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, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8483
UNOCAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3825062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2141 ROSECRANS AVENUE, SUITE 4000, EL SEGUNDO, CALIFORNIA 90245
(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
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Number of shares of Common Stock,$1 par value, outstanding as of April 30, 2001:
243,371,783
TABLE OF CONTENTS
PART I PAGE
Item 1. Financial Statements
Consolidated Earnings............................................ 1
Consolidated Balance Sheet........................................ 2
Consolidated Cash Flows........................................... 3
Notes to Financial Statements..................................... 4
Operating Highlights ............................................... 19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 20
Item 3 Quantative and Qualitative Disclosures about Market Risk............ 27
PART II
Item 1 Legal Proceedings................................................... 29
Item 6 Exhibits and Reports on Form 8-K.................................... 29
SIGNATURES.................................................................. 30
EXHIBIT INDEX............................................................... 31
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED EARNINGS UNOCAL CORPORATION
(UNAUDITED)
For the Three Months
Ended March 31,
-----------------------------
Millions of dollars except per share amounts 2001 2000
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Revenues
Sales and operating revenues $ 2,206 $ 1,838
Interest, dividends and miscellaneous income 8 20
Loss on sales of assets - (2)
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Total revenues 2,214 1,856
Costs and other deductions
Crude oil, natural gas and product purchases 987 1,051
Operating expense 330 236
Selling, administrative and general expense 44 48
Depreciation, depletion and amortization 245 206
Dry hole costs 40 14
Exploration expense 34 49
Interest expense 49 53
Property and other operating taxes 21 13
Distributions on convertible preferred securities of subsidiary trust 8 8
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Total costs and other deductions 1,758 1,678
Earnings from equity investments 42 25
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Earnings from continuing operations before
income taxes and minority interests 498 203
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Income taxes 190 83
Minority interests 16 (4)
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Earnings from continuing operations 292 124
Discontinued operations
Gain on disposal (net of tax) 4 9
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Earnings from discontinued operations 4 9
Cumulative effect of accounting change (net of tax) (1) -
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Net earnings $ 295 $ 133
========================================================================================================
Basic earnings per share of common stock (a)
Continuing operations $ 1.19 $ 0.51
Discontinued operations 0.02 0.04
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Net earnings $ 1.21 $ 0.55
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Diluted earnings per share of common stock (b)
Continuing operations $ 1.16 $ 0.51
Discontinued operations 0.02 0.04
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Net earnings $ 1.18 $ 0.55
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Cash dividends declared per share of common stock $ 0.20 $ 0.20
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(a) Basic weighted average shares outstanding (in thousands) 243,169 242,703
(b) Diluted weighted average shares outstanding (in thousands) 256,399 242,963
See Notes to Consolidated Financial Statements.
-1-
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
March 31, December 31,
-----------------------------------------
Millions of dollars 2001 (a) 2000
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Assets
Current assets
Cash and cash equivalents $ 587 $ 235
Accounts and notes receivable 1,122 1,299
Inventories 61 88
Deferred income taxes 167 155
Other current assets 18 25
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Total current assets 1,955 1,802
Investments and long-term receivables 1,456 1,379
Properties - net (b) 6,689 6,433
Deferred income taxes 190 231
Other assets 165 165
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Total assets $ 10,455 $ 10,010
=====================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 856 $ 1,022
Taxes payable 351 282
Interest payable 41 55
Current portion of environmental liabilities 133 124
Current portion of long-term debt and capital leases 132 114
Other current liabilities 314 248
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Total current liabilities 1,827 1,845
Long-term debt and capital leases 2,608 2,392
Deferred income taxes 556 618
Accrued abandonment, restoration and environmental liabilities 576 554
Other deferred credits and liabilities 1,067 968
Minority interests 411 392
Company-obligated mandatorily redeemable convertible preferred securities
of a subsidiary trust holding solely parent debentures 522 522
Common stock ($1 par value, shares authorized: 750,000,000 (c)) 254 254
Capital in excess of par value 531 522
Unearned portion of restricted stock issued (24) (21)
Retained earnings 2,714 2,468
Accumulated other comprehensive income (loss) (136) (53)
Notes receivable - key employees (40) (40)
Treasury stock - at cost (d) (411) (411)
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Total stockholders' equity 2,888 2,719
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Total liabilities and stockholders' equity $ 10,455 $ 10,010
=====================================================================================================================
(a) Unaudited
(b) Net of accumulated depreciation, depletion and amortization of: $ 10,967 $ 10,745
(c) Number of shares outstanding (in thousands) 243,319 243,045
(d) Number of shares (in thousands) 10,623 10,623
See Notes to the Consolidated Financial Statements.
-2-
CONSOLIDATED CASH FLOWS UNOCAL CORPORATION
(UNAUDITED)
For the Three Months
Ended March 31,
---------------------------------
Millions of dollars 2001 2000
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Cash Flows from Operating Activities
Net earnings $ 295 $ 133
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation, depletion and amortization 245 206
Dry hole costs 40 14
Deferred income taxes 32 2
Loss on sales of assets (pre-tax) - 2
Gain on disposal of discontinued operations (pre-tax) (7) -
Other 70 4
Working capital and other changes related to operations
Accounts and notes receivable 169 62
Inventories 27 11
Accounts payable (166) (82)
Taxes payable 69 60
Other (1) (37)
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Net cash provided by operating activities 773 375
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Cash Flows from Investing Activities
Capital expenditures (includes dry hole costs) (360) (295)
Major acquisitions (261) -
Proceeds from sales of assets 8 52
Proceeds from sale of discontinued operations 7 25
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Net cash used in investing activities (606) (218)
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Cash Flows from Financing Activities
Long-term borrowings 240 8
Reduction of long-term debt and capital lease obligations (6) (173)
Minority interests (5) (10)
Proceeds from issuance of common stock 5 1
Dividends paid on common stock (49) (49)
Loans to key employees - (32)
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Net cash provided by (used in) financing activities 185 (255)
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Increase (decrease) in cash and cash equivalents 352 (98)
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Cash and cash equivalents at beginning of year 235 332
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Cash and cash equivalents at end of period $ 587 $ 234
==========================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 61 $ 72
Income taxes (net of refunds) $ 85 $ 30
See Notes to the Consolidated Financial Statements.
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General
The consolidated financial statements included in this report are unaudited and,
in the opinion of management, include all adjustments necessary for a fair
presentation of financial position and results of operations. All adjustments
are of a normal recurring nature. Such financial statements are presented in
accordance with the Securities and Exchange Commission's disclosure requirements
for Form 10-Q.
These interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and the related notes filed with the
Commission in Unocal Corporation's 2000 Annual Report on Form 10-K.
For the purpose of this report, Unocal Corporation (Unocal) and its consolidated
subsidiaries, including Union Oil Company of California (Union Oil), are
referred to as the "Company".
The consolidated financial statements of the Company include the accounts of
subsidiaries in which a controlling interest is held. Investments in entities
without a controlling interest are accounted for by the equity method. Under the
equity method, the investments are stated at cost plus the Company's equity in
undistributed earnings and losses after acquisition. Income taxes estimated to
be payable when earnings are distributed are included in deferred income taxes.
Results for the three months ended March 31, 2001, are not necessarily
indicative of future financial results.
Segment data and certain other items in the prior year financial statements have
been reclassified to conform to the 2001 presentation:
- The Pipelines business has been combined with certain activities of
Canada's gas storage business, which was previously reported in the
Exploration and Production segment, into a new segment called Midstream.
- The Carbon and Minerals businesses are no longer disclosed as a separate
segment and are now reported in the Corporate and Other heading.
(2) Accounting Changes
ADOPTION OF NEW ACCOUNTING STANDARDS - Effective January 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) and Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" (SFAS 138). These standards require
that all derivative instruments be recorded on the balance sheet at their fair
values. Changes in the fair values of derivative instruments are reported in
current period earnings unless they are designated and qualify as effective
hedges.
In accordance with the transition provisions of SFAS 133, the Company recorded a
one-time after-tax charge of approximately $1 million during the quarter ended
March 31, 2001, representing the cumulative effect of the accounting change in
its consolidated statement of income and an after-tax unrealized loss of
approximately $59 million to accumulated other comprehensive loss, of which $28
million is expected to be reclassified to earnings during the current year. The
transition amounts represent accumulated changes in the fair values of
derivative instruments that were previously off balance sheet and used to hedge
certain future commodity sales (e.g. commodity swaps, options). Accumulated
losses in fair value of these derivative instruments will be substantially
offset by corresponding gains on the hedged commodity sales when those sales
occur. Amounts pertaining to the derivative contracts of acquired companies that
were previously capitalized under purchase accounting rules were not impacted.
-4-
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - The primary
objectives of the Company's risk management policies are to reduce the overall
volatility of the Company's cash flows and to preserve revenues. As part of its
overall risk management strategy, the Company enters into various derivative
instrument contracts to protect its exposures to changes in interest rates,
changes in foreign currency exchange rates, and fluctuations in crude oil and
natural gas prices. The Company also pursues outright pricing positions in
hydrocarbon derivative financial instruments.
At the inception of a derivative contract, the Company may choose to designate
and document a derivative as a hedge of a certain exposure. In general, the
Company enters into derivative instruments to hedge two types of exposures:
hedges of cash flow exposures and hedges of fair value exposures. Hedges of cash
flow exposures are generally undertaken to reduce cash flow volatility
associated with forecasted transactions. They may also be used to reduce
volatility associated with cash flows to be paid related to recognized
liabilities. Hedges of fair value exposures are undertaken to hedge recognized
assets or liabilities or unrecognized firm commitments against changes in fair
value.
On the date that a hedge is established, the Company designates and documents
the derivative as either a cash flow hedge or a fair value hedge. Changes in the
fair values of derivatives not designated and documented as hedges are recorded
in current period earnings. Changes in the fair values of derivatives that
qualify for, and are designated and effective as cash flow hedges are deferred
and recorded as a component of accumulated other comprehensive loss until the
hedged transactions occur and are recognized in earnings. The ineffective
portions of cash flow hedge derivatives' changes in fair value, along with any
changes in the time value of options that are excluded from the Company's
measurement of hedge effectiveness, are recognized immediately in earnings as
components of the line items reflecting the underlying hedged transaction.
Changes in the fair values of derivatives that qualify for, and are designated
and effective as fair value hedges are recognized in current period earnings.
Changes in the fair values of the underlying hedged items (e.g. recognized
assets, liabilities or unrecognized firm commitments) are also recognized in
current period earnings and offset the changes in the fair values of the
corresponding hedging derivatives. Any resulting fair value hedge
ineffectiveness is recognized in current period earnings as the difference
between the offseting changes in fair values of the derivative and the
underlying hedged item.
The Company documents its risk management objectives, its strategies for
undertaking various hedge transactions and the hedge relationships between
hedging instruments and hedged items. Derivatives designated as cash flow hedges
are linked to forecasted transactions. Derivatives identified as fair value
hedges are linked to specific assets, liabilities or firm commitments. At hedge
inception and on an on-going basis, the Company assesses whether changes in the
fair values of derivatives used in hedging activities are highly effective in
offsetting changes in the fair values of the hedged items. The Company
discontinues hedge accounting prospectively when (1) it determines that the
derivative is not highly effective as a hedge, (2) the derivative is sold,
exercised or otherwise terminated, (3) management elects to remove the
derivative's hedge designation, (4) the hedged transaction is no longer expected
to occur, or (5) a hedged item no longer meets the definition of a firm
commitment. When a hedged forecasted transaction is no longer expected to occur,
the derivative continues to be carried on the balance sheet at its fair value
and all gains and losses that were previously deferred in accumulated other
comprehensive loss are recognized immediately in earnings. When a hedged item no
longer meets the definition of a firm commitment, the derivative continues to be
carried on the balance sheet at its fair value and any asset or liability that
was recorded on the balance sheet for the change in fair value of the hedged
firm commitment are removed from the balance sheet and recognized immediately in
current period earnings. In all other situations where hedge accounting is
discontinued, the derivative continues to be carried on the balance sheet at its
fair value and any prospective changes in its fair value are recognized in
current period earnings. Deferred gains and losses already recorded in
accumulated other comprehensive loss remain until the forecasted transaction
occurs, at which time those gains and losses are recognized in earnings.
-5-
(3) Asset Acquisitions
In January 2001, the Company's Pure Resources, Inc. (Pure), subsidiary acquired
oil and gas properties, certain general and limited oil and gas partnership
interests and fee mineral and royalty interests from International Paper
Company. The total cost of the acquisition was approximately $261 million,
subject to adjustment, in cash. Included in the transaction were total proved
reserves of approximately 25 million barrels of oil equivalent and ownership in
6 million gross fee mineral acres (3.2 million net) along with participation in
several offshore exploration programs. The transaction was funded from Pure's
credit facilities (see note 10). Pure's acquisition has expanded its business
areas into the Gulf Coast region and offshore in the Gulf of Mexico.
(4) Restructuring Costs
Activities related to the restructuring plan adopted in the first quarter of
2000 are completed. Of the 195 targeted employees, 171 have been terminated or
have received termination notices as a result of the plans. The amount of unpaid
benefits remaining on the consolidated balance sheet at March 31, 2001 was $3
million. These benefits are scheduled to be paid over the coming months and into
the third quarter of 2001. No material changes are expected in the costs accrued
for the plan and no adjustments to the liability have been made to date.
(5) Other Financial Information
During the first quarters of 2001 and 2000, approximately 37 percent and 52
percent, respectively, of total sales and operating revenues were attributable
to the resale of crude oil, natural gas and natural gas liquids purchased from
others in connection with the Company's trading and marketing activities.
Related purchase costs are classified as expense in the crude oil, natural gas
and product purchases category on the consolidated earnings statement.
Capitalized interest totaled $5 million and $2 million for the first quarters of
2001 and 2000, respectively.
(6) Income Taxes
Income taxes on earnings from continuing operations for the first quarter of
2001 were $190 million compared with $83 million for the comparable period of
2000. The effective income tax rate for the first quarter of 2001 was 39 percent
compared with 40 percent for the first quarter of 2000.
-6-
(7) Earnings Per Share
The following are reconciliations of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations for earnings from
continuing operations for the three months ended March 31, 2001 and 2000:
Earnings Shares Per Share
Millions except per share amounts (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2001
Earnings from continuing operations $ 292 243.2
Basic EPS $ 1.19
=============
Effect of dilutive securities
Options and common stock equivalents 0.9
--------------------------------
292 244.1 $ 1.19
Distributions on subsidiary trust preferred securities (after-tax) 7 12.3
--------------------------------
Diluted EPS $ 299 256.4 $ 1.16
=============
Three months ended March 31, 2000
Earnings from continuing operations $ 124 242.7
Basic EPS $ 0.51
=============
Effect of dilutive securities
Options and common stock equivalents 0.3
--------------------------------
Diluted EPS 124 243.0 $ 0.51
=============
Distributions on subsidiary trust preferred securities (after-tax) 6 12.3
--------------------------------
Antidilutive $ 130 255.3 $ 0.51
---------------------------------------------------------------------------------------------------------------------------
Not included in the computation of diluted EPS at March 31, 2001, were options
to purchase approximately 5 million shares of common stock. These options were
not included in the computation as the exercise prices were greater than the
year-to-date average market price of the common shares. The exercise prices of
these options ranged from $35.66 to $45.25 per share. These options will expire
periodically through 2011.
(8) Comprehensive Income
The Company's comprehensive income was:
For the Three Months
Ended March 31,
-------------------------
Millions of dollars 2001 2000
----------------------------------------------------------------------------------------------------------
Net earnings $ 295 $ 133
Cumulative effect of change in accounting principle - SFAS 133 adoption (a) (59) -
Change in unrealized loss on hedging instruments (b) (5) -
Reclassification adjustment for settled hedging contracts (c) 12 -
Change in foreign currency translation adjustments (31) 1
----------------------------------------------------------------------------------------------------------
Comprehensive income $ 212 $ 134
==========================================================================================================
(a) Net of tax effect of: 36 -
(b) Net of tax effect of: 3 -
(c) Net of tax effect of: (7) -
-7-
(9) Restricted Cash
Of the total amounts of Cash and Cash Equivalents reported at March 31, 2001,
cash in the amount of $33 million was restricted as to usage or withdrawal.
Under the terms of the Company's limited recourse project financing for its
share of the Azerbaijan International Operating Company Early Oil Project, the
lenders' principal and interest payments are payable only out of the proceeds
from the Company's sale of crude oil from the project. In keeping with the terms
of the financing agreements, $9 million at March 31, 2001, of the Company's oil
sales proceeds (cash) were reserved for debt principal and interest obligations
falling due within the next 180 days. In addition, at March 31, 2001, the
Company had placed with a trustee $24 million in cash which will ultimately be
used in settlement of claims arising out of the valuation of the royalty owner's
portion of crude oil produced from certain federal leases. Per the terms of the
trust agreement the trustee invests the cash in acceptable investments and will
deliver to the Company any cash balances remaining in the trust after final
settlement of the claims. The Company anticipates final settlement and
disbursement of all funds during the second half of 2001.
(10) Long Term Debt and Credit Agreements
During the first quarter of 2001, the Company's consolidated debt, including the
current portion, increased by $234 million. This was primarily due to an
additional $240 million in borrowings by the Company's Pure subsidiary to fund
an asset acquisition (see note 3). This Pure debt consisted of borrowings under
two separate $250 million unsecured credit facilities, $145 million under a five
year revolving credit facility due 9/29/05 and $95 million under a 364 day
revolving credit facility due 9/28/01, which will then be converted to a term
loan due 9/28/02. Average interest rates paid or accrued during March on the two
credit facilities were 6.15 percent and 6.2 percent, respectively.
On May 8, 2001, Pure entered into a $200 million unsecured line of credit, which
was fully funded on May 11, 2001. The line of credit matures on July 15, 2001.
At maturity, the line of credit will convert to a five year term loan maturing
on July 15, 2006, provided the term loan has been fully syndicated. The terms of
the line of credit and term loan are comparable to those of its current
facilities.
(11) Accrued Abandonment, Restoration and Environmental Liabilities
At March 31, 2001, the Company had accrued $468 million for the estimated future
costs to abandon and remove wells and production facilities. The total costs for
these abandonments are predominantly accrued for on a unit-of-production basis
and are estimated to be approximately $640 million. This estimate was derived in
large part from abandonment cost studies performed by independent third party
firms and is used to calculate the amount to be amortized. The Company's reserve
for environmental remediation obligations at March 31, 2001 totaled $241
million, of which $133 million was included in current liabilities.
(12) Commitments and Contingencies
The Company has certain contingent liabilities with respect to material existing
or potential claims, lawsuits and other proceedings, including those involving
environmental, tax and other matters, certain of which are discussed more
specifically below. The Company accrues liabilities when it is probable that
future costs will be incurred and such costs can be reasonably estimated. Such
accruals are based on developments to date, the Company's estimates of the
outcomes of these matters and its experience in contesting, litigating and
settling other matters. As the scope of the liabilities becomes better defined,
there will be changes in the estimates of future costs, which could have a
material effect on the Company's future results of operations and financial
condition or liquidity.
-8-
Environmental matters - The Company is subject to loss contingencies pursuant to
federal, state and local environmental laws and regulations. These include
existing and possible future obligations to investigate the effects of the
release or disposal of certain petroleum, chemical and mineral substances at
various sites; to remediate or restore these sites; to compensate others for
damage to property and natural resources, for remediation and restoration costs
and for personal injuries; and to pay civil penalties and, in some cases,
criminal penalties and punitive damages. These obligations relate to sites owned
by the Company or others and are associated with past and present operations,
including sites at which the Company has been identified as a potentially
responsible party (PRP) under the federal Superfund laws and comparable state
laws.
Liabilities are accrued when it is probable that future costs will be incurred
and such costs can be reasonably estimated. However, in many cases,
investigations are not yet at a stage where the Company is able to determine
whether it is liable or, even if liability is determined to be probable, to
quantify the liability or estimate a range of possible exposure. In such cases,
the amounts of the Company's liabilities are indeterminate due to the
potentially large number of claimants for any given site or exposure, the
unknown magnitude of possible contamination, the imprecise and conflicting
engineering evaluations and estimates of proper clean-up methods and costs, the
unknown timing and extent of the corrective actions that may be required, the
uncertainty attendant to the possible award of punitive damages, the recent
judicial recognition of new causes of action, the present state of the law,
which often imposes joint and several and retroactive liabilities on PRPs, the
fact that the Company is usually just one of a number of companies identified as
a PRP, or other reasons.
As disclosed in note 11, at March 31, 2001, the Company had accrued $241 million
for estimated future environmental assessment and remediation costs at various
sites where liabilities for such costs are probable. At those sites where
investigations or feasibility studies have advanced to the stage of analyzing
feasible alternative remedies and/or ranges of costs, the Company estimates that
it could incur possible additional remediation costs aggregating approximately
$235 million.
Tax matters - The Company believes it has adequately provided in its accounts
for tax items and issues not yet resolved. Several prior material tax issues are
unresolved. Resolution of these tax issues impact not only the year in which the
items arose, but also the company's tax situation in other tax years. With
respect to 1979-1984 taxable years, all issues raised for these years have now
been settled, with the exception of the effect of the carryback of a 1993 net
operating loss (NOL) to tax year 1984 and resultant credit adjustments. The
1985-1990 taxable years are before the Appeals division of the Internal Revenue
Service. All issues raised with respect to those years have now been settled,
with the exception of the effect of the 1993 NOL carryback and resultant
adjustments. The settlements were subject to review by the Joint Committee on
Taxation of the U.S. Congress. The Joint Committee has reviewed the settled
issues with respect to 1979-1990 taxable years and no additional issues have
been raised. While all tax issues for the 1979-1990 taxable years have been
agreed and reviewed by the Joint Committee, these taxable years will remain open
due to the 1993 NOL carryback. The 1993 NOL results from certain specified
liability losses which occurred during 1993 and which resulted in a tax refund
of $73 million. Consequently, these tax years will remain open until the
specified liability loss, which gave rise to the 1993 NOL, is finally determined
by the Internal Revenue Service and is either agreed to with the IRS or
otherwise concluded in the Tax Court proceeding. In 1999, the United States Tax
Court granted Unocal's motion to amend the pleadings in its Tax Court cases to
place the 1993 NOL carryback in issue. The 1991-1992 taxable years are now
before the Appeals division of the Internal Revenue Service. The 1993-1997
taxable years are under examination by the Internal Revenue Service.
-9-
Pure Resources, Inc. Employment and Severance Agreements - Under circumstances
specified in the employment and/or severance agreements entered into between the
Company's Pure subsidiary and its officers, each covered officer will have the
right to require Pure to purchase its common shares currently held or
subsequently obtained by the exercise of any option held by the officer at a
calculated "net asset value" per share. The net asset value per share is
calculated by reference to each common share's pro rata amount of the present
value of Pure's proved reserves discounted at 10 percent, times 110 percent,
less funded debt, as defined. At March 31, 2001, Pure estimated that the amount
which it would have to repurchase under these agreements was approximately $155
million, which is reflected in other deferred credits and liabilities on the
consolidated balance sheet. The repurchase amount will fluctuate with the market
value of Pure's common stock and/or changes in the net asset value per share.
Other matters - The Company has a five-year lease agreement relating to its
Discoverer Spirit deepwater drill ship. The future remaining minimum lease
payment obligation was approximately $341 million at March 31, 2001. The
drillship has a minimum daily rate of approximately $210,000.
The Company's Molycorp subsidiary, working cooperatively and collaboratively
with the New Mexico Environmental Department and other state agencies, has
secured new and revised permits covering discharges from its Questa, New Mexico,
molybdenum mine. This process involved the posting by Molycorp of two
performance bonds totaling $152 million that are intended to provide financial
assurance of completion of temporary closure plans (only required upon cessation
of operations) and other obligations required under the terms of the permits.
These costs are based on estimations provided by the state of New Mexico
agencies. Unocal has indemnified the insurance company that issued the bonds
with respect to all amounts that may be drawn against them.
The Company also has certain other contingent liabilities with respect to
litigation, claims, and contractual agreements arising in the ordinary course of
business. Although these contingencies could result in expenses or judgments
that could be material to the Company's results of operations for a given
reporting period, on the basis of management's best assessment of the ultimate
amount and timing of these events, such expenses or judgments are not expected
to have a material adverse effect on the Company's consolidated financial
condition or liquidity.
(13) Financial Instruments and Commodity Hedging
Fair values of debt and other long-term instruments - The estimated fair value
of the Company's long-term debt at March 31, 2001, including the current
portion, was approximately $2.872 billion. Fair values were based on the
discounted amounts of future cash outflows using the rates offered to the
Company for debt with similar remaining maturities.
The estimated fair value of the mandatorily redeemable convertible preferred
securities of the Company's subsidiary trust was $504 million at March 31, 2001.
The fair value was based on the trading prices of the preferred securities on
March 30, 2001.
Commodity hedging activities - During the quarter the company recognized
immaterial after-tax losses for the ineffectiveness of both cash flow and fair
value hedges. The company also recorded an after-tax loss of approximately $1
million in sales and operating revenues related to changes in the time values of
its commodity hedging options that were excluded from the company's measure of
hedge effectiveness. At March 31, 2001, the company's various subsidiaries had
approximately $52 million (after-tax) deferred in accumulated other
comprehensive loss related to cash flow hedges for future commodity sales for
the period beginning April 2001 through October 2004. Of this amount,
approximately $17 million (after-tax) is expected to be reclassified to earnings
during the next twelve months.
-10-
(14) Supplemental Condensed Consolidating Financial Information
Unocal guarantees all the publicly held securities issued by its 100
percent-owned subsidiaries Unocal Capital Trust and Union Oil. Such guarantees
are full and unconditional and no other subsidiaries of Unocal or Union Oil
guarantee these securities.
The following tables present condensed consolidating financial information for
(a) Unocal (Parent), (b) the Trust, (c) Union Oil (Parent) and (d) on a combined
basis, the subsidiaries of Union Oil. Virtually all of the Company's operations
are conducted by Union Oil and its subsidiaries.
CONDENSED CONSOLIDATED EARNINGS STATEMENT
Period ended March 31, 2001
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues $ - $ - $ 693 $ 2,082 $ (569) $ 2,206
Interest, dividends and miscellaneous income 5 8 (1) 5 (9) 8
Gain on sales of assets - - - - - -
----------------------------------------------------------------------------------------------------------------------------
Total revenues 5 8 692 2,087 (578) 2,214
Costs and other deductions
Purchases, operating and other expenses 1 - 385 1,610 (580) 1,416
Depreciation, depletion and amortization - - 96 149 - 245
Dry hole costs - - 10 30 - 40
Interest expense 8 - 45 5 (9) 49
Distributions on convertible preferred securities - 8 - - - 8
----------------------------------------------------------------------------------------------------------------------------
Total costs and other deductions 9 8 536 1,794 (589) 1,758
Equity in earnings of subsidiaries 299 - 211 - (510) -
Earnings from equity investments - - (2) 44 - 42
----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes and minority interests 295 - 365 337 (499) 498
----------------------------------------------------------------------------------------------------------------------------
Income taxes (1) - 69 122 - 190
Minority interests - - - 4 12 16
----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 296 - 296 211 (511) 292
Earnings from discontinued operations - - 4 - - 4
Cumulative effect of accounting change - - (1) - - (1)
----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 296 $ - $ 299 $ 211 $ (511) $ 295
============================================================================================================================
-11-
CONDENSED CONSOLIDATED EARNINGS STATEMENT
Period ended March 31, 2000
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------------
Revenues
Sales and operating revenues $ - $ - $ 456 $ 1,700 $ (318) $ 1,838
Interest, dividends and miscellaneous income 10 8 (3) 15 (10) 20
Gain (loss) on sales of assets - - (3) 1 - (2)
----------------------------------------------------------------------------------------------------------------------------
Total revenues 10 8 450 1,716 (328) 1,856
Costs and other deductions
Purchases, operating and other expenses 1 - 313 1,402 (319) 1,397
Depreciation, depletion and amortization - - 86 120 - 206
Dry hole costs - - 6 8 - 14
Interest expense 8 - 52 3 (10) 53
Distributions on convertible preferred securities - 8 - - - 8
----------------------------------------------------------------------------------------------------------------------------
Total costs and other deductions 9 8 457 1,533 (329) 1,678
Equity in earnings of subsidiaries 134 - 135 - (269) -
Earnings from equity investments - - 12 16 (3) 25
----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes and minority interests 135 - 140 199 (271) 203
----------------------------------------------------------------------------------------------------------------------------
Income taxes - - 7 76 - 83
Minority interests - - (1) (3) - (4)
----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 135 - 134 126 (271) 124
Earnings from discontinued operations - - - 9 - 9
----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 135 $ - $ 134 $ 135 $ (271) $ 133
============================================================================================================================
-12-
CONDENSED CONSOLIDATED BALANCE SHEET
Period ended March 31, 2001
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 1 $ - $ 319 $ 267 $ - $ 587
Accounts and notes receivable 5 - 124 993 - 1,122
Inventories - - 8 53 - 61
Other current assets - - 131 54 - 185
-----------------------------------------------------------------------------------------------------------------------------
Total current assets 6 - 582 1,367 - 1,955
Investments and long-term receivables 3,837 - 3,913 832 (7,126) 1,456
Properties - net - - 2,031 4,658 - 6,689
Other assets 58 541 532 1,404 (2,180) 355
-----------------------------------------------------------------------------------------------------------------------------
Total assets $3,901 $ 541 $ 7,058 $ 8,261 $ (9,306) $ 10,455
=============================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ - $ - $ 237 $ 619 $ - $ 856
Current portion of long-term debt and capital leases - - 123 9 - 132
Other current liabilities 48 3 277 511 - 839
-----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 48 3 637 1,139 - 1,827
Long-term debt and capital leases - - 2,158 450 - 2,608
Deferred income taxes - - (11) 567 - 556
Accrued abandonment, restoration
and environmental liabilities - - - 576 - 576
Other deferred credits and liabilities 541 - 705 1,932 (2,111) 1,067
Minority interests - - - 291 120 411
Company-obligated mandatorily redeemable
convertible preferred securities of a
subsidiary trust holding solely parent debentures - 522 - - - 522
Stockholders' equity 3,312 16 3,569 3,306 (7,315) 2,888
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,901 $ 541 $ 7,058 $ 8,261 $ (9,306) $ 10,455
=============================================================================================================================
-13-
CONDENSED CONSOLIDATED BALANCE SHEET
Year ended December 31, 2000
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 1 $ - $ 84 $ 150 $ - $ 235
Accounts and notes receivable - - 165 1,134 - 1,299
Inventories - - 13 75 - 88
Other current assets - - 127 53 - 180
-----------------------------------------------------------------------------------------------------------------------------
Total current assets 1 - 389 1,412 - 1,802
Investments and long-term receivables 3,620 - 3,765 781 (6,787) 1,379
Properties - net - - 1,988 4,445 - 6,433
Other assets 56 541 646 1,153 (2,000) 396
-----------------------------------------------------------------------------------------------------------------------------
Total assets $3,677 $ 541 $ 6,788 $ 7,791 $ (8,787) $ 10,010
=============================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ - $ - $ 283 $ 739 $ - $ 1,022
Current portion of long-term debt and capital leases - - 105 9 - 114
Other current liabilities 42 3 233 431 - 709
-----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 42 3 621 1,179 - 1,845
Long-term debt and capital leases - - 2,181 211 - 2,392
Deferred income taxes - - (10) 628 - 618
Accrued abandonment, restoration
and environmental liabilities - - - 554 - 554
Other deferred credits and liabilities 541 - 721 1,698 (1,992) 968
Minority interests - - - 287 105 392
Company-obligated mandatorily redeemable
convertible preferred securities of a
subsidiary trust holding solely parent debentures - 522 - - - 522
Stockholders' equity 3,094 16 3,275 3,234 (6,900) 2,719
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,677 $ 541 $ 6,788 $ 7,791 $ (8,787) $ 10,010
=============================================================================================================================
-14-
CONDENSED CONSOLIDATED CASH FLOWS
Period ended March 31, 2001
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities $ 44 $ - $ 420 $ 309 $ - $ 773
Cash Flows from Investing Activities
Capital expenditures and acquisitions
(includes dry hole costs) - - (195) (426) - (621)
Proceeds from sales of assets
and discontinued operations - - 15 - - 15
-----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities - - (180) (426) - (606)
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Change in long-term debt and capital leases - - (5) 239 - 234
Dividends paid on common stock (49) - - - - (49)
Minority interests - - - (5) - (5)
Other 5 - - - - 5
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (44) - (5) 234 - 185
-----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents - - 235 117 - 352
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1 - 84 150 - 235
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1 $ - $ 319 $ 267 $ - $ 587
=============================================================================================================================
CONDENSED CONSOLIDATED CASH FLOWS
Period ended March 31, 2000
Unocal Non-
Unocal Capital Union Oil Guarantor
Millions of dollars (Parent) Trust (Parent) Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities $ 55 $ - $ 75 $ 245 $ - $ 375
Cash Flows from Investing Activities
Capital expenditures and acquisitions
(includes dry hole costs) - - (136) (159) - (295)
Proceeds from sales of assets
and discontinued operations 25 - 52 - - 77
-----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities 25 - ( 84) (159) - (218)
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Change in long-term debt and capital leases - - (123) (42) - (165)
Dividends paid on common stock (49) - - - - (49)
Minority interests - - - (10) - (10)
Other (31) - - - - (31)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (80) - (123) (52) - (255)
-----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents - - (132) 34 - (98)
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1 - 162 169 - 332
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1 $ - $ 30 $ 203 $ - $ 234
=============================================================================================================================
-15-
(15) Segment Data
The Company has made changes in the reporting of its segments from the reporting
utilized in the 2000 Annual Report on Form 10-K. The Company's reportable
segments are now: Exploration and Production, Global Trade, Midstream, and
Geothermal and Power Operations. General corporate overhead, unallocated costs
and other miscellaneous operations, including real estate, carbon and minerals
and those businesses that were sold or being phased-out, are included under the
Corporate and Other heading. See also Management`s Discussion and Analysis in
Item 2 for further description of the new segments.
--------------------------------------------------------------------
Segment Information Exploration & Production Global
For the Three Months North America International Trade
ended March 31, 2001
Millions of dollars Lower 48 Alaska Canada Far East Other
--------------------------------------------------------------------
Sales & operating revenues $ 161 $ 72 $ 32 $ 232 $ 35 $ 1,503
Other income (loss) (a) 1 - (1) (3) (1) (7)
Inter-segment revenues 566 - - 55 35 -
--------------------------------------------------------------------
Total 728 72 31 284 69 1,496
Earnings (loss) from equity investments 6 - - 11 - -
Earnings (loss) from continuing operations 241 19 (3) 106 22 3
Earnings from discontinued operations - - - - - -
Cumulative effect of accounting change - - - - - -
--------------------------------------------------------------------
Net earnings (loss) 241 19 (3) 106 22 3
Assets (at March 31, 2001) 2,889 300 985 2,336 672 574
--------------------------------------------------------------------
--------------------------------------------------------------------------------
Midstream Geothermal Corporate & Other Total
& Power Admin Net Environmental
Operations & Interest &
General Expense Litigation Other (b)
--------------------------------------------------------------------------------
Sales & operating revenues $ 100 $ 44 $ - $ - $ - $ 27 $ 2,206
Other income (loss) (a) 1 3 - 6 - 9 8
Inter-segment revenues 2 - - - - (658) -
--------------------------------------------------------------------------------
Total 103 47 - 6 - (622) 2,214
Earnings (loss) from equity investments 9 - - - - 16 42
Earnings (loss) from continuing operations 9 1 (23) (33) (34) (16) 292
Earnings from discontinued operations - - - - - 4 4
Cumulative effect of accounting change - - - - - (1) (1)
--------------------------------------------------------------------------------
Net earnings (loss) 9 1 (23) (33) (34) (13) 295
Assets (at March 31, 2001) 377 604 - - - 1,708 10,445
--------------------------------------------------------------------------------
(a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets.
(b) Includes eliminations and consolidation adjustments.
-16-
--------------------------------------------------------------------
Segment Information Exploration & Production Global
For the Three Months North America International Trade
ended March 31, 2000
Millions of dollars Lower 48 Alaska Canada Far East Other
--------------------------------------------------------------------
Sales & operating revenues $ 24 $ 61 $ 44 $ 216 $ 29 $ 1,374
Other income (loss) (a) (2) - 3 (2) (2) -
Inter-segment revenues 301 17 - 68 14 1
--------------------------------------------------------------------
Total 323 78 47 282 41 1,375
Earnings (loss) from equity investments 2 - - - 1 -
Earnings (loss) from continuing operations 63 23 3 82 (2) (2)
Earnings from discontinued operations - - - - - -
--------------------------------------------------------------------
Net earnings (loss) 63 23 3 82 (2) (2)
Assets (at December 31, 2000) 2,701 315 1,019 2,251 603 655
--------------------------------------------------------------------
--------------------------------------------------------------------------------
Midstream Geothermal Corporate & Other Total
& Power Admin Net Environmental
Operations & Interest &
General Expense Litigation Other (b)
--------------------------------------------------------------------------------
Sales & operating revenues $10 $ 39 $ - $ - $ - $ 41 $ 1,838
Other income (loss) (a) 1 3 - 6 - 11 18
Inter-segment revenues 3 - - - - (404) -
--------------------------------------------------------------------------------
Total 14 42 - 6 - (352) 1,856
Earnings (loss) from equity investments 15 - - - - 7 25
Earnings (loss) from continuing operations 16 9 (22) (36) (5) (5) 124
Earnings from discontinued operations - - - - - 9 9
--------------------------------------------------------------------------------
Net earnings (loss) 16 9 (22) (36) (5) 4 133
Assets (at December 31, 2000) 416 574 - - - 1,476 10,010
--------------------------------------------------------------------------------
(a) Includes interest, dividends and miscellaneous income, and gain (loss) on sales of assets.
(b) Includes eliminations and consolidation adjustments.
OPERATING HIGHLIGHTS
The Company began reporting all production related to Production Sharing
Contracts (PSCs) on the net-economic interests basis, which excludes host
country shares. In previous reporting, production had included host country
shares in Indonesia and the Democratic Republic of Congo. The Company also began
reporting natural gas production on a dry basis, with natural gas liquids now
included with crude oil and condensate production volumes. The amounts in the
table on the following page reflect these restatements:
-17-
OPERATING HIGHLIGHTS (UNAUDITED)
For the Three Months
Ended March 31,
--------------------
2001 2000
----------------------------------------------------------------------------------------------
North America Net Daily Production
Crude oil, condensate and natural gas liquids (thousand barrels)
Lower 48 (a) 53 54
Alaska 24 28
Canada (a) 15 17
----------------------------------------------------------------------------------------------
Total crude oil, condensate and natural gas liquids 92 99
Natural gas - dry basis (million cubic feet)
Lower 48 (a) 874 714
Alaska 138 151
Canada (a) 140 98
----------------------------------------------------------------------------------------------
Total natural gas 1,152 963
North America Average Prices (b)
Crude oil, condensate and natural gas liquids (per barrel)
Lower 48 $ 26.71 $ 25.15
Alaska $ 22.76 $ 23.15
Canada $ 20.46 $ 18.82
Average $ 24.60 $ 23.47
Natural gas (per mcf)
Lower 48 $ 6.93 $ 2.50
Alaska $ 1.20 $ 1.20
Canada $ 4.22 $ 1.60
Average $ 5.87 $ 2.19
----------------------------------------------------------------------------------------------
International Net Daily Production
Crude oil, condensate and natural gas liquids (thousand barrels)
Far East 50 46
Other 19 18
----------------------------------------------------------------------------------------------
Total crude oil, condensate and natural gas liquids 69 64
Natural gas - dry basis (million cubic feet)
Far East 793 781
Other 57 61
----------------------------------------------------------------------------------------------
Total natural gas 850 842
International Average Prices (b)
Crude oil, condensate and natural gas liquids (per barrel)
Far East $ 24.25 $ 23.60
Other $ 25.55 $ 25.53
Average $ 24.67 $ 24.00
Natural gas (per mcf)
Far East $ 2.48 $ 2.29
Other $ 2.89 $ 2.73
Average $ 2.50 $ 2.33
Worldwide Net Daily Production (a)
Crude oil, condensate and natural gas liquids (thousand barrels) 161 163
Natural gas - dry basis (million cubic feet) 2,002 1,805
Barrels oil equivalent (thousands) 495 464
Worldwide Average Prices (b)
Crude oil, condensate and natural gas liquids (per barrel) $ 24.63 $ 23.66
Natural gas (per mcf) $ 4.41 $ 2.26
----------------------------------------------------------------------------------------------
(a) Production includes 100 percent of production of consolidated subsidiaries and proportional
shares of production of equity investees.
(b) Average prices include hedging gains and losses but exclude gains or losses on derivative
positions not accounted for as hedges and other Global Trade margins.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated financial condition
and results of operations of Unocal should be read in conjunction with
Management's Discussion and Analysis in Item 7 of the Company's 2000 Annual
Report on Form 10-K.
The Pipelines business has been combined with certain activities of Canada's gas
storage business, which was previously reported in the Exploration and
Production segment, into a new segment called Midstream. The Carbon and Minerals
businesses are no longer disclosed as a separate segment and are now reported in
the Corporate and Other heading. See note 15 to the consolidated financial
statements in Item 1 of this report for revisions in the Company's reportable
segments.
CONSOLIDATED RESULTS
For the Three Months
Ended March 31,
------------------------
Millions of dollars 2001 2000
----------------------------------------------------------------------------------------
Earnings from continuing operations $ 292 $ 124
Earnings from discontinued operations 4 9
Cumulative effect of accounting change (1) -
----------------------------------------------------------------------------------------
Net earnings $ 295 $ 133
========================================================================================
Earnings from continuing operations totaled $292 million in the first quarter of
2001, which was an increase of $168 million from the same period a year ago. The
increase was primarily due to higher worldwide average natural gas prices and
increased natural gas production. The Company's worldwide average natural gas
price, including hedging activities, was $4.41 per thousand cubic feet (mcf) in
the first quarter of 2001, which was an increase of $2.15 per mcf, or 95
percent, from the same period a year ago. The Company's worldwide natural gas
production increased by 11 percent from the same period a year ago, primarily
due to higher natural gas production from the U.S. Lower 48. These positive
factors were partially offset by higher environmental costs, related to former
businesses that were previously sold, higher depreciation, depletion and
amortization expense and higher dry hole costs.
Earnings from discontinued operations were $4 million in the first quarter of
2001 versus $9 million for the same period a year ago. The Company collected and
recorded a $7 million (pre-tax) gain in the first quarter of 2001 related to a
participation agreement tied to its former West Coast refining, marketing and
transportation assets, which were sold in 1997. The payment reflected
differences in California reformulated gasoline and conventional gasoline. The
maximum potential payments under this participation agreement are capped at $100
million and extend to 2003. The 2000 results reflected the Company's former
agricultural products business, which was sold later in that year.
The Company recorded a one-time non-cash $1 million after-tax charge consisting
of the cumulative effect of change in accounting principle related to the
initial adoption of Financial Accounting Standards No. 133.
-19-
Special items represent certain significant transactions, presented in net
earnings, that management determines to be unrelated to or not representative of
the Company's ongoing operations. The following table is a reconciliation of
consolidated adjusted (excluding special items) after-tax earnings to net
earnings for the quarterly periods ended March 31:
For the Three Months
Ended March 31,
------------------------
Millions of dollars 2001 2000
---------------------------------------------------------------------------------------------
Adjusted after-tax earnings (a) $ 340 $ 139
Special items:
Continuing operations
Environmental and litigation provisions/settlements (31) (4)
Trading derivatives- non-hedging (17) -
Restructuring costs - (11)
---------------------------------------------------------------------------------------------
Total special items from continuing operations (48) (15)
Discontinued operations
Gain on disposal - Agricultural products - 9
Gain on disposal - Refining and marketing 4 -
---------------------------------------------------------------------------------------------
Total special items from discontinued operations 4 9
Cumulative effect of accounting change (1) -
---------------------------------------------------------------------------------------------
Net earnings (a) $ 295 $ 133
=============================================================================================
(a) Includes minority interests of: $ (16) $ 4
-20-
EXPLORATION AND PRODUCTION
The Company engages in oil and gas exploration, development and production
worldwide.
North America - Included in this category are the U.S. Lower 48, Alaska and
Canada oil and gas operations. The emphasis of the U.S. Lower 48 operations is
on the onshore, continental shelf and deepwater areas of the Gulf of Mexico
region. The U.S. Lower 48 also includes the consolidated results of the
Company's Pure Resources, Inc. (Pure), a 65-percent owned subsidiary, which
operates primarily in the Permian and San Juan Basins in West Texas and New
Mexico, the Gulf Coast and the Gulf of Mexico. A substantial portion of the
crude oil and natural gas produced in the U.S. Lower 48 operations, excluding
Pure, is sold to the Company's Global Trade segment. The remainder of North
America production, including the production of Pure and the Company's Northrock
Resources Ltd. (Northrock) Canadian subsidiary, is sold to third parties. In
Alaska, natural gas production, pursuant to agreements with Agrium, Inc.
(Agrium), is sold to Agrium's fertilizer plant in Kenai. In addition, Northrock
and Pure take pricing positions in hydrocarbon derivative instruments in support
of their oil and gas operations.
For the Three Months
Ended March 31,
------------------------
Millions of dollars 2001 2000
----------------------------------------------------------------------------------------
Adjusted after-tax earnings (before special items)
Lower 48 (a) $ 241 $ 63
Alaska 19 24
Canada (b) 14 3
----------------------------------------------------------------------------------------
Adjusted after-tax earnings (before special items) (a) (b) 274 90
Special items:
Litigation provisions (Alaska) - (1)
Trading derivatives- non-hedging (Canada) (17) -
----------------------------------------------------------------------------------------
Total special items (17) (1)
----------------------------------------------------------------------------------------
After-tax earnings (a) (b) $ 257 $ 89
========================================================================================
(a) Includes minority interests of: $ (17) $ (5)
(b) Includes minority interests of: $ - $ 8
After-tax earnings totaled $257 million in the first quarter of 2001, which was
an increase of $168 million from the same period a year ago. This increase was
primarily due to higher North America average natural gas prices and higher
natural gas production. Average North America natural gas prices were $5.87 per
mcf in the first quarter of 2001, which was an increase of $3.68 per mcf, or 268
percent, from the same period a year ago. North America average net daily
natural gas production increased 20 percent from the same period a year ago
behind strong results from the Gulf of Mexico Muni field, other Gulf of Mexico
shelf areas and production increases by Pure. These positive results were
partially offset by higher dry hole costs from the Gulf of Mexico deepwater
drilling program, higher depreciation, depletion and amortization expense and
minority interests.
-21-
International - Unocal's International operations include oil and gas
exploration and production activities outside of North America. The Company
operates or participates in production operations in Thailand, Indonesia,
Myanmar, Bangladesh, the Netherlands, Azerbaijan, and the Democratic Republic of
Congo. International operations also include the Company's exploration
activities and the development of energy projects primarily in Asia, Latin
America and West Africa.
For the Three Months
Ended March 31,
------------------------
Millions of dollars 2001 2000
----------------------------------------------------------------------------------------
Adjusted after-tax earnings (loss) (before special items)
Far East $ 106 $ 82
Other 22 (2)
----------------------------------------------------------------------------------------
Adjusted after-tax earnings (before special items) 128 80
Special items: - -
----------------------------------------------------------------------------------------
After-tax earnings $ 128 $ 80
========================================================================================
After-tax earnings totaled $128 million in the first quarter of 2001, which was
an increase of $48 million from the same period a year ago. The increase was
primarily due to higher crude oil production volumes and natural gas prices.
Crude oil production increased six percent from the same period a year ago,
primarily in Indonesia. The average natural gas price for International
operations was $2.50 per mcf in the first quarter of 2001, which was an increase
of 17 cents per mcf, or seven percent, from the same period a year ago.
GLOBAL TRADE
The Global Trade segment conducts most of the Company's worldwide crude oil,
condensate, natural gas and refined products trading and marketing activities,
excluding those of Pure and Northrock. It is also responsible for
commodity-specific risk management activities on behalf of most of the Company's
Exploration and Production segment, excluding Pure. Global Trade also purchases
crude oil, condensate and natural gas from certain of the Company's royalty
owners, joint venture partners and other unaffiliated oil and gas producing and
trading companies for resale. In addition, Global Trade takes pricing positions
in hydrocarbon derivative instruments.
For the Three Months
Ended March 31,
------------------------
Millions of dollars 2001 2000
----------------------------------------------------------------------------------------
Adjusted after-tax earnings (loss) (before special items) $ 3 $ (2)
Special items: - -
----------------------------------------------------------------------------------------
After-tax earnings (loss) $ 3 $ (2)
========================================================================================
After-tax results totaled $3 million in the first quarter of 2001, which was an
increase of $5 million from the same period a year ago. The increase in the
first quarter of 2001 was primarily due to improved results from non-hedging
commodity derivative positions related to both crude oil and natural gas.
-22-
MIDSTREAM
The Midstream segment is comprised of the Pipelines business, which principally
encompasses the Company's equity interests in affiliated petroleum pipeline
companies and wholly-owned pipeline systems throughout the U.S., and the
Company's North America gas storage business.
For the Three Months
Ended March 31,
------------------------
Millions of dollars 2001 2000
----------------------------------------------------------------------------------------
Adjusted after-tax earnings (before special items) $ 9 $ 16
Special items: - -
----------------------------------------------------------------------------------------
After-tax earnings $ 9 $ 16
========================================================================================
After-tax earnings totaled $9 million for the first quarter of 2001, which was a
decrease of $7 million from the same period a year ago. The decrease was
primarily due to a $6 million asset write-down related to a Colonial Pipeline
Company investment.
GEOTHERMAL AND POWER OPERATIONS
The Geothermal and Power Operations segment produces geothermal steam for power
generation, with operations in the Philippines and Indonesia. The segment's
activities also include the operation of power plants in Indonesia and equity
interests in gas-fired power plants in Thailand. The Company's non-exploration
and production business development activities, primarily power-related, are
also included in this segment.
For the Three Months
Ended March 31,
------------------------
Millions of dollars 2001 2000
----------------------------------------------------------------------------------------
Adjusted after-tax earnings (before special items) $ 1 $ 9
Special items: - -
----------------------------------------------------------------------------------------
After-tax earnings $ 1 $ 9
========================================================================================
After-tax earnings totaled $1 million in the first quarter of 2001, which was a
decrease of $8 million from the same period a year ago. This decrease was
primarily due to higher receivable provisions related to operations in
Indonesia.
-23-
CORPORATE AND OTHER
Corporate and other includes general corporate overhead, miscellaneous
operations (including real estate activities, carbon and minerals) and other
corporate unallocated costs. Net interest expense represents interest expense,
net of interest income and capitalized interest.
For the Three Months
Ended March 31,
------------------------
Millions of dollars 2001 2000
----------------------------------------------------------------------------------------
Adjusted after-tax earnings effect (before special items)
Administrative and general expense $ (23) $ (22)
Net interest expense (a) (33) (36)
Environmental and litigation expense (3) (3)
Other (a) (16) 7
----------------------------------------------------------------------------------------
Adjusted after-tax earnings effect (before special items) (a) (75) (54)
Special items:
Environmental and litigation provisions (31) (3)
Restructuring costs (Other) - (11)
----------------------------------------------------------------------------------------
Total special items (31) (14)
----------------------------------------------------------------------------------------
After-tax earnings effect (a) $ (106) $ (68)
========================================================================================
(a) Includes minority interests of: $ 1 $ 1
The after-tax earnings effect was a loss of $106 million in the first quarter of
2001 compared to a loss of $68 million in the same period a year ago.
Environmental provisions in the first quarter of 2001 were higher, principally
due to higher estimated costs related to the cleanup of former Company operated
sites and facilities sold with retained liabilities. The Company also made a $10
million pre-tax cash contribution, included in the Other category, in the first
quarter of 2001, to fund a charitable foundation.
FINANCIAL CONDITION AND CAPITAL EXPENDITURES
At At At
March 31, December 31, March 31,
--------------------------------------------------
Millions of dollars 2001 2000 2000
------------------------------------------------------------------------------------------------------------------
Current ratio 1.1:1 1.0:1 1.0:1
Total debt and capital leases $ 2,740 $ 2,506 $ 2,689
Trust convertible preferred securities 522 522 522
Stockholders' equity 2,888 2,719 2,247
--------------------------------------------------
Total capitalization $ 6,150 $ 5,747 $ 5,458
==================================================
Total debt/total capitalization 45% 44% 49%
Floating-rate debt/total debt 11% 3% 5%
------------------------------------------------------------------------------------------------------------------
For the three months ended March 31, 2001, net cash flow provided by operating
activities was $773 million compared with $375 million in the same period a year
ago. This increase primarily reflected the effects of higher worldwide average
natural gas prices and lower overall working capital.
Pre-tax proceeds from asset sales, including those classified as discontinued
operations, were $15 million for the first three months of 2001 compared with
$77 million in the same period a year ago. In 2001, pre-tax proceeds included $8
million for the sale of certain oil and gas properties and $7 million associated
with a participation agreement involving certain gasoline margins realized by
the Company's former West Coast refining, marketing and transportation assets,
which were sold in 1997.
-24-
Capital spending for the first three months ended March 31, 2001, was $360
million compared with $295 million in the same period a year ago. The higher
capital spending in 2001 was primarily due to higher exploratory expenditures
and property acquisitions in the Gulf of Mexico. In addition to the capital
spending amount for the first three months of 2001, Pure acquired properties
from International Paper Company for $261 million (see note 3 to the
consolidated financial statements in Item 1 of this report).
For the full year 2001, total capital expenditures, excluding major
acquisitions, are currently expected to be approximately $1.7 billion. Of this
total, about 58 percent is expected to be spent in support of North American
exploration and development (E&P) programs, including the Company's Gulf of
Mexico deepwater drilling program, with the bulk of the remainder for
International E&P expenditures.
The Company's long-term debt, including the current portion, was $2.74 billion
at March 31, 2001, compared with $2.51 billion at year-end 2000. This increase
primarily reflected the borrowings made by Pure to fund its acquisition of the
International Paper Company properties.
ENVIRONMENTAL MATTERS
At March 31, 2001, the Company's reserves for environmental remediation
obligations totaled $241 million, of which $133 million was included in current
liabilities. During the first three months of 2001, cash payments of $19 million
were applied against the reserve and $47 million in provisions were added to the
reserve balance. The increase in the reserve provisions was primarily for the
anticipated cleanup at former Company operated facilities and facilities sold
with retained liabilities. The Company also estimated that it possibly could
incur additional remediation costs aggregating approximately $235 million (as
discussed in note 12 to the consolidated financial statements in Item 1 of this
report). The Company's total environmental reserve amount is grouped into the
following four categories.
Reserve Summary
At
March 31,
Millions of dollars 2001
---------------------------------------------------------------------------------------
Superfund and similar sites $ 15
Active company facilities 46
Company facilities sold with retained liabilities
and former company-operated sites 80
Inactive or closed company facilities 100
---------------------------------------------------------------------------------------
Total reserves $ 241
=======================================================================================
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OUTLOOK
Certain of the statements in this discussion, as well as other forward-looking
statements within this document, contain estimates and projections of amounts of
or increases / decreases in future revenues, earnings, cash flows, capital
expenditures, assets, liabilities and other financial items and of future levels
of or increases / decreases in reserves, production, sales including related
costs and prices, and other statistical items; plans and objectives of
management regarding the Company's future operations, products and services; and
certain assumptions underlying such estimates, projection plans and objectives.
While these forward-looking statements are made in good faith, future operating,
market, competitive, legal, economic, political, environmental, and other
conditions and events could cause actual results to differ materially from those
in the foward-looking statements. See pages 47 through 49 of Management's
Discussion and Analysis in Item 7 of the Company's 2000 Annual Report on Form
10-K for a discussion of certain of such conditions and events.
Volatile energy prices continue to impact financial results in the year 2001.
The Company expects energy prices to remain volatile due to changes in climate
conditions, worldwide demand, crude oil and natural gas inventory levels,
production quotas set by OPEC and other factors.
The Company expects adjusted (excluding special items) after-tax earnings to be
between 80 to 90 cents per share for the second quarter of 2001, assuming
average NYMEX benchmark commodity prices of $27.75 per barrel of crude oil and
$5.15 per MMBtu for natural gas. The Company also expects adjusted after-tax
earnings for the full year of 2001 to be between $3.85 and $4.15 per share,
assuming average NYMEX benchmark commodity prices of $28 per barrel of crude oil
and $5.70 per MMBtu for natural gas. The second quarter and full year forecasts
are also dependent on the Company's deepwater drilling results and other
factors. The Company expects net daily worldwide production for the second
quarter 2001 to average between 495,000 and 500,000 Barrels of Oil Equivalent
(BOE). For full-year 2001, the Company expects net worldwide daily production of
about 500,000 to 510,000 BOE.
The Company is currently drilling a deepwater wildcat well on the Trident
prospect, located on Alaminos Canyon Block 903 in the Gulf of Mexico, with the
Discoverer Spirit drillship. The Company has a 70 percent working interest in
the prospect.
In May 2001, the Company's Pure subsidiary successfully completed its initial
tender offer to acquire all the outstanding shares of common stock of Hallwood
Energy Corporation at a price of $12.50 per share and all the outstanding shares
of Series A Cumulative Preferred Stock of Hallwood at a price of $10.84 per
share. The total consideration for the transaction would be approximately $268
million, including assumed debt. The boards of directors of both Hallwood and
Pure have unanimously approved the transaction. Pure accepted for payment
approximately 85 percent of the issued and outstanding shares of common stock
and approximately 78 percent of the issued and outstanding shares of the
preferred stock. A second offering period will expire on May 15, 2001. The
transaction is expected to close in the second half of 2001.
The Company is currently involved in a multiple well delineation drilling
program on the Ranggas prospect offshore East Kalimantan in Indonesia. The
Company has previously announced the initial exploratory well as an oil and gas
discovery in January 2001. The Ranggas discovery is located in the Rapak
Production Sharing Contract area in which the Company holds an 80 percent
working interest.
In Myanmar, the 2000 "take-or-pay" obligation, of which the Company's share is
approximately $72 million, was billed to the Petroleum Authority of Thailand
(PTT) in late January of 2001. Under the terms of the contract, PTT was
obligated to pay this amount by March 1, 2001. The obligation remains
outstanding, but the Company expects to receive payment.
In Gabon, the Company is participating in a multi-well program. The first two
wells, the Renee #1 well on the Astrid East prospect and the Judy #1 well on the
Astrid West prospect, were drilled and did not encounter commercial quantities
of hydrocarbons. The wells were subsequently plugged and abandoned.
-26-
In Brazil, deepwater drilling began in May 2001 on the Lagosta prospect in Block
BES-2, where the Company has a 30 percent working interest. Drilling is also
expected to begin on two deepwater wells in the Company-operated Block BC-9
later in the second quarter of 2001. The Company has a 35 percent working
interest in Block BC-9. In addition, the Company anticipates completing its
acquisition of an interest in the Pescada-Arabaiana oil and gas project in the
Potiguar basin by the end of May 2001.
As of March 31, 2001, the Company had a gross receivable balance of
approximately $314 million related to its geothermal operations in Indonesia.
Approximately $130 million was related to Gunung Salak electric generating Units
1, 2, and 3, of which $128 million represented past due amounts and accrued
interest resulting from partial payments for March 1998 through March 2001.
Although invoices generally have not been paid in full, amounts that have been
paid have been received in a timely manner in accordance with the steam sales
contract. The remaining $184 million primarily relates to Salak electric
generating Units 4, 5 and 6. Provisions covering a portion of these receivables
have been recorded. The Company continues to pursue collection of the
outstanding receivables.
In the second quarter of 2001, the Company entered into several licensing
agreements that granted motor gasoline producers, including CITGO Petroleum
Corporation and Tesoro Petroleum Corporation, the right to make cleaner burning
gasolines using formulations patented by the Company. The terms of the licensing
agreements are confidential. The Company continues to work with other refiners,
blenders and importers on licensing agreements for the cleaner burning gasoline
patents. In March 2001, ExxonMobil Corporation requested the U.S. Federal Trade
Commission to conduct an investigation with respect to the Company's patents.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the values of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices. As part of its overall risk
management strategies, the Company uses derivative financial instruments to
manage and reduce risks associated with these factors. The Company also pursues
outright pricing positions in certain hydrocarbon derivative instruments, such
as futures contracts.
Interest Rate Risk - From time to time the Company temporarily invests its
excess cash in interest-bearing securities issued by high-quality issuers.
Company policies limit the amount of investment in securities of any one
financial institution. Due to the short time the investments are outstanding and
their general liquidity, these instruments are classified as cash equivalents in
the consolidated balance sheet and do not represent a material interest rate
risk to the Company. The Company's primary market risk exposure for changes in
interest rates relates to the Company's long-term debt obligations. The Company
manages its exposure to changing interest rates principally through the use of a
combination of fixed and floating rate debt. Interest rate risk sensitive
derivative financial instruments, such as swaps or options may also be used
depending upon market conditions.
The Company evaluated the potential effect that near term changes in interest
rates would have had on the fair value of its interest rate risk sensitive
financial instruments at March 31, 2001. Assuming a ten percent decrease in the
Company's weighted average borrowing costs at March 31, 2001, the potential
increase in the fair value of the Company's debt obligations and associated
interest rate derivative instruments, including the Company's net interests in
the debt obligations and associated interest rate derivative instruments of its
subsidiaries, would have been approximately $100 million at March 31, 2001.
-27-
Foreign Exchange Rate Risk - The Company conducts business in various parts of
the world and in various foreign currencies. To limit the Company's foreign
currency exchange rate risk related to operating income, foreign sales
agreements generally contain price provisions designed to insulate the Company's
sales revenues against adverse foreign currency exchange rates. In most
countries, energy products are valued and sold in U.S. dollars and foreign
currency operating cost exposures have not been significant. In other countries,
the Company is paid for product deliveries in local currencies but at prices
indexed to the U.S. dollar. These funds, less amounts retained for operating
costs, are converted to U.S. dollars as soon as practicable. The Company's
Canadian subsidiaries are paid in Canadian dollars for their crude oil and
natural gas sales.
From time to time the Company may purchase foreign currency options or enter
into foreign currency swap or foreign currency forward contracts to limit the
exposure related to its foreign currency debt or other obligations. At March 31,
2001, the Company had various foreign currency swaps and foreign currency
forward contracts outstanding to hedge its debt and other local currency
obligations in Canada, Thailand and The Netherlands. The Company evaluated the
effect that near term changes in foreign exchange rates would have had on the
fair value of the Company's combined foreign currency position related to its
outstanding foreign currency swaps and forward contracts. Assuming an adverse
change of ten percent in foreign exchange rates at March 31, 2001, the potential
decrease in fair value of the Company's foreign currency forward contracts,
foreign-currency denominated debt, foreign currency swaps and foreign currency
forward contracts of its subsidiaries, would have been approximately $12 million
at March 31, 2001.
Commodity Price Risk - The Company is a producer, purchaser, marketer and trader
of certain hydrocarbon commodities such as crude oil and condensate, natural gas
and refined products and is subject to the associated price risks. The Company
uses hydrocarbon price-sensitive derivative instruments (hydrocarbon
derivatives), such as futures contracts, swaps and options to mitigate its
overall exposure to fluctuations in hydrocarbon commodity prices. The Company
may also enter into hydrocarbon derivatives to hedge contractual delivery
commitments and future crude oil and natural gas production against price
exposure. The Company also actively trades hydrocarbon derivatives, primarily
exchange regulated futures and options contracts, subject to internal policy
limitations.
The Company uses a variance-covariance value at risk model to assess the market
risk of its hydrocarbon derivatives. Value at risk represents the potential loss
in fair value the Company would experience on its hydrocarbon derivatives, using
calculated volatilities and correlations over a specified time period with a
given confidence level. The Company's risk model is based upon historical data
and uses a three-day time interval with a 97.5-percent confidence level. The
model includes offsetting physical positions for hydrocarbon derivatives related
to the Company's fixed price pre-paid crude oil and pre-paid natural gas sales.
The model also includes the Company's net interests in its subsidiaries' crude
oil and natural gas hydrocarbon derivatives and forward sales contracts. Based
upon the Company's risk model, the value at risk related to hydrocarbon
derivatives held for purposes other than trading was approximately $14 million
at March 31, 2001. The value at risk related to hydrocarbon derivatives held for
trading purposes was approximately $11 million at March 31, 2001.
-28-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is incorporated by reference: the information with respect to certain
legal proceedings pending or threatened against the Company previously reported
in Item 3 of Unocal's Annual Report on Form 10-K for the year ended December 31,
2000 (2000 Form 10-K); the information regarding environmental remediation
reserves in note 11 to the consolidated financial statements in Item 1 of Part I
of this report; the discussion of such reserves in the Environmental Matters
section of Management's Discussion and Analysis in Item 2 of Part I; and the
information regarding certain legal proceedings and other contingent liabilities
in note 12 to the consolidated financial statements. Information with respect to
recent developments in one of such legal proceedings is set forth below:
Certain Environmental Matters Involving Civil Penalties
1. In April 2001, the Company was served in the action filed on behalf of
the U.S. Environmental Protection Agency contemplated in Paragraph 10
of Item 3 of the 2000 Form 10-K
(United States of America v. Unocal Corporation, U.S. District Court
------------------------------------------------
for the Central District of California, Civil No. 01-2369 SVW (BQRx)).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The Exhibit Index on page 31 of this report lists
the exhibits that are filed as part of this report.
(b) Reports on Form 8-K:
Filed during the first quarter of 2001
(1) Current Report on Form 8-K dated January 4, 2001, and
filed January 11, 2001, for the purpose of reporting,
under Item 5, the Company's worldwide drilling results.
(2) Current Report on Form 8-K, dated January 25, 2001, and
filed January 29, 2001, for the purpose of reporting,
under Item 5, the Company's fourth quarter 2000
earnings and related information, as well as the
Company's 2001 earnings forecast.
Filed during the second quarter of 2001 to the date hereof:
(1) Current Report on Form 8-K, dated March 27, 2001, and
filed April 5, 2001, for the purpose of reporting,
under Item 5, Unocal bylaw amendments, filed as an
exhibit under Item 7, and effective March 27, 2001.
-29-
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 14, 2001 By: /s/ JOE D. CECIL
------------------------------
Joe D. Cecil
Vice President and Comptroller
(Duly Authorized Officer
Principal Accounting Officer)
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EXHIBIT INDEX
12.1 Statement regarding computation of ratio of earnings to fixed charges of
Unocal Corporation for the three months ended March 31, 2001 and 2000.
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, 2001
and 2000.
Copies of exhibits will be furnished upon request. Requests should be addressed
to the Corporate Secretary.
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