1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(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, 1996
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 1-13916
UNION PACIFIC RESOURCES GROUP INC.
(Exact name of registrant as specified in its charter)
UTAH 13-2647483
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 7, 801 CHERRY STREET, FORT WORTH, TEXAS
(Address of principal executive offices)
76101
(Zip Code)
(817) 877-6000
(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
--- ---
As of April 30, 1996, there were 249,243,242 shares of the Registrant's
common stock outstanding.
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UNION PACIFIC RESOURCES GROUP INC.
INDEX
PART I. FINANCIAL INFORMATION
Page Number
-----------
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED STATEMENTS OF CONSOLIDATED INCOME - For the
Three Months Ended March 31, 1995 and 1996............. 1
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION -
At December 31, 1995 and March 31, 1996................ 2 - 3
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS - For the
Three Months Ended March 31, 1995 and 1996............. 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS..... 5 - 9
INDEPENDENT ACCOUNTANTS' REPORT.......................... 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 11 - 16
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS........................................ 17 - 18
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K......................... 19
SIGNATURE......................................................... 20
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
For the Three Months Ended March 31, 1995 and 1996
(Millions, except per share amounts)
(Unaudited)
1995 1996
------ ------
Operating revenues: (Note 4)
Oil and gas operations:
Producing properties........................ $205.6 $232.0
Plants, pipelines and marketing............. 75.6 114.2
Other oil and gas revenues.................. 17.3 12.3
------ ------
Total oil and gas operations.............. 298.5 358.5
Minerals...................................... 26.2 31.2
------ ------
Total operating revenues.................. 324.7 389.7
------ ------
Operating expenses:
Production.................................... 58.0 62.8
Exploration................................... 20.5 29.7
Plants, pipelines and marketing............... 40.8 60.6
Minerals...................................... 1.7 1.6
Depreciation, depletion and amortization...... 106.4 123.7
General and administrative.................... 10.8 14.0
------ ------
Total operating expenses.................. 238.2 292.4
------ ------
Operating income................................. 86.5 97.3
Other income (expense) - net..................... (3.9) 2.0
Interest expense - net........................... (1.2) (13.0)
------ ------
Income before income taxes....................... 81.4 86.3
Income taxes..................................... (20.2) (27.1)
------ ------
Net income (Note 2).............................. $ 61.2 $ 59.2
====== ======
Earnings per share (Note 3)...................... $ 0.24
======
Weighted average shares outstanding.............. 249.9
Cash dividends per share (Note 3)................ $ 0.05
See the notes to the condensed consolidated financial statements.
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
At December 31, 1995 and March 31, 1996
(Millions of Dollars)
(Unaudited)
December 31, March 31,
ASSETS 1995 1996
----------- ---------
Current assets:
Cash and temporary investments............... $ 27.6 $ 27.0
Accounts receivable - net.................... 240.1 226.5
Inventories.................................. 67.5 45.8
Other current assets......................... 84.8 54.1
--------- ---------
Total current assets..................... 420.0 353.4
--------- ---------
Properties:
Cost......................................... 5,450.4 5,574.8
Accumulated depreciation, depletion and
amortization............................... (2,686.1) (2,814.7)
--------- ---------
Total properties - net................... 2,764.3 2,760.1
Intangible and other assets..................... 124.6 114.8
--------- ---------
Total assets............................. $ 3,308.9 $ 3,228.3
========= =========
See the notes to the condensed consolidated financial statements.
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
At December 31, 1995 and March 31, 1996
(Millions of Dollars)
(Unaudited)
December 31, March 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1996
----------- ---------
Current liabilities:
Accounts payable............................. $ 347.0 $ 306.3
Accrued taxes payable........................ 87.4 80.0
Note payable to and advances from
Union Pacific Corporation - net (Note 2)... 567.8 477.9
Other current liabilities.................... 64.3 64.5
-------- --------
Total current liabilities................ 1,066.5 928.7
-------- --------
Long-term debt (Note 2)......................... 101.5 101.5
Deferred income taxes........................... 438.5 445.9
Other long-term liabilities (Note 5)............ 390.0 391.4
Shareholders' equity (Note 2):
Common stock, no par value; 400,000,000
shares authorized; 249,248,603 shares
issued and outstanding at December 31,
1995; 249,240,755 shares issued at
March 31, 1996............................. -- --
Paid-in surplus.............................. 860.2 860.1
Retained earnings............................ 472.9 519.7
Unearned compensation........................ (9.2) (7.9)
Deferred foreign exchange adjustment......... (11.5) (11.1)
Treasury stock, at cost; 1,571 shares at
March 31, 1996............................. -- --
-------- --------
Total shareholders' equity............... 1,312.4 1,360.8
-------- --------
Total liabilities and shareholders' equity $3,308.9 $3,228.3
======== ========
See the notes to the condensed consolidated financial statements.
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Three Months Ended March 31, 1995 and 1996
(Millions of Dollars)
(Unaudited)
1995 1996
------- -------
Cash provided by operations:
Net income.................................... $ 61.2 $ 59.2
Non-cash charges to income:
Depreciation, depletion and amortization.... 106.4 123.7
Deferred income taxes....................... 9.2 7.4
Other non-cash charges - net................ 7.4 7.6
Changes in current assets and liabilities..... (18.1) 18.1
------- -------
Cash provided by operations............... 166.1 216.0
------- -------
Investing activities:
Capital and exploratory expenditures.......... (171.6) (138.3)
Proceeds from sales of assets................. 24.2 22.7
------- -------
Cash used by investing activities......... (147.4) (115.6)
------- -------
Financing activities:
Dividends..................................... (31.0) (12.4)
Advances from (to) Union Pacific Corporation.. 18.7 (89.8)
Other financings - net........................ (2.7) 1.2
------- -------
Cash used by financing activities......... (15.0) (101.0)
------- -------
Net change in cash and temporary investments..... 3.7 (0.6)
Cash at beginning of period...................... 6.7 27.6
------- -------
Cash at end of period............................ $ 10.4 $ 27.0
======= =======
See the notes to the condensed consolidated financial statements.
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UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS - The condensed consolidated
financial statements include the accounts of Union Pacific Resources Group
Inc. and subsidiaries, including its principal operating subsidiary Union
Pacific Resources Company, and certain other affiliated companies. These
consolidated operations are hereinafter referred to collectively as the
"Company." The condensed consolidated financial statements, which are
unaudited, have been reviewed by the Company's independent accountants
whose report thereon appears on page 10. Such interim financial statements
reflect all adjustments (consisting only of normal and recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results of the Company
for the interim periods. The Condensed Statement of Consolidated Financial
Position at December 31, 1995 is derived from audited financial statements.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995. The results of operations for the three months ended
March 31, 1996 are not necessarily indicative of the results for the full
year ending December 31, 1996.
Certain prior year amounts have been reclassified to conform to the current
presentation. Such reclassifications have no effect on operating income or
net income.
2. PRO FORMA INFORMATION - In October 1995, the Company sold 42.5 million
shares of its common stock in an initial public offering (the "Offering").
Prior to consummation of the Offering, the Company was wholly owned by
Union Pacific Corporation ("UPC"). UPC currently owns approximately 83% of
the Company's outstanding common stock. UPC has announced that it intends,
subject to the receipt of a favorable ruling from the Internal Revenue
Service and the satisfaction of certain other conditions, to distribute pro
rata to its shareholders as a dividend its remaining ownership interest in
the Company by means of a tax-free distribution (the "Distribution"). The
Distribution is expected to occur in the fourth quarter of 1996.
Prior to the Offering (1) UPC caused the Company to own all the rights and
assets historically employed by the natural resources business segment of
UPC in connection with the operations presented in the consolidated
financial statements and (2) the Company declared dividends to UPC totaling
$1,621 million consisting of (i) a cash dividend of $912 million payable
promptly after the completion of the Offering, (ii) a $650 million note
payable to UPC bearing interest at 8.5% per annum payable within 90 days of
the Distribution and (iii) a $59 million receivable from UPC. In addition,
the Company borrowed $68 million which was used, together with the proceeds
from the Offering, to pay the cash dividend of $912 million. Such
transactions are reflected in the consolidated financial statements as of
December 31, 1995 and thereafter.
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The following pro forma information reflects adjustments to the historical
March 31, 1995 Condensed Statement of Consolidated Income necessary to give
effect to the transactions described above as if such transactions had
occurred at the beginning of 1995.
Three Months Ended March 31, 1995
-------------------------------------
Pro Forma Pro Forma
Historical Adjustments As Adjusted
---------- ----------- -----------
(Millions, except per share amounts)
Operating income..................... $ 86.5 $ (2.3) (a) $ 84.2
Other income - net................... (3.9) (1.3) (b) (5.2)
Interest expense..................... (1.2) (14.9) (c) (16.1)
------ ------ ------
Income before income taxes........... 81.4 (18.5) 62.9
Income taxes......................... (20.2) 7.0 (d) (13.2)
------ ------ ------
Net income........................... $ 61.2 $(11.5) $ 49.7
====== ====== ======
Earnings per share........................... $ 0.20
======
Weighted average shares outstanding (e)...... 249.7
======
(a) Adjustment to reflect management's estimate of additional
administrative and third-party costs that the Company will incur as a
result of becoming a stand-alone entity. These costs include (1)
additional administrative personnel, (2) additional third-party fees
such as audit fees, actuarial fees, legal fees and stock transfer
fees, (3) additional stock compensation costs related to employee
retention shares and (4) fees payable to UPC for certain financial
guarantees provided to the Company.
(b) Adjustment to eliminate intercompany interest income as a result of
the dividend to UPC of the $59 million intercompany receivable.
(c) Adjustment to reflect increased interest expense on the $650 million
note payable to UPC at 8.5% per annum and the $68 million in bank debt
at 6.1% per annum.
(d) Adjustment to reflect decreased Federal and state income tax expense
resulting from increased expenses in (a) through (c) above, calculated
at an income tax rate of 37.5%.
(e) Pro forma earnings per share is based upon the average number of
shares of common stock outstanding during the period from completion
of the Offering until December 31, 1995, including shares issuable
upon exercise of outstanding stock options determined using the
treasury stock method.
Concurrent with the Distribution, pension assets related to UPC's funded
pension plan, in which the Company participates, will be allocated between
UPC and the Company. Based on the plan status as of December 31, 1995, the
additional cost to the Company associated with this allocation would be
approximately $6.7 million annually, which is not reflected in the pro forma
financial information above. The final allocation of pension plan assets
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will be based on the plan status at the time of the Distribution;
therefore, actual amounts may differ from this estimate.
3. EARNINGS PER SHARE - Earnings and dividends per share for the quarter ended
March 31, 1995 have been omitted from the Condensed Statements of
Consolidated Income as the Company was a wholly owned subsidiary of UPC
during such period (see Note 2 for pro forma information).
4. PRICE RISK MANAGEMENT - The Company uses hydrocarbon-based derivative
financial instruments to limit the effects of unfavorable hydrocarbon price
movements and to retain the economic benefits of forward prices perceived
to be favorable. While the use of these hedging arrangements limits the
downside risk of adverse price movements, it may also limit future gains
from favorable movements. Hedging is generally accomplished pursuant to
exchange-traded futures contracts or master swap agreements based on
standard forms. The Company does not hold or issue such financial
instruments for trading purposes and does not hedge any significant amount
of production beyond a 24 month time frame. The Company addresses market
risk by selecting hydrocarbon-based financial instruments whose historical
value fluctuations correlate strongly with those of the item being hedged.
Credit risk related to hedging activities is managed by requiring that
counterparties meet minimum credit standards and by monthly mark-to-market
analysis to determine if collateral is required. At March 31, 1996, the
largest credit risk associated with any of the Company's counterparties was
approximately $14.1 million, which is partially protected by a $10 million
letter of credit. In connection with its futures contract hedging activity,
the Company is required to deposit monies with the New York Mercantile
Exchange ("NYMEX") representing contract margin requirements and deposits
required relating to unrealized losses on open contracts. Such deposits are
included in other current assets in the Company's Statements of
Consolidated Financial Position. At March 31, 1996, the Company had made
such deposits totaling $13 million, representing $6.3 million for contract
margin deposits and $6.7 million relating to unrealized losses on open
contracts.
Basis risk arises from differences in the cash price of the hedged item and
the underlying price of the hedging instrument. The Company uses futures
contracts and price swaps denominated in NYMEX prices in its hedging
activities. In order to lessen the resulting basis risk and to provide
better correlation, the Company uses basis swaps in combination with these
futures contracts and price swaps when relative movements in the NYMEX
price do not fully correspond to movements in the cash price for a given
location. Because of differences in the markets for NYMEX contracts and
basis swaps, the Company may temporarily have outstanding NYMEX contracts
without corresponding basis swaps, or basis swaps without corresponding
NYMEX positions. During such periods, unusual market price swings may
weaken correlation between the financial instrument and the underlying item
being hedged, exposing the Company to potential losses. As of March 31,
1996, the Company had no significant amount of outstanding NYMEX contracts
without corresponding basis swaps, or basis swaps without corresponding
NYMEX positions.
At March 31, 1996, the Company had entered into near-term futures contracts
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and price swaps for May-June, 1996 with respect to average natural gas
sales volumes of 238 MMcfd at $1.81/Mcf (NYMEX price), which would have
represented approximately 25% of its actual average daily natural gas sales
for the first quarter of 1996. The unrecognized mark-to-market loss on such
contracts at March 31, 1996 was $1.7 million.
The Company also enters into long-term fixed price sales agreements for
physical deliveries of natural gas and at March 31, 1996 had outstanding
contracts relating to 155.8 Bcf of natural gas for periods through December
31, 2008. Average annual commitments during this period constitute no more
than 4% of the Company's historical average annual natural gas sales
volumes. The Company's marketing subsidiary, Union Pacific Fuels, Inc. ("UP
Fuels"), enters into long-term financial contracts that, in combination
with these long-term fixed price sales agreements, secure a margin on the
corresponding volume positions. Where necessary, UP Fuels also enters into
basis swaps, which are currently available for 1996 and 1997, to strengthen
the hedge securing the margin on the corresponding positions. At March 31,
1996, long-term fixed price sales commitments for which corresponding
financial positions had not been entered into totaled 70.6 Bcf at an
average price of $3.03/Mcf, with a mark-to-market present value of $26.4
million. The remaining commitments for 85.2 Bcf had been offset with
financial contracts for similar volumes, resulting in a $0.41/Mcf average
profit on those volumes. The unrecognized mark-to-market present value on
these corresponding positions comprises a $40.5 million gain on the
long-term fixed price sales commitments and a $12.9 million loss on the
corresponding financial contracts, resulting in a $27.6 million
unrecognized mark-to-market present value margin for the Company.
At March 31, 1996, the Company had a total unrecognized mark-to-market
present value gain of $52.3 million related to all open hedging and
associated risk management transactions. Such gain comprises a $66.9
million net gain on contracts for physical delivery and a $14.6 million net
loss on financial contracts. Unrecognized mark-to-market gains or losses
were determined based upon current market value, as quoted by recognized
dealers, assuming a round lot transaction and using a mid-market convention
without regard to market liquidity.
Beginning in April 1996, the Company purchased commodity options which have
the effect of locking in a minimum sales price without eliminating the
Company's participation in the benefits of higher prices. As of April 30,
1996, the Company had effectively set a minimum average crude oil price of
$18.04/Bbl (NYMEX price) for the last seven months of 1996 with respect to
27 MBbld, as well as a minimum average natural gas price of $2.01/Mcf for
the last six months of 1996 with respect to 110 MMcfd of Texas volumes.
Such volumes would have represented 55% and 12% of the Company's actual
average daily sales of crude oil and natural gas, respectively, for the
first quarter of 1996.
5. COMMITMENTS AND CONTINGENCIES - The Company is subject to Federal, state,
provincial and local environmental laws and regulations and is currently
participating in the investigation and remediation of a number of sites.
Where the remediation costs can be reasonably determined, and where such
remediation is probable, the Company has recorded a liability. Based on
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current rules and regulations, management does not expect future
environmental obligations to have a material impact on the results of
operations or financial condition of the Company.
In the last nine years, the Company has disposed of significant pipeline,
refining and producing property assets. In connection therewith, the
Company has given certain representations and warranties relating to the
assets sold and certain indemnities with respect to liabilities associated
with such assets. The Company has been advised of possible claims which may
be asserted by the purchasers of certain of the disposed assets for alleged
breaches of representations and warranties. Certain claims related to
compliance with environmental laws remain pending. In addition, as some of
the representations, warranties and indemnities related to some of the
disposed assets have not expired, further claims may be made against the
Company. While no assurance can be given as to the actual outcome of these
claims, the Company does not expect these matters to have a materially
adverse effect on its results of operations or financial condition.
There are lawsuits pending against the Company and certain of its
subsidiaries which are described in Part I, Item 3 - Legal Proceedings in
the Company's 1995 Annual Report on Form 10-K and in Part II, Item 1 -
Legal Proceedings in this report. While the Company intends to defend
vigorously against these lawsuits and any similar lawsuits, if the suits
with respect to the underpayment of royalties based on "posted prices" are
ultimately resolved against the Company on a widespread basis, damage
awards and a loss of future revenue could result which, in the aggregate,
could be material.
The Company is a defendant in a number of other lawsuits and is involved in
governmental proceedings arising in the ordinary course of business in
addition to those described above. The Company has also entered into
commitments and provided guarantees for specific financial and contractual
obligations of its subsidiaries and affiliates. The Company does not expect
that these lawsuits, commitments or guarantees will have a materially
adverse effect on its results of operations or financial condition.
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INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Union Pacific Resources Group Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed statement of consolidated financial
position of Union Pacific Resources Group Inc. (the "Company") as of March 31,
1996, and the related condensed statements of consolidated income and cash flows
for the three months ended March 31, 1995 and 1996. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of Union Pacific
Resources Group Inc. as of December 31, 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated January 18,
1996, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed statement of consolidated financial position as of December 31, 1995
is fairly stated, in all material respects, in relation to the statement of
consolidated financial position from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
April 18, 1996
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
UNION PACIFIC RESOURCES GROUP INC.
RESULTS OF OPERATIONS
Quarter Ended March 31, 1995 Compared to March 31, 1996
OVERVIEW
Three Months Ended March 31,
----------------------------
1995 1996
------ ------
(Millions of dollars)
Selected financial data:
Total operating revenues............... $324.7 $389.7
Total operating expenses............... 238.2 292.4
Operating income....................... 86.5 97.3
Net income............................. 61.2 59.2
The Company reported net income of $59.2 million ($0.24 per share) for the
quarter ended March 31, 1996, down by $2 million from $61.2 million in 1995. The
decrease reflects additional general and administrative and interest expenses
following the Company's October 1995 initial public offering, partially offset
by improved operating results which reflect higher product prices, expanded gas
plant processing volumes from additional capacity, increased pipeline throughput
due to expansions, and higher income from marketing activities.
Total operating revenues advanced by $65 million (20%) to $389.7 million in 1996
primarily as a result of a $38.6 million increase in plants, pipelines and
marketing revenues and a $26.4 million increase in producing property revenues.
Operating expenses rose by $54.2 million (23%) to $292.4 million reflecting
increases in plants, pipelines and marketing expenses ($19.8 million),
depreciation, depletion and amortization expenses ($17.3 million), exploration
expenses ($9.2 million), production costs ($4.8 million) and general and
administrative costs ($3.2 million). Operating income increased by $10.8 million
(12%) to $97.3 million.
OIL AND GAS OPERATIONS
OPERATING REVENUES
Three Months Ended March 31,
----------------------------
1995 1996
------ ------
(Millions of dollars)
Operating revenues:
Producing properties................... $205.6 $232.0
Plants, pipelines and marketing........ 75.6 114.2
Other oil and gas revenues............. 17.3 12.3
Producing property revenues increased by $26.4 million (13%) to $232 million.
Production volumes declined by 5.2 MMcfed to reduce revenues by $3.2 million;
however, this reduction was more than offset by higher product prices of
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14
$0.20/Mcfe (12%) which added $29.6 million in revenues. Natural gas volumes
increased by 40.4 MMcfd (5%) to 930.5 MMcfd. Increased production from the
Austin Chalk of 82.9 MMcfd attributable to the Company's continued development
drilling program was partially offset by production declines in the Gulf Coast.
Crude oil volumes declined by 7 MBbld (12%) to 49.5 MBbld. All business units
declined with the majority of the decrease coming from Plains/Canada and the
Rockies. Natural gas liquids volumes from producing properties decreased by 0.6
MBbld (2%) to 24.7 MBbld, primarily attributable to the Rockies.
Three Months Ended March 31,
----------------------------
1995 1996
------ ------
Production volumes - producing properties:
Natural gas (MMcfd).................... 890.1 930.5
Natural gas liquids (MBbld)............ 25.3 24.7
Crude oil (MBbld)...................... 56.5 49.5
Total (MMcfed)......................... 1,380.9 1,375.7
Three Months Ended March 31,
----------------------------
1995 1996 1995 1996
---- ---- ---- ----
(without Hedging) (with Hedging)
Average product price realizations-
producing properties:
Natural gas (per Mcf)............ $ 1.23 $ 1.73 $ 1.32 $ 1.59
Natural gas liquids (per Bbl).... 8.17 9.68 8.05 9.68
Crude oil (per Bbl).............. 16.22 17.54 16.08 16.70
Average (per Mcfe)............... 1.60 1.97 1.65 1.85
Plants, pipelines and marketing revenues increased by $38.6 million (51%) to
$114.2 million. Increased plant volumes of 33.4 MMcfed (15%), primarily
attributable to the 1995 expansion of the Company's two Ozona plants in West
Texas, added $5.1 million in plant revenues, while higher prices of $0.30/Mcfe
(19%) added $6.9 million in revenues. Pipeline revenues advanced by $16.2
million principally as a result of the expansion of pipelines in West Texas and
the Austin Chalk. Marketing revenues increased by $13.3 million due to higher
natural gas margins.
Three Months Ended March 31,
----------------------------
1995 1996
------ ------
Sales volumes - plants:
Natural gas (MMcfd).................... 21.0 25.0
Natural gas liquids (MBbld)............ 33.2 38.1
Total (MMcfed)......................... 220.2 253.6
Average product price realizations - plants:
Natural gas (per Mcf).................. $ 1.51 $ 1.72
Natural gas liquids (per Bbl).......... 9.26 11.13
Average (per Mcfe)..................... 1.54 1.84
Other oil and gas revenues declined by $5 million from 1995 primarily as a
result of a decrease in recognition of deferred revenue reflecting lower
preferential volumes distributed to an investor in the Company's Section 29
limited partnership.
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OPERATING EXPENSES
Three Months Ended March 31,
----------------------------
1995 1996
------ ------
(Millions of dollars)
Operating expenses:
Production.............................. $ 58.0 $ 62.8
Exploration............................. 20.5 29.7
Plants, pipelines and marketing......... 40.8 60.6
Depreciation, depletion and amortization 106.4 123.7
Production expenses increased by $4.8 million (8%) to $62.8 million, largely
because of increased workover expenditures in the Rockies and Austin Chalk and
higher production taxes.
Exploration expenses increased by $9.2 million (45%) to $29.7 million, primarily
due to higher dry hole costs and non-producing lease amortization. The increase
in dry hole costs reflects exploratory drilling on prospects identified in 1995;
the increase in non-producing lease amortization reflects leasing activity in
the Louisiana extension of the Austin Chalk.
Operating expenses for plants, pipelines and marketing increased by $19.8
million (49%) to $60.6 million due to the expansion of pipeline assets and
higher gas purchase costs at gas plants.
Depreciation, depletion and amortization expense increased by $17.3 million
(16%) to $123.7 million. Depreciation, depletion and amortization related to oil
and gas operations accounted for $17 million of this increase, rising to $122.7
million as a result of the $5 million writedown of an offshore Gulf Coast
property, a higher asset base in plants and pipelines and a larger percentage of
production coming from higher cost areas such as Austin Chalk and West Texas. On
a per unit basis for producing properties, depreciation, depletion and
amortization expense, excluding the writedown, increased by $0.07/Mcfe from
$0.75/Mcfe to $0.82/Mcfe.
OIL AND GAS OPERATING INCOME
Total oil and gas operating income increased by $9.2 million to $82.7 million as
higher plants, pipelines and marketing operating income of $15.7 million was
partially offset by lower producing property operating income of $6.5 million.
MINERALS
Minerals revenues increased by $5 million to $31.2 million primarily due to
higher joint venture income of $2.8 million and an increase in royalties income
of $1.6 million. Minerals expenses were down by $0.1 million. As a result,
Minerals operating income increased by $5.1 million.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $3.2 million (30%) to $14
million principally reflecting increased costs associated with being a
stand-alone company.
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INTEREST AND OTHER INCOME
Interest expense increased by $11.8 million to $13 million, while other
income/expense increased by $5.9 million to income of $2 million. The increase
in interest expense reflects debt incurred in connection with the asset
restructuring occurring at the time of the Company's initial public offering.
The increase in other income reflects the absence of 1995 costs associated with
converting to new information and accounting systems.
INCOME TAXES
Income taxes increased by $6.9 million because of higher income before taxes and
the absence of a $5.3 million favorable state tax adjustment in 1995. The
effective tax rate for 1996 was 31.4% (including $3.9 million of Section 29 tax
credits) compared with 24.8% for 1995 (including $5.5 million of Section 29 tax
credits).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital resources include cash from operations, unused
borrowing capacity under its bank credit facility and intercompany credit
agreement with UPC, and proceeds from the sale of non-core assets. The Company
generally funds its capital spending program through internally-generated cash
flows.
Cash provided by operations for the first quarter of 1996 was $216 million, an
increase of $49.9 million (30%) from the corresponding period of 1995. The
increase reflects higher cash operating income from plants, pipelines and
marketing ($18.8 million) and an increase in producing property revenues net of
production costs ($21.6 million) partially offset by a $15 million increase in
general and administrative and interest costs associated with becoming a
stand-alone company. In addition, favorable changes in working capital of $18.1
million for the first quarter reflect a decrease in futures margin deposits
related to the Company's hedging activities, reductions in inventories due to
the sale and withdrawal of volumes in gas storage, and other favorable working
capital changes, partially offset by increased Federal income tax payments
principally related to the November 1995 Columbia Gas Transmission Company
bankruptcy settlement.
The Company's primary needs for cash include capital expenditures for its oil
and gas operations and dividends. The Company expects to refinance its existing
debt.
First quarter capital expenditures were $138.3 million, a decrease of $33.3
million (19%) from the first quarter of 1995. Capital and exploratory
expenditures are summarized as follows:
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Three Months Ended March 31,
----------------------------
1995 1996
------ ------
(Millions of dollars)
Capital expenditures:
Producing properties................... $131.9 $122.0
Plants, pipelines and marketing........ 38.7 15.9
Minerals and other..................... 1.0 0.4
------ ------
Total.................................. $171.6 $138.3
====== ======
Capital expenditures for producing properties decreased by $9.9 million from the
first quarter of 1995 reflecting a decrease in development spending partially
offset by increased lease acquisition activity. Plants, pipelines and marketing
expenditures were down by $22.8 million reflecting the 1995 completion of plant
and pipeline construction primarily in West Texas and the Austin Chalk. In the
second quarter, the Company increased its 1996 capital spending budget by $100
million to $767 million. Because of the timing of project investments, not all
of this budget may be expended in 1996. Also, capital spending programs may be
adjusted as business and operating conditions change.
Under the terms of the Company's intercompany credit agreement with UPC, excess
funds generated or cash borrowings required by the Company are transferred to
and from UPC and bear interest at 8.5% per annum. During the first quarter of
1996, the Company transferred $89.8 million to UPC in accordance with this
agreement, which principally reflects the excess of the Company's cash generated
from operations of $216 million over current quarter capital expenditures of
$138.3 million. The intercompany credit agreement offers available credit to the
Company up to a $200 million aggregate limit on net advances by UPC. None of
this available credit has been utilized as of March 31, 1996.
The Company's total debt at March 31, 1996 of $580.7 million includes short-term
debt of $477.9 million payable to UPC, other short-term borrowings of $1.3
million, borrowings under the Company's bank credit agreement of $68 million and
tax exempt revenue bonds of $33.5 million. The short-term debt payable to UPC of
$477.9 million comprises a $650 million note payable incurred at the time of the
Offering which bears interest at 8.5%, partially offset by $172.1 million in
cumulative advances to UPC under the intercompany credit agreement. This net
debt is payable within 90 days following the Distribution, which is expected to
occur in the fourth quarter of 1996. Borrowings under the bank credit agreement
of $68 million bear interest at a 5.54% floating rate at March 31, 1996 and are
payable in the year 2000. Available credit under the bank credit agreement at
March 31, 1996 is $32 million.
Based on capital spending plans, the Company will not be able to significantly
reduce its overall level of indebtedness in 1996. Therefore, prior to 90 days
following the Distribution, management intends to refinance its debt portfolio
with a combination of long-term fixed rate debentures and short-term commercial
paper supported by a revolving credit agreement. During the first quarter of
1996, the Company received preliminary indicative ratings from credit agencies
relating to its senior unsecured indebtedness ranging from A to A3. This solid
investment grade rating combined with a debt to capitalization ratio of 29.9% at
March 31, 1996 should allow the Company to successfully refinance its debt at
favorable interest rates.
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The Company paid a $0.05 per share ($12.4 million) quarterly cash dividend on
its outstanding shares of common stock in January 1996, representing the first
quarterly dividend following the Company's initial public offering. This
compares to a cash dividend of $31 million paid to UPC in the first quarter of
1995. The Company's reduced dividend level is anticipated to offset increased
interest expense resulting from changes in the Company's debt structure which
occurred at the time of the Offering. In addition, on February 1, 1996, the
Board of Directors declared a cash dividend of $0.05 per share payable in the
second quarter of 1996.
The Company believes that, following the anticipated refinancing of its debt,
cash from operations and available financing will enable it to fund its capital
expenditures, dividends and working capital requirements.
OUTLOOK
The Company has increased its hydrocarbon reserves consistently over the last
eight years through a combination of drilling and acquisitions, while upgrading
its production base by disposing of lower-margin and non-core properties. The
Company expects to remain one of the most active drillers in the United States
in 1996 based on the number of active drilling rigs. Drilling is expected to
focus in the Austin Chalk, Gulf Coast, West Texas and East/South Texas. The
Company also expects to increase its oil and gas production volume in 1996 while
maintaining its reserve position. This volume growth is anticipated primarily in
the Austin Chalk and West Texas. The Company will continue to review acquisition
opportunities which benefit earnings and cash flow, and develop its capital
structure to maximize shareholders' return and maintain financial flexibility.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1994, the surface owners of portions of five sections of Colorado land
that are subject to mineral reservations made by the Company's predecessor in
title brought suit against the Company in the District Court of Weld County,
Colorado to quiet title to minerals, including crude oil (in some of the lands)
and natural gas. In September 1994, the case was removed to the U.S. District
Court for the District of Colorado, but a District Court Magistrate has entered
an order which, if upheld, would have the practical effect of sending the case
back to the state court. The Company has filed a motion for summary judgment
asking the District Court to rule as a matter of law that the Company owns the
oil and gas and all minerals that are part of a severed mineral estate. No trial
date is currently set. Similar claims were made under identical mineral
reservations by Utah and Wyoming surface owners in cases litigated in the
Federal courts of Utah and Wyoming between 1979 and 1987. In those cases, the
Federal courts held as a matter of law that, under the laws of Utah and Wyoming,
these mineral reservations unambiguously reserved oil and gas to Union Pacific
Railroad Company ("the Railroad") and its successors. These holdings were
affirmed by the United States Court of Appeals for the Tenth Circuit. While the
Company believes that the rule of law applied by the Federal courts in Utah and
Wyoming should also be applied under Colorado law, there are Colorado court
decisions that could provide a basis for an alternative interpretation. The
value of the disputed reserves in the properties subject to the lawsuit is
estimated to be approximately $5 million. Approximately 400,000 acres of other
lands in Weld County, Colorado are subject to mineral reservations that are in
the same form as the reservations at issue in the present suit. An adverse
interpretation of the reservations at issue is likely to implicate the mineral
title in these other lands as well. In addition, over two million acres of lands
elsewhere in Colorado are subject to the same forms of mineral reservations.
Depending on the grounds of an adverse decision in the case, title to minerals
held by the Company in some or all of these lands could also be affected, which
might have the effect of significantly reducing the Company's interest in the
Las Animas area of southeastern Colorado and the Denver-Julesburg Basin in
eastern Colorado.
On August 31, 1995, the Texas General Land Office and two other royalty owners
filed a suit against the Company in the Texas District Court of Fayette County,
Texas. The suit alleges that the Company underpaid the plaintiffs for their
royalty interest share of the Company's crude oil production in Texas, and seeks
certification as a class action. Since late August 1995, the Company has been
made a party to a number of other lawsuits making allegations similar to those
made in the Fayette County suit. On August 25, 1995, an individual interest
owner filed suit in County Court in Calhoun County, Texas and on August 31,
1995, the Lee County Attorney filed suit in the Texas District Court in Lee
County on behalf of the State of Texas, Lee County and two individual royalty
owners. These additional suits all name the Company and a number of other
non-affiliated defendants, and all seek certification as class actions. The
premise of these suits is that the Company and the other named defendants used
"posted prices" to determine the amounts payable for crude oil production
attributable to the plaintiffs' interests. Plaintiffs allege that these posted
prices have been set consistently below "market value," and that this practice
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20
has resulted in plaintiffs and other interest owners being underpaid for their
interests. The Calhoun County case makes additional claims not made in the
other suits, including claims with respect to prices paid for natural gas and
natural gas liquids as well as for crude oil. The Calhoun County case alleges
that the defendants discriminated against plaintiffs in (1) sales of natural
gas and natural gas liquids, (2) charges for transportation and other services
and (3) the prices used for accounting to the plaintiffs for such sales and
services. The Calhoun County suit also alleges that the Company and the other
named defendants have breached fiduciary duties to certain purported class
members and intentionally misrepresented the circumstances of their purchases
and sales of oil. In addition, the Lee County and Calhoun County cases name the
Company's marketing subsidiary, UP Fuels, and certain other affiliates of the
Company as defendants. The Lee County case also alleges discriminatory
practices in sales of crude oil, claims that the defendants have conspired and
acted in concert to accomplish a shared unlawful purpose in making sales of
crude oil, and alleges violations of numerous state statutes. These suits are
similar to suits recently brought in Texas by the Texas General Land Office
against eight other major crude oil producers and in New Mexico, Louisiana and
Oklahoma by private royalty owners against major crude oil producers, not
including the Company. Also, an additional suit has been filed in Lee County
against a number of major crude oil producers. This suit, which does not name
the Company, makes allegations similar to the Lee County suit described above.
More recently, the Company has been brought into interest owner litigation on
natural gas. In November 1995, a suit was filed against the Company in the
District Court for Panola County, Texas by an individual royalty owner
contending that the Company has not paid royalties on the highest price
obtainable and, further, that the Company has improperly deducted costs from
its interest owners. Plaintiff seeks certification as a class action. In
January 1996, the Railroad was named a party in a suit brought in the District
Court for the City and County of Denver, Colorado, alleging that the Railroad
and other named defendants are improperly deducting post-production costs from
interest owners in gas production. The plaintiffs are individual interest
owners and seek certification as a class action. One of the plaintiffs has a
surface owner agreement with the Railroad. The Company has not been named as a
defendant, but the Company does administer the surface owner agreements and
make the payments thereunder, and has agreed to indemnify the Railroad with
respect to this litigation. None of the suits articulate a theory of recovery
or allege a specific amount of damages. This litigation activity against the
Company and other crude oil and natural gas producers suggests that more suits
of this type may be filed against the Company including, perhaps, suits by
other types of interest owners and in jurisdictions other than Texas. While the
Company intends to defend vigorously against these lawsuits and any similar
lawsuits, if suits of this type are ultimately resolved against the Company on
a widespread basis, damage awards and a loss of future revenue could result
which, in the aggregate, may be material.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11 Computation of earnings per share
12 Computation of ratio of earnings to fixed charges
15 Awareness letter of Deloitte & Touche LLP dated as of May 13, 1996
27 Financial data schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1996.
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22
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.
Dated: May 14, 1996
UNION PACIFIC RESOURCES GROUP INC.
(Registrant)
/s/ Patrick D. Hanley
---------------------------------
Patrick D. Hanley,
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer)
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UNION PACIFIC RESOURCES GROUP INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Computation of earnings per share
12 Computation of ratio of earnings to fixed charges
15 Awareness letter of Deloitte & Touche LLP dated as of
May 13, 1996
27 Financial data schedule