Share
The following are reconciliations of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations for earnings from
continuing operations for the first quarters ended March 31, 1998 and 1997:
Earnings Shares Per Share
Millions except per share amounts (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months ended March 31, 1998
Earnings from continuing operations ......................................... $ 18 241
Basic EPS ............................................................. $ 0.07
=====
Effect of Dilutive Securities
Options .................................................................. -- 1
-------------------------------------
Diluted EPS .............................................................. $ 18 $242 0.07
=====
Distributions on preferred securities (after-tax) ........................ 6 12
-------------------------------------
Antidilutive ............................................................. $ 24 $254 0.09
=====
Three Months ended March 31, 1997
Earnings from continuing operations ......................................... $188 251
Basic EPS ............................................................. $ 0.75
=====
Effect of Dilutive Securities
Options .................................................................. -- 1
-------------------------------------
188 $252 0.75
=====
Distributions on preferred securities (after-tax) ........................ 6 12
-------------------------------------
Diluted EPS ........................................................... $194 $264 0.73
-------------------------------------
Not included in the computation of diluted EPS were options outstanding at
March 31, 1998 to purchase approximately 827 thousand shares of common
stock. These options were not included in the computation, as the exercise
prices were greater than the average market price of the common shares. The
exercise prices of these options range from $38.81 to $44.75 per share. The
options will expire in 2007.
At March 31, 1997, the basic and diluted loss per share for discontinued
operations were $.18 and $.17, respectively.
(7) Long Term Debt and Credit Agreements
Financing activities during the first quarter of 1998 primarily consisted
of increased borrowings through the issuance of $395 million in commercial
paper, bringing the outstanding balance to $495 million. In addition, the
company retired $25 million in medium-term notes and $108 million of the
$250 million Thailand revolving credit facility. The balance remaining
outstanding under the Thailand revolving credit facility at March 31, 1998
was $52 million. Commercial paper was used to refinance the medium-term
notes and the retired portion of the credit facility.
(8) Financial Instruments
The fair values of the company's financial instruments at March 31, 1998
are described below:
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The Deutsche Mark currency swap agreement had a notional value of $110
million and an increased value of approximately $25 million based on dealer
quotes.
The company had four foreign currency forward contracts to purchase 1,505
million baht for $35 million to hedge a series of known United States
dollar requirements. Based upon quoted market prices of comparable
instruments, at March 31, 1998, the net fair value of the contracts were
approximately $32 million.
The company had outstanding commodity futures contracts covering 2,360
thousand barrels of crude oil with a notional amount of $39 million and 4
billion cubic feet of natural gas with a notional amount of $10 million.
The company also had outstanding contracts for the purchase and sale of
18,900 thousand gallons of heating oil and 10,500 thousand gallons of
unleaded gasoline with notional amounts of $9 million and $6 million,
respectively, at March 31, 1998. Fair values of the outstanding futures
contracts approximated their carrying values at March 31, 1998.
The estimated fair value of the company's long-term debt was $2,550
million. The estimated fair value of the mandatorily redeemable convertible
preferred securities of the company's subsidiary trust was $581 million.
(9) Accrued Abandonment, Restoration and Environmental Liabilities
At March 31, 1998, the company had accrued $453 million for the estimated
future costs to abandon and remove wells and production facilities. The
total costs for abandonments are predominately accrued for on a
units-of-production basis and are estimated to be approximately $629
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. The company's reserve for environmental remediation
obligations at March 31, 1998 totaled $286 million, of which $99 million
was included in current liabilities.
(10) 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 clean-up methods and costs,
the unknown timing and extent of the corrective actions that may be
required, the uncertainty attendant to the possible award of punitive
damages, the recent judicial recognition of new causes of action, the
present state of the law, which often imposes joint and several and
retroactive liabilities on PRPs, and the fact that the company is usually
just one of a number of companies identified as a PRP.
As disclosed in note 9, at March 31, 1998, the company had accrued $286
million for estimated future environmental assessment and remediation costs
at various sites where liabilities for such costs are probable. At those
sites where
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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 $240 million.
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 nearly complete, and it now
appears unlikely that any issues raised in the Notice will proceed to
either litigation or mediation, and it is expected that all matters will be
settled. The settlement will require approval by the Joint Committee on
Taxation of the U.S. Congress and such approval should be granted.
The total amount of tax and interest that the company would be required to
pay if the IRS were ultimately to prevail on the material issues described
in the Notice, 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 $508 million as of March 31, 1998.
During the first quarter of 1997, the IRS examination team completed its
review of a claim for refund filed by the company relating to its 1985 tax
liability. The IRS has not formally allowed the claim, however, as a result
of the expected settlement described above, the company believes that a
portion of the claim will be allowed and that such allowance should entitle
it to a small refund for overpayment of tax or interest for all open
taxable years preceding 1988.
The company believes it has adequately provided in its accounts for items
and issues not yet resolved.
Other matters - In February 1996, Bridas Corporation filed a petition
against the company and others in the District Court of Fort Bend County,
Texas, alleging that the defendants conspired to and did tortiously
interfere with Bridas' rights under agreements with the government of
Turkmenistan to develop the Yashlar Field and to transport gas from that
field to Pakistan. The petition also alleges that the defendants interfered
with Bridas' exclusive right to lay a gas pipeline in Afghanistan. Bridas
seeks actual damages as well as punitive damages, plus interest. Bridas'
expert witnesses have stated in pre-trial discovery that Bridas' total
actual damages for loss of future profits are approximately $1.7 billion.
In the alternative, Bridas is expected to seek an award of approximately
$430 million with respect to its total expenditures in Turkmenistan. The
company believes the assertions made by Bridas are without merit and is
vigorously defending the lawsuit.
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.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(11) Unocal guarantees certain indebtedness of Union Oil. Summarized below is
financial information for Union Oil and its consolidated subsidiaries:
For the Three Months
Ended March 31
--------------------------
Millions of dollars 1998 1997
- --------------------------------------------------------------------------------
Total revenues ............................ $ 1,207 $ 1,455
Total costs and other deductions
(including income taxes) ............... 1,184 1,262
- --------------------------------------------------------------------------------
Earnings from continuing operations ....... 23 193
Discontinued operations
Loss on disposal (a) ................... -- (44)
- --------------------------------------------------------------------------------
Net earnings .............................. $ 23 $ 149
- --------------------------------------------------------------------------------
(a) Net of tax benefit of: $ - $ (27)
At December
At March 31 31 (b)
--------------------------
Millions of dollars 1998 1997
- --------------------------------------------------------------------------------
Current assets ............................... $1,373 $1,576
Noncurrent assets ............................ 6,231 6,053
Current liabilities .......................... 983 1,124
Noncurrent liabilities ....................... 3,828 3,534
Shareholder's equity ......................... 2,793 2,971
- --------------------------------------------------------------------------------
(b) Audited
(12) Subsequent Event
On May 6, 1998, Union Oil issued $100 million of 6-1/2% notes due May 1,
2008 and $200 million of 7% debentures due May 1, 2028, in each case
guaranteed by Unocal. The proceeds from the sale were used to retire the
maturing $110 million Deutsche Mark bonds and to reduce outstanding
commercial paper borrowings.
8
OPERATING HIGHLIGHTS UNOCAL CORPORATION
(Unaudited)
For the Three Months
Ended March 31
---------------------
1998 1997
- --------------------------------------------------------------------------------
NET DAILY PRODUCTION
Crude oil and condensate (thousand barrels daily)
United States
Spirit Energy 76 .............................. 44 48
Alaska ........................................ 30 34
- --------------------------------------------------------------------------------
Total United States ......................... 74 82
International
Far East (a) .................................. 89 93
Other ......................................... 31 27
- --------------------------------------------------------------------------------
Total International ......................... 120 120
Worldwide ........................................ 194 202
- --------------------------------------------------------------------------------
Natural gas (million cubic feet daily)
United States
Spirit Energy 76 .............................. 788 910
Alaska ........................................ 138 156
- --------------------------------------------------------------------------------
Total United States ......................... 926 1,066
International
Far East (a) .................................. 826 805
Other ......................................... 52 67
- --------------------------------------------------------------------------------
Total International ......................... 878 872
Worldwide ........................................ 1,804 1,938
- --------------------------------------------------------------------------------
Natural gas liquids (thousand barrels daily) ........ 18 20
Geothermal (million kilowatt-hours daily) ........... 21 16
- --------------------------------------------------------------------------------
(a) Includes host country share in Indonesia of:
Crude oil and condensate 18 30
Natural gas 33 33
9
OPERATING HIGHLIGHTS (continued) UNOCAL CORPORATION
(Unaudited)
For the Three Months
Ended March 31
----------------------
1998 1997
- --------------------------------------------------------------------------------
AVERAGE SALES PRICES (a)
Crude oil and condensate (per barrel)
United States
Spirit Energy 76 .............................. $13.94 $20.79
Alaska ........................................ 10.84 18.51
Total United States ......................... 12.66 19.85
International
Far East ...................................... $13.97 $21.03
Other ......................................... 12.30 20.07
Total International ......................... 13.50 20.75
Worldwide ........................................ $13.15 $20.32
- --------------------------------------------------------------------------------
Natural gas (per thousand cubic feet)
United States
Spirit Energy 76 .............................. $ 2.14 $ 2.78
Alaska ........................................ 1.47 1.35
Total United States ......................... 2.03 2.57
International
Far East ...................................... $ 2.03 $ 2.40
Other ......................................... 2.09 2.22
Total International ......................... 2.04 2.38
Worldwide ........................................ $ 2.04 $ 2.49
- --------------------------------------------------------------------------------
AGRICULTURAL PRODUCTS PRODUCTION VOLUMES
(thousand tons)
Ammonia ............................................. 374 391
Urea ................................................ 260 275
Other products ...................................... 175 207
AGRICULTURAL PRODUCTS SALES VOLUMES (thousand tons)
Ammonia ............................................. 220 156
Urea ................................................ 325 210
Other products ...................................... 174 252
(a) Excludes Global Trade margins
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and results of
operations of Unocal should be read in conjunction with the company's
Management, Discussion and Analysis in Item 7 of the 1997 Annual Report on Form
10-K. Unless otherwise specified, the following discussion pertains to the
company's continuing operations.
CONSOLIDATED RESULTS
For the Three Months
Ended March 31
------------------------
Millions of dollars 1998 1997
- ------------------------------------------------------------------------------
After-tax earnings from continuing operations ................ $ 18 $ 188
Special items (net of tax):
Environmental and litigation provisions .................. (33) (9)
Asset sales .............................................. -- 7
Deferred tax adjustment .................................. (21) --
- --------------------------------------------------------------------------------
Total special items ....................................... (54) (2)
-------------------------------------------------------------------------------
Adjusted after-tax earnings from continuing operations .... 72 190
Net loss on disposal of discontinued operations .............. -- (44)
Special item: discontinued operations ....................... -- (44)
- --------------------------------------------------------------------------------
Adjusted after-tax loss from discontinued operations ...... -- --
- --------------------------------------------------------------------------------
Adjusted after-tax earnings ............................ $ 72 $ 190
- --------------------------------------------------------------------------------
The company's first quarter 1998 adjusted earnings from continuing operations
decreased 62 percent over the same period last year. The lower earnings level
was primarily due to significantly lower average worldwide sales prices for
crude oil and natural gas, lower U.S. natural gas and crude oil production,
higher U.S. dry hole costs and higher international exploration expenses.
Partially offsetting these negative factors were increased power generation at
Salak in Indonesia, higher agricultural products sales volumes and lower
interest expense.
EXPLORATION AND PRODUCTION
Exploration and Production involves the exploration for, and production of crude
oil and natural gas.
UNITED STATES - Included in the United States category is Spirit Energy 76 and
Alaska oil and gas operations. Spirit Energy 76 is responsible for oil and gas
operations in the Lower 48 United States with emphasis on the Gulf Coast,
deepwater areas in the Gulf of Mexico and the Permian Basis in West Texas. A
substantial portion of crude oil and natural gas produced domestically is sold
interdivision to the company's Global Trade group. The remainder is contracted
to third parties, sold in the spot market or used in the company's agricultural
products operations.
For the Three Months
Ended March 31
----------------------
Millions of dollars 1998 1997
- --------------------------------------------------------------------------------
After-tax earnings:
Spirit Energy 76 .................................. $ 10 $ 95
Alaska ............................................ 12 21
- --------------------------------------------------------------------------------
Total after-tax earnings ....................... 22 116
Special items:
Asset sales ..................................... -- 2
- --------------------------------------------------------------------------------
Adjusted after-tax earnings .............. $ 22 $114
- --------------------------------------------------------------------------------
During the first three months of 1998, adjusted after-tax earnings decreased 81
percent compared with the same period a year ago. The decrease was primarily due
to substantially lower average sales prices for crude oil and natural gas,
decreased crude oil and natural gas production and higher dry hole costs.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Compared with the first quarter of 1997, average sales prices for United States
crude oil decreased by $7.19 per barrel, or 36 percent, and average sales prices
for United States natural gas decreased by $.54 per thousand cubic feet (mcf) ,
or 21 percent.
The company's United States crude oil and natural gas production decreased by 10
percent and 13 percent, respectively, over the same period a year ago. The
decreased production volumes were primarily due to two separate pipeline
curtailments and mechanical-related shut-ins.
Dry hole expense increased by $20 million (after-tax) compared with the first
quarter of 1997 due to increased exploratory drilling activities in the Gulf of
Mexico.
INTERNATIONAL - The company's international operations pursue oil and gas
exploration and exploitation opportunities outside the United States.
For the Three Months
Ended March 31
----------------------
Millions of dollars 1998 1997
- --------------------------------------------------------------------------------
After-tax earnings 13 102
Special items:
Deferred tax adjustment .................... (21) 1
- --------------------------------------------------------------------------------
Adjusted after-tax earnings ..................... $ 34 $101
- --------------------------------------------------------------------------------
During the first quarter of 1998, international adjusted after-tax earnings
decreased compared with 1997 results primarily due to substantially lower
average sales prices for crude oil and natural gas, increased exploration
expenses and higher current income taxes in Thailand.
Compared with the first quarter of 1997, total international crude oil and
condensate average sales prices decreased 35 percent to $13.50 per barrel and
natural gas average sales prices decreased by 14 percent to $2.04 per mcf.
During the first quarter of 1998, crude oil and condensate production remained
at the 1997 level of 120 thousand barrels per day and natural gas increased
slightly from the 1997 level of 872 million cubic feet (mmcf) per day to 878
mmcf per day.
During the first quarter of 1998, exploration expense was higher by $7 million
(after-tax), primarily due to increased exploration activities in Indonesia.
GLOBAL TRADE
The Global Trade group handles the company's worldwide crude oil, condensate and
natural gas marketing and trading activities. Global Trade also purchases crude
oil, condensate and natural gas from the company's joint venture partners,
royalty owners and other unaffiliated oil and gas producers for resale.
During the first quarters of 1998 and 1997 Global Trade's after-tax earnings
were $6 million.
GEOTHERMAL AND POWER OPERATIONS
The Geothermal and Power Operations segment explores for, produces and sells
geothermal resources, and constructs and operates electric power generation
plants and sells the related electricity.
First quarter 1998 and 1997 adjusted after-tax earnings were $14 million and $6
million, respectively. Improved 1998 earnings were primarily the result of a 31
percent increase in power generation and related sale of electricity,
principally from the Indonesian Salak field Units 3 through 6, which came on
line during the fourth quarter of 1997.
Partially offsetting these positive factors were higher dry hole provisions.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
DIVERSIFIED BUSINESS GROUP
For the Three Months
Ended March 31
-----------------------
Millions of dollars 1998 1997
- -------------------------------------------------------------------------------
After-tax earnings
Agricultural Products ............................ $ 9 $ 20
Carbon and Minerals .............................. 15 10
Pipelines ........................................ 15 14
Other ............................................ -- 1
- --------------------------------------------------------------------------------
Total ............................................ 39 45
Special items:
Carbon and Minerals (Litigation) ................. (1) --
- -------------------------------------------------------------------------------
Adjusted after-tax earnings ......................... $ 40 $ 45
- --------------------------------------------------------------------------------
The Diversified Business group's lower adjusted after-tax earnings for the first
quarter of 1998 were primarily due to lower margins on the Agricultural
Products' export sales activity. The lower export sales activity was the result
of lower sales prices and production volumes at the Kenai, Alaska plant. This
negative impact to earnings was partially offset by higher Agricultural Products
export sales volumes and sales margins associated with its West Coast operation.
The higher adjusted net earnings for the Carbon and Minerals group were
primarily due to increased earnings from its Brazilian affiliate.
CORPORATE AND UNALLOCATED
Corporate and Unallocated expense includes general corporate overhead, the
non-exploration and production related activities of the New Ventures group and
other unallocated costs. Net interest expense represents interest expense, net
of interest income and capitalized interest.
For the Three Months
Ended March 31
---------------------
Millions of dollars 1998 1997
- --------------------------------------------------------------------------------
After-tax earnings effect
Administrative and general expense .......................... $(11) $(13)
Net interest expense ........................................ (26) (42)
Environmental and litigation expense ........................ (33) (11)
New Ventures ................................................ (7) (7)
Other ....................................................... 1 (14)
- --------------------------------------------------------------------------------
Total ....................................................... (76) (87)
Special items:
Environmental and litigation provisions ................... (32) (9)
Asset sales (Other) ....................................... -- 4
- --------------------------------------------------------------------------------
Total special items ......................................... (32) (5)
- --------------------------------------------------------------------------------
Adjusted after-tax earnings effect from continuing operations .. $(44) $(82)
- --------------------------------------------------------------------------------
Net interest expense decreased 38 percent from the first quarter of 1997 as a
result of a decreased debt level and increased capitalized interest. The Other
category decreased $15 million primarily due to dividends from a petroleum
industry mutual insurance company. Asset sales for 1997 primarily consisted of
the sale of a company airplane.
FINANCIAL CONDITION AND CAPITAL EXPENDITURES
For the first three months of 1998, cash flow from operating activities,
including working capital changes, was $94 million, compared with $334 million
in 1997. This decrease was principally due to lower commodity prices, payment to
Thailand
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
for 1997 income taxes and extension of payment terms for certain foreign and
domestic fertilizer sales.
Proceeds from asset sales were $4 million for the first three months of 1998 and
primarily consisted of miscellaneous real estate properties.
Consolidated working capital at March 31, 1998 was $391 million, an increase of
$50 million from the year-end 1997 level of $341 million.
Capital expenditures for the first three months of 1998 totaled $326 million, an
increase of $40 million from the 1997 level of $286 million, primarily due to
increased drilling activities in the U.S. Gulf Coast.
The company's total debt including capital leases was $2,428 million at March
31, 1998, an increase of $258 million from the year-end 1997 level of $2,170
million. The debt-to-total capitalization ratio increased to 47 percent from 43
percent at year-end 1997.
During the first quarter of 1998, the company repurchased approximately 1.33
million shares of common stock for a total cost of approximately $48 million.
ENVIRONMENTAL MATTERS
At March 31, 1998, the company's reserves for environmental remediation
obligations totaled $286 million, of which $99 million was included in current
liabilities. During the first quarter, cash payments of $14 million were applied
against the reserve and an additional $32 million in liabilities were recorded
to the reserve account. The company also estimates that it could incur
additional remediation costs aggregating approximately $240 million as discussed
in note 10 to the consolidated financial statements. The company's total
environmental reserve amount is grouped into the following five categories:
March 31
Millions of dollars 1998
- --------------------------------------------------------------------------------
Superfund and similar sites .................................... $ 21
Former company-operated sites .................................. 26
Company facilities sold with retained liabilities .............. 68
Inactive or closed company facilities .......................... 140
Active company facilities ...................................... 31
- --------------------------------------------------------------------------------
Total reserves .............................................. $286
- --------------------------------------------------------------------------------
The additional $32 million in reserves were for estimated cleanup and associated
costs primarily for various company facilities where the company's operations
have been closed or shut down, including the Avila Beach and Guadalupe sites. On
April 3, 1998, the California Central Coast Regional Water Quality Control Board
issued Cleanup and Abatement Orders for both sites. The order for Avila Beach
requires excavation of the affected sections of the beach and town. The
Guadalupe order requires excavation of 18 locations and bioremediation at other
locations of the site in addition to the recovery of contaminants utilizing
shallow wells. Estimates for possible additional remediation costs related to
these sites are included in the $240 million total possible additional
remediation costs disclosed in note 10 to the consolidated financial statements.
(See notes 9 and 10 to the consolidated financial statements for related
information.)
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
The current economic problems continue to be significant in Indonesia and
Thailand. The company remains optimistic about Asia's long-term economic growth
and is working closely with host governments and business associates through
this difficult period.
The company expects energy prices to remain volatile in 1998 due to climate
conditions, the production quotas set by OPEC and the ongoing developments
between Iraq and the United Nations.
As a result of the current crude oil price outlook, the company expects to
reduce its capital spending below the original 1998 forecast of $1.5 billion.
Estimated expenditures for the full year 1998 are expected to total between $1.3
and $1.4 billion. The company is also reducing its expectations for 1998 oil and
gas production levels from the United States Lower 48 by about five percent to
178,000 barrels of oil equivalent (boe) per day compared with an earlier
forecast of 188,000 boe per day. However, long-term, high-potential growth
projects in Indonesia, Bangladesh, Argentina and the Caspian Sea, as well as the
exploration of high-potential prospects in shelf and deepwater areas of the Gulf
of Mexico, are expected to proceed as planned. The company is focused on reserve
replacement from high-potential prospects, rather than short-term projects to
boost production.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk generally represents the risk that losses may occur in the value of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices. As part of its overall risk
management strategies, the company uses derivative financial instruments to
manage and reduce risks associated with these factors. The following discussion
and analysis focuses on significant changes in the company's position regarding
these risk factors since year end 1997.
Interest Rate Risk - The company's primary market exposure for changes in
interest rates relates to the company's long term debt obligations. During the
first quarter of 1998, the company increased its outstanding debt level
(excluding capital lease obligations) by $258 million or twelve percent, to
$2,426 million from its year end 1997 level of $2,168 million primarily through
the additional issuance of commercial paper. The addition was principally due to
increased cash requirements for capital expenditures and lower than anticipated
first quarter commodity prices. The company expects to have cash available to
repay a portion of the commercial paper borrowings in 1998 through a combination
of cash generated by operations, sales of assets, new debt offerings and
decreases in planned capital spending. However, a continuation of depressed
commodity prices may lead to a further increase in the company's debt level at
December 31, 1998. The following table provides principal amounts and related
weighted average interest rates for the company's outstanding debt obligations
at March 31, 1998 by expected maturity dates and constitutes a forward-looking
statement. Circumstances could arise which may cause the timing and amount of
actual cash flows to differ materially from the projections.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
Debt Obligation Principal Amounts by Expected Maturity Dates at March 31, 1998
(excludes capital leases)
Fair
Millions of U.S. dollars 1998-2002 There-after Total Value
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed rate ................................................... $ -- $1,744 $1,744 $1,868
Average Interest Rates ..................................... 8.18% 8.18%
Fixed rate (DM denominated) (a) .............................. -- 135 135 135
Average Interest Rates ..................................... -- 6.125% 6.125%
Variable rate ................................................ -- 547 547 547
Average Interest Rates ..................................... -- 5.94% 5.94%
- ------------------------------------------------------------------------------------------------------------------------------------
$ -- $2,426 $2,426 $2,550
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The underlying debt obligation is a 6.125 percent Deutsche Mark (DM) 250
million bond which was hedged by a currency swap agreement. Under the terms
of the currency swap agreement, the company was to pay $110 million and
receive DM 250 million at maturity. On May 6, 1998, the DM bond and the
currency swap agreement matured. The company retired the DM bond with DM
250 million received from the currency swap agreement. The company used
proceeds received from two new debt issues to pay its $110 million
obligation under the currency swap agreement and to retire commercial
paper. See note 12 to the consolidated financial statements for information
regarding the new debt issues.
Foreign exchange rate risk - Due to the recent volatility in foreign currency
exchange rates, the company entered into foreign currency forward contracts
primarily to lock in exchange rates for funds to be converted to U.S. dollars.
At March 31, 1998, the company had four foreign currency forward contract hedges
outstanding related to its Thailand oil and gas operations with notional amounts
totaling $35 million. Two of the outstanding contracts call for the company to
pay 920,100,000 Thai baht in exchange for $20 million (U.S.) at maturity on
April 9, 1998. The remaining two contracts call for the company to pay
584,500,000 Thai baht in exchange for $15 million (U.S.) at maturity on May 8,
1998. The contracts had a total value of approximately $32 million (U.S.) based
upon the exchange rates in effect on March 31, 1998. The company will continue
to monitor its exposure to foreign exchange rate volatility as part of its
strategy to mitigate foreign currency risks.
Commodity price risk - The company generally uses hydrocarbon commodity based
derivative financial instruments, such as options or futures contracts with
maturities of 18 months or less, to mitigate its exposure to fluctuations in
petroleum commodity prices. The company also trades hydrocarbon-based derivative
financial instruments on a limited basis. The company has controls in place and
monitors its trading activities to ensure compliance.
The company uses a value at risk model to assess the market risk of its
commodity price sensitive derivative financial instruments for internal risk
management purposes. Value at risk represents the potential loss in fair value
the company would experience on its commodity price sensitive derivative
financial instruments, using calculated volatilities and correlations over a
specified time period with a given confidence level. The company's calculation
model is based on historical data and uses a one week time interval and a 95
percent confidence level. The total amount of commodity derivative financial
instruments held for trading purposes and purposes other than trading were not
material at March 31, 1998. Based upon the company's calculations, the risk of
loss in fair value associated with commodity price sensitive derivative
financial instruments at March 31, 1998 was immaterial.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is incorporated by reference the information with respect to certain legal
proceedings previously reported in Item 1 of Unocal's Annual Report on Form 10-K
for the year ended December 31, 1997 (1997 Form 10-K), the information regarding
environmental remediation reserves in note 9 to the consolidated financial
statements in Item 1 of Part I hereof, the discussion thereof in the
Environmental Matters section of Management's' Discussion and Analysis in Item 2
of Part I, and the information regarding certain legal proceedings and other
contingent liabilities in note 10 to the consolidated financial
16
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
statements.
(1) In Citizens for a Better Environment, et al. v. Union Oil Company of
California, described in Paragraph (3) of Item 3 of the 1997 Form 10-K,
the trial has been postponed to September 1998 while the parties
continue with mediation in an attempt to settle the case.
(2) With reference to the matters involving the Guadalupe oil field,
described in Paragraph (4) of Item 3 of the 1997 Form 10-K, a letter of
intent (LOI) to settle the civil proceeding brought by the California
Attorney General was executed by the parties in April 1998; however,
final documentation and court approval are still necessary. The County
of San Luis Obispo certified the Environmental Impact Report (EIR) in
late March 1998, and on April 3, 1998, the Regional Water Quality
Control Board (RWQCB) issued a Cleanup and Abatement Order
substantially reflecting the agreement reached in the LOI.
(3) With reference to the matters involving the town of Avila Beach,
California, described in Paragraph (5) of Item 3 of the 1997 Form 10-K,
on April 3, 1998, the RWQCB certified the EIR and issued a Cleanup and
Abatement Order.
(4) With reference to the preliminary determinations of underpaid royalties
described in Paragraph (10) of Item 3 of the 1997 Form 10-K, the
company has now received notices from the U.S. Department of Interior,
Minerals Management Service, alleging underpaid royalties totaling
approximately $48 million, as well as undetermined late payment
charges.
(5) With reference to the matters involving the Mountain Pass, California,
lanthanide facility of the company's Molycorp, Inc. (Molycorp),
subsidiary, described in Paragraph (14) of Item 3 of the 1997 Form
10-K, on March 5, 1998, Molycorp was served by the Lahontan Regional
Water Quality Control Board (LRWQCB) with a Notice of Proposed
Administrative Civil Liability which seeks civil penalties in the
amount of approximately $550,000 for alleged failures to submit
self-monitoring reports and discharge reports in a timely manner.
Molycorp has the opportunity to contest the proposed civil penalties at
a hearing scheduled in July 1998. In addition, the LRWQCB issued three
Cleanup and Abatement Orders on March 25, 1998, relating to the present
wastewater evaporation pond, a former and now-closed wastewater
evaporation pond, and the mine and mill site, all located at the
Mountain Pass facility. These three orders do not carry civil
penalties, but may require significant expenditures for environmental
investigation and remediation.
(6) With reference to the matter involving the company's former refinery in
Rodeo, California, described in Paragraph (18) of Item 3 of the 1997
Form 10-K, in April 1998 the company settled the claims of the Bay Area
Air Quality Management District for aggregate civil penalties of
$285,000, which was paid in May.
ITEM 2. CHANGES IN SECURITIES
During the first quarter of 1998, the company awarded 4,496 restricted stock
units to 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 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 first quarter of 1998, Unocal issued 46 shares of its common stock
upon the conversion of 40 of the 6-1/4% 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The Exhibit Index on page 20 of this report lists the
exhibits that are filed as part of this report.
(b) Reports on Form 8-K:
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
Filed during the first quarter of 1998:
1. Current Report on Form 8-K dated and filed January 28, 1998,
for the purpose of reporting, under Item 5, the company's
fourth quarter and full year 1997 earnings and related
information.
2. Current Report on Form 8-K dated February 13, 1998 and filed
February 17, 1998, for the purpose of reporting, under Item
5, the company's Unocal Canada Limited subsidiary's
agreement to exchange certain of its Canadian oil and gas
properties with Tarragon Oil and Gas Limited for Tarragon
common stock and debentures.
3. Current Report on Form 8-K dated February 25, 1998 and filed
March 3, 1998, for the purpose of reporting, under Item 5,
the company's crude oil and natural gas reserve data.
Filed during the second quarter of 1998 to the date hereof:
1. Current Report on Form 8-K dated April 15, 1998 and filed
April 21, 1998, for the purpose of reporting, under Item 5,
the completion of Unocal Canada Limited subsidiary's
exchange of certain of its Canadian oil and gas properties
with Tarragon Oil and Gas for Tarragon common stock and
debentures.
2. Current Report on Form 8-K dated April 28, 1998 and filed
April 29, 1998, for the purpose of reporting, under Item 5,
Unocal's first quarter 1998 earnings and related
information.
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: May 13, 1998 By: /s/ Joe D. Cecil
----------------
Joe D. Cecil
Vice President and Comptroller
(Duly Authorized Officer and
Principal Accounting Officer)
19
EXHIBIT INDEX
3 Bylaws of Unocal, as amended to be effective June 1, 1998.
10 Amendments to 1985 and 1991 Incentive Plan Awards.
12.1 Statement regarding computation of ratio of earnings to fixed charges
of Unocal for three months ended March 31, 1998 and 1997.
12.2 Statement regarding computation of ratio of earnings to fixed charges
of Union Oil Company of California for the three months ended March
31, 1998 and 1997.
27 Financial data schedule for the period ended March 31, 1998 (included
only in the copy of this report filed electronically with the
Commission).
20