SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
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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 ________________.
Commission file number 1-554
UNION OIL COMPANY OF CALIFORNIA
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1315450
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 West Fifth Street, Los Angeles, California 90017
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (213) 977-7600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No___
Number of shares of Common Stock, $2-1/12 par value, outstanding as of
October 31, 1994: 1,000
Registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is, therefore, filing this form with the reduced
disclosure format.
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONSOLIDATED EARNINGS UNION OIL COMPANY OF CALIFORNIA
(Unaudited)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------
Dollars in millions except per share amounts 1994 1993 1994 1993
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<S> <C> <C> <C> <C>
Revenues
Sales and operating revenues (a) $1,989 $1,907 $5,841 $6,152
Interest, dividends and miscellaneous income 18 18 71 53
Equity in earnings of affiliated companies 10 17 63 61
Gain on sales of assets 3 21 6 113
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Total revenues 2,020 1,963 5,981 6,379
Costs and Other Deductions
Crude oil and product purchases 739 711 2,133 2,434
Operating expense 407 435 1,239 1,275
Selling, administrative and general expense 135 106 383 355
Depreciation, depletion and amortization 236 230 775 702
Dry hole costs 30 10 64 28
Exploration expense 25 33 79 88
Interest expense 68 72 209 229
Excise, property and other operating taxes (a) 259 221 777 713
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Total costs and other deductions 1,899 1,818 5,659 5,824
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Earnings before income taxes 121 145 322 555
Income taxes 60 74 157 255
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Earnings before cumulative effect of accounting changes 61 71 165 300
Cumulative effect of accounting changes - - - (130)
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Net Earnings $ 61 $ 71 $ 165 $ 170
(a) Includes consumer excise taxes of $ 229 $ 194 $ 686 $ 608
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET UNION OIL COMPANY OF CALIFORNIA
(Unaudited)
September 30 December 31
--------------------------
Millions of dollars 1994 1993
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<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 193 $ 205
Accounts and notes receivable
Trade 872 877
Refundable income taxes 84 114
Inventories
Crude oil 23 44
Refined products 159 146
Chemicals 39 55
Minerals 15 15
Supplies, merchandise and other 92 66
Other current assets 49 56
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Total current assets 1,526 1,578
Investments and long-term receivables 880 847
Properties (net of accumulated depreciation and other allowances
of $11,128 in 1994; $11,215 in 1993) 7,090 7,175
Other assets 90 119
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Total assets $9,586 $9,719
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Liabilities
Current liabilities
Accounts payable $ 593 $ 735
Taxes payable 199 208
Current portion of long-term debt and capital lease obligations 55 54
Interest payable 60 92
Other current liabilities (includes amounts due Unocal:
$66 in 1994; $83 in 1993) 99 132
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Total current liabilities 1,006 1,221
Long-term debt and capital lease obligations 3,445 3,468
Deferred income taxes 803 875
Accrued abandonment, restoration and environmental costs 607 539
Other deferred credits and liabilities 548 499
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Total liabilities 6,409 6,602
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Shareholder's Equity
Common stock ($2-1/12 par value) - -
Capital in excess of par value 891 891
Foreign currency translation adjustment (7) (5)
Retained earnings 2,293 2,231
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Total shareholder's equity 3,177 3,117
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Total liabilities and shareholder's equity $9,586 $9,719
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See Notes to Consolidated Financial Statements.
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<PAGE>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED CASH FLOWS UNION OIL COMPANY OF CALIFORNIA
(Unaudited)
For the Nine Months
Ended September 30
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Millions of Dollars 1994 1993
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $165 $170
Adjustments to reconcile net earnings to
net cash provided by operating activities
Cumulative effect of accounting changes - 130
Depreciation, depletion and amortization 775 702
Dry hole costs 64 28
Deferred income taxes (60) 66
Gain on sales of assets (before-tax) (6) (113)
Other 96 77
Working capital and other changes related to operations
Accounts and notes receivable 37 183
Inventories (2) (43)
Accounts payable (144) (87)
Taxes payable (9) (114)
Other (42) (326)
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Net cash provided by operating activities 874 673
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (includes dry hole costs) (839) (813)
Proceeds from sales of assets 136 579
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Net cash used in investing activities (703) (234)
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term borrowings 527 128
Reduction of long-term debt and capital lease obligations (549) (402)
Dividends paid to the Parent (152) (148)
Other (9) (1)
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Net cash used in financing activities (183) (423)
Increase (decrease) in cash and cash equivalents (12) 16
Cash and cash equivalents at beginning of year 205 157
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Cash and cash equivalents at end of period $193 $173
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $221 $240
Income taxes (net of refunds) $201 $258
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated financial statements included herein are unaudited and,
in the opinion of management, include all adjustments necessary for a
fair presentation of financial position and results of operations. All
adjustments are of a normal recurring nature, except for items discussed
in Note 2. Such financial statements are presented in accordance with
the Securities and Exchange Commission's disclosure requirements for
Form 10-Q.
Union Oil Company of California ("Union Oil" or "the company") is a
wholly owned subsidiary of Unocal Corporation ("Unocal" or "the
Parent").
These interim consolidated financial statements should be read in
conjunction with the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements filed with the Commission in Union
Oil's 1993 Annual Report on Form 10-K.
Results for the three and nine months ended September 30, 1994, are not
necessarily indicative of future financial results.
(2) 1993 Accounting Changes:
(a) Effective January 1, 1993, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This
accounting standard requires the company to recognize its obligation
to provide postretirement health care benefits and to accrue such
costs rather than recording them on a cash basis. The actuarial
present value of the accumulated postretirement health care
obligation existing at January 1, 1993 was recognized in the
Consolidated Earnings Statement as the cumulative effect of an
accounting change, resulting in a charge to the first quarter 1993
earnings of $192 million before tax ($121 million after tax).
(b) The company also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1993. This statement
requires the company to recognize its obligation to provide
benefits, such as workers' compensation and disabled employees'
medical care, to former or inactive employees after employment but
before retirement. The charge to earnings for the cumulative effect
of the company's unfunded obligation prior to 1993, was $14 million
before tax ($9 million after tax).
(3) Capitalized interest totaled $8 million for the third quarter 1994 and
$26 million for the first nine months of 1994. For the same periods of
1993, $8 million and $25 million of interest were capitalized,
respectively.
(4) Contingent Liabilities:
The company has certain contingent liabilities with respect to existing
or potential claims, lawsuits and other proceedings, including those
involving environmental, tax and other matters, certain of which are
more specifically discussed below. The company accrues liabilities when
it is probable that future costs will be incurred and such costs can be
reasonably estimated. In some cases, amounts of such future costs are
currently indeterminable. As the scope of the obligations becomes
better defined, there may be changes in the estimates of future costs,
which could result in charges against the company's future results of
operations. Based on developments to date, its estimate of the outcome
of these matters and its experience in contesting, litigating and
settling other matters, management does not expect the resolution of
such matters to have a material adverse effect on the company's
financial position or liquidity, although the resolution of any one or
more of such matters in any year or quarter could have a material effect
on the company's results of operations for such period.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 and criminal penalties and, in some cases, punitive damages.
These obligations relate to sites owned by the company or others and
associated with present and past operations, including 96 sites at which
the company has been identified as a "potentially responsible party
(PRP)" under the federal Superfund laws and comparable state laws.
Reserves have been 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 liability or, if liability is probable, to quantify the
liability or determine a range of possible exposure. The potentially
large number of claimants for any given site or exposure, the unknown
magnitude of possible contamination, the imprecise and conflicting
engineering evaluations and estimates of proper cleanup methods and
costs, the unknown time 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
liability on PRPs and the fact that the company is usually just one of
a number of companies identified as PRPs all contribute to the
difficulty of making reasonable estimates of the company's liability or
possible additional liability for many of these environmental matters.
At September 30, 1994, reserves for environmental remediation obligations
relating to prior asset sales, for Superfund sites and other sites, totaled
$124 million, compared with $95 million at December 31, 1993. The company
will continue to evaluate the adequacy of the reserves. The company has
also accrued for future costs to abandon and remove wells and production
facilities. The total cost to abandon and remove wells and production
facilities is estimated to be from $840 million to $990 million. The
minimum of the range is accrued over the useful life of the related assets.
Such accrual amounted to $483 million at September 30, 1994. The above
accruals are included in Accrued abandonment, restoration and
environmental costs on the consolidated balance sheet.
The company has received Notices of Proposed Adjustments from the
Internal Revenue Service (IRS) related to a 1985 takeover attempt and
efforts undertaken to defeat it. These proposed adjustments, if
sustained, would increase the company's 1985 taxable income by up to
$607 million, of which $201 million would result in decreases in taxable
income in subsequent years. The company believes it has substantial
legal defenses to the proposed adjustments. Upon receipt of a Notice of
Proposed Deficiency for 1985 (expected before the end of 1994), the
company will protest the proposed adjustments to the Appeals section of
the IRS. In the opinion of management, a successful outcome in these
disputes is reasonably likely. Although considered unlikely,
substantial adverse decisions could have a material effect on the
company's financial condition or operating results in a given year or
quarter when such matters are resolved.
(5) In the 1993 Consolidated Cash Flow Statement, under working capital
changes, "other" included an adjustment of ($125) million related to the
settlement of crude oil forward sales contracts, for which income was
recognized in 1993 when the oil was produced, but cash was received in
1992. It also included approximately ($100) million of settlement
payments for Alaska tax assessments and a geothermal sales contract
dispute.
(6) Between March 24 and April 27, 1994, the company issued $179 million in
Medium Term Notes with interest rates ranging from 6.33% to 7.24% and
maturity dates ranging from February 1997 to March 2001. The proceeds
were used to refinance maturing and callable debt.
(7) Certain items in the prior year financial statements have been
reclassified to conform to the 1994 classification. Among them, the
accumulated provision for future abandonment and restoration costs has
been reclassified on the consolidated balance sheet from the property
account to Accrued abandonment, restoration and environmental costs.
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<PAGE>
<TABLE>
<CAPTION>
OPERATING HIGHLIGHTS UNION OIL COMPANY OF CALIFORNIA
For the Three Months For the Nine Months
Ended September 30 Ended September 30
---------------------------------------------
1994 1993 1994 1993
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<S> <C> <C> <C> <C>
NET DAILY PRODUCTION (a)
Crude oil and condensate (thousand barrels):
United States 135.8 143.9 139.1 148.3
----- ----- ----- -----
Foreign:
Far East 92.2 65.2 85.3 67.5
Other 33.8 29.7 36.4 30.0
----- ----- ----- -----
Total foreign 126.0 94.9 121.7 97.5
----- ----- ----- -----
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Worldwide 261.8 238.8 260.8 245.8
====== ====== ===== =====
Natural gas (million cubic feet):
United States 1,115 956 1,117 936
----- ---- ----- ----
Foreign:
Far East 653 551 605 612
Other 35 38 55 48
--- --- --- ---
Total foreign 688 589 660 660
--- --- --- ---
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Worldwide 1,803 1,545 1,777 1,596
===== ===== ===== =====
Natural gas liquids (thousand barrels) 23.0 19.2 21.4 19.4
Geothermal (million kilowatt-hours) 21.6 19.6 20.6 20.4
Input to crude oil processing units (thousand barrels
daily) (b) 273 293 291 288
Sales of petroleum products (thousand barrels daily) (b) 319 327 311 346
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AVERAGE SALES PRICES
Crude oil and condensate (per barrel):
United States $14.48 $13.28 $12.83 $14.39
Foreign:
Far East $15.61 $14.96 $14.46 $16.08
Other $15.73 $14.43 $14.05 $15.46
Total foreign $15.66 $14.74 $14.30 $15.83
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Worldwide $14.95 $13.76 $13.41 $14.86
Natural gas (per thousand cubic feet):
United States $ 1.64 $ 1.96 $ 1.85 $ 1.95
Foreign:
Far East $ 1.97 $ 2.16 $ 1.99 $ 2.12
Other $ 1.65 $ 2.11 $ 1.77 $ 1.63
Total foreign $ 1.96 $ 2.16 $ 1.97 $ 2.07
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Worldwide $ 1.76 $ 2.04 $ 1.89 $ 1.99
(a) Includes net profits type agreements on a gross basis.
(b) Includes 50% of the volumes of The UNO-VEN Company.
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Union Oil's net earnings for the third quarter of 1994 were $61 million,
compared with $71 million in the third quarter of 1993. For the first nine
months of 1994, net earnings were $165 million. This compares with nine-
month 1993 earnings of $169 million. The comparability of the company's
reported earnings for these periods is affected by the following special
items:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------------------------------
Millions of dollars 1994 1993 1994 1993
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<S> <C> <C> <C> <C>
Special items:
Cumulative effect of accounting changes:
For postretirement benefits (SFAS 106) $ - $ - $ - $(121)
For postemployment benefits (SFAS 112) - - - (9)
Write-down of investment and provision for abandonment
and remediation of the Guadalupe oil field (4) - (31) -
Litigation - (15) (17) (24)
Mesa settlement - - 24 -
Asset sales 10 9 12 66
Effect of federal tax rate change on deferred taxes - (14) - (14)
Other (5) (1) (10) (6)
----------------------------------------------------------------------------------------------------------
Total $ 1 $(21) $(22) $(108)
----------------------------------------------------------------------------------------------------------
</TABLE>
Excluding the special items, third quarter 1994 net earnings were $60
million, compared with $92 million in the third quarter of 1993. The 1994
year-to-date earnings, excluding special items, were $187 million compared
with $278 million a year ago. The company experienced lower natural gas
prices and reduced margins from petroleum refining and marketing operations
in the third quarter which also adversely impacted the nine months results.
The 1994 year-to-date consolidated revenues were $5.98 billion, down from
$6.38 billion in the same period a year ago. Total costs and other
deductions for the nine months were $5.66 billion in 1994, compared to $5.83
billion for 1993. The decrease in both sales revenues and purchase costs
reflects the sale of several businesses during 1993 and the continued phase-
out of Southeastern retail gasoline marketing operations. Lower average
sales prices for refined products also contributed to decreased sales
revenues. The increase in depreciation and depletion expense was
attributable to higher worldwide oil and gas production.
PETROLEUM EXPLORATION AND PRODUCTION. Net earnings for the third quarter
1994 totaled $111 million, compared with $106 million in 1993. For the nine-
month period, net earnings were $261 million in 1994, compared with $361
million in 1993. Both the 1994 quarter and nine-month periods included
special items related to gains on asset sales and charges for the Guadalupe
oil field, while the 1993 periods included gains on asset sales and a $4
million charge due to the effect of a federal tax rate change on deferred
taxes. Excluding these special items, petroleum exploration and production
third quarter earnings were $105 million and $101 million in 1994 and 1993,
respectively, and the nine-month 1994 earnings were $284 million, compared
with $343 million during the same period a year ago.
The third quarter 1994 results reflect higher worldwide natural gas
production and improved crude oil prices. These increases were partially
offset by lower worldwide natural gas prices and higher foreign exploration
expense. Worldwide natural gas production in the third quarter was about 17
percent above the level of a year ago. The worldwide average sales price
for crude oil in the third quarter of 1994 was $14.95 per barrel, up from
$13.76 per barrel a year ago, while the worldwide natural gas average sales
price was $1.76 per thousand cubic feet (mcf), down from $2.04 per mcf last
year.
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<PAGE>
For the nine-month period, decreased earnings were due mainly to lower
worldwide crude oil and natural gas sales prices. Increases in natural gas
and crude oil production partially offset these reductions. The worldwide
average sales price for crude oil was $13.41 for the nine-month period
compared with $14.86 a year ago. The worldwide average natural gas price
was $1.89, down from $1.99 for the same period last year. Domestic natural
gas production was up 19 percent from a year ago due to the accelerated
development program initiated in 1993. Foreign gas production was the same
as last year.
The results for the third quarter and nine months also reflected the
earnings benefit of an increase in the company's worldwide crude oil
production. Although domestic crude oil production declined, mainly due to
the asset divestment program, the decrease was more than offset by increased
foreign production from Indonesia and the Netherlands.
In July 1994, the company completed the sale of its Point Pedernales Unit
(the Union Oil-operated Platform Irene, offshore California) and adjacent
onshore fields and facilities. Under the sales agreement, which had an
effective date of January 1, 1993, Union Oil sold the properties for $43
million. Included in that total was an initial cash payment of $25 million
(before adjusting for 1993 net cash flows) plus an additional $18 million
contingent upon the price per barrel received for the properties' future
production. Union Oil took an after-tax charge in the third quarter of $10
million arising from the asset sale.
REFINING, MARKETING AND TRANSPORTATION. Union Oil's refining, marketing and
transportation segment recorded net earnings of $18 million in the third
quarter of 1994, compared with $49 million a year ago. Net earnings for the
first nine months were $97 million, compared with $143 million in 1993.
Excluding the special items, the operating earnings were $21 million and $56
million in the third quarter of 1994 and 1993, respectively, and the nine
months earnings were $99 million in 1994, compared with $136 million in
1993. Special items for the third quarter and nine months of 1993 included
a $7 million charge due to the effect of the federal tax rate change on
deferred taxes. The 1993 nine months also included gains from asset sales.
The decline for both the third quarter and nine months results reflected
depressed margins on refined products, primarily due to lower average sales
prices. While the nine months earnings benefited from lower crude oil
costs, such costs were higher in the third quarter which put additional
pressure on margins. Petroleum product sales volumes were 311,000 barrels
per day in 1994, down from 346,000 barrels per day in 1993. The decline was
mainly due to the sale of the auto/truckstop system in 1993 and the
continued phase-out of Southeastern retail gasoline marketing. However, the
company's West Coast petroleum product sales volumes in the first nine
months of 1994 rose 9 percent from a year ago.
The company's equity in earnings from The UNO-VEN Company, a refining and
marketing partnership in the Midwest, was lower in the third quarter due to
a scheduled maintenance shut-down at its Chicago Refinery. The refinery
returned to full production in early September.
CHEMICALS. Chemicals recorded net earnings of $12 million for the third
quarter and $34 million for the first nine months of 1994. This compares
with $5 million and $33 million for the same periods in 1993, respectively.
The quarter and nine months results benefited from improved margins on
export sales of urea and ammonia products. However, the nine months 1994
results also reflected lower earnings from the sale of petroleum coke.
GEOTHERMAL. Net earnings for the third quarter of 1994 were $11 million, up
from $3 million in 1993. Nine months net earnings were $25 million in 1994,
compared with $41 million in 1993. The nine months 1993 earnings included a
$26 million after-tax gain in the first quarter from the sale of the
geothermal Imperial Valley (California) assets and other exploration
properties. Both the third quarter and nine months 1994 results benefited
from the beginning of commercial operations in Indonesia and lower domestic
expense.
During the quarter two 55-megawatt power plants began commercial operation
at Union Oil's first geothermal energy development in Indonesia. The first
55-megawatt power plant began commercial operation in late July and the
second in September. The company, under a joint operation contract from
Pertamina, the state oil company, supplies geothermal energy to fuel the
power plants at the Gunung Salak geothermal field on the island of Java,
south of Jakarta. The power plants are operated by PLN, Indonesia's state
utility.
-8-
<PAGE>
CORPORATE AND OTHER. Third quarter 1994 corporate expenses and the results
of other businesses were $91 million, compared with $92 million for the same
period in 1993. For the nine-month period, expenses were $252 million in
1994 and $278 million in 1993. Adjusted for special items, net expense for
corporate and other for the third quarter was $88 million in 1994, versus
$75 million for the same period a year ago. Nine months expenses were $254
million and $252 million for 1994 and 1993, respectively. Third quarter
1993 results included favorable adjustments for California state income tax
provisions.
The 1994 nine-month results included a $24 million benefit from the
settlement of a lawsuit against Mesa Petroleum, related to the takeover
attempt in 1985. Additional special items included in the results for each
reporting period were unusual litigation and environmental expenses.
FINANCIAL CONDITION AND CAPITAL EXPENDITURES
For the nine months of 1994, cash flows from operating activities, including
working capital changes, were $874 million, up from $673 million in 1993.
Last year's cash flow reflected an adjustment for the 1992 crude oil forward
sales as well as settlement payments for Alaska tax assessments and other
litigation. See Note 5 to the consolidated financial statements.
Proceeds from asset sales were $136 million for the first nine months of
1994, compared to $579 million in the same period a year ago. The 1994
proceeds were mainly from the sale of various oil and gas properties, while
1993 included $222 million from the sale of the company's Imperial Valley
(California) geothermal assets and other geothermal exploration properties,
$176 million from the sale of the national auto/truckstop network and the
balance from the sale of miscellaneous nonstrategic assets, including oil
and gas properties.
Capital expenditures for the nine months 1994 totaled $839 million, compared
with $813 million a year ago. The increase primarily reflected refinery
construction to prepare for manufacturing reformulated gasoline.
Working capital at September 30, 1994 was $520 million, an increase of $163
million from the 1993 year-end level of $357 million. This was primarily
due to lower accounts payable. The company's total debt was $3,500 million,
a decrease of $22 million from the year-end 1993 level. The planned
reduction in total debt for the year is approximately $50 million.
In August 1994, the company and Unocal filed a new shelf registration
statement with the Securities and Exchange Commission to register for
offering and sale, from time to time, up to $1 billion of debt securities of
the company, to be guaranteed as to payment by Unocal, equity securities of
Unocal and warrants to purchase such securities.
CURRENT ENVIRONMENTAL MATTERS
The company continues to concentrate on the beach cleanup at the Guadalupe
oil field (central coast of California) of a diesel-like additive formerly
used to produce the heavy crude oil. It became apparent that the cleanup
standard imposed by the California Regional Water Quality Control Board in
September 1994 would require the excavation, transportation, stockpiling,
thermal treatment and replacement of approximately three times the amount of
sand previously anticipated. As a consequence, the company accrued an
additional pre-tax $7 million ($4 million after tax) in the third quarter of
1994. At the end of the third quarter, the company had net total pre-tax
accruals for remediation and abandonment costs of approximately $21 million.
In addition to the amounts accrued to date, it is possible that the company
will incur additional costs. At the present time, however, the reasonably
possible range of additional costs is indeterminable.
See the Legal Proceedings section in Part II of this report for legal
actions regarding Guadalupe and other environmental matters. See also Note
4 to the consolidated financial statements.
OUTLOOK
Worldwide crude oil prices improved during the third quarter and are
expected to remain stable for the remainder of the year. Natural gas prices
declined in the third quarter due to mild weather and reduced gas storage
injections. Any future improvement in market prices will depend on the
upcoming winter temperatures, among other things.
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<PAGE>
The annual adjustment to the natural gas contract prices in Thailand will
cause the average price to be lower by approximately 10 percent because of
the general energy factors used in the calculation. The adjusted prices
became effective October 1, 1994.
The company's worldwide production of natural gas is expected to average
about 1,750 million cubic feet per day during the full-year 1994, up nearly
11 percent from the 1993 level. However, current low natural gas prices
have recently caused some operators of domestic fields in which Union Oil
has interests to curtail natural gas production. This may cause a short-
term decline in the company's overall production.
The company's worldwide crude oil and condensate production is expected to
average 258,000 barrels per day for the full-year 1994, up nearly 5 percent
from 1993, reflecting higher foreign production which more than offset a
decline in domestic production. Further decline in domestic production is
expected in the future. This reflects the company's capital spending focus
on natural gas projects worldwide and the possible sales of various U.S.
producing properties.
The company has nearly reached its asset sales target of $700 million in
after-tax proceeds. Through the first nine months of 1994, the company has
realized proceeds of $683 million (after tax) from asset sales under the
program announced in April 1992. Additional asset sales are planned in the
fourth quarter.
The company has signed a letter of intent to sell its process technology and
licensing business. The sale would include approximately 200 U.S. patents
and about 300 licenses with third parties who use various process
technologies developed by Union Oil.
Union Oil continues to evaluate the sale of the company's crude oil and
natural gas assets in California. The company expects to receive bids from
prospective buyers by mid 1995.
Union Oil's subsidiary, Philippines Geothermal, Inc., is currently
negotiating to extend the service contract with the National Power
Corporation, the state-owned utility. The current contract has an initial
primary term of 25 years which will expire in September 1996.
On November 2, 1994, the company announced that it expects to reduce its
1,540 person corporate staff by about 630 positions over the next two years.
When the reductions are complete, the company expects to realize pre-tax
savings of approximately $50 million per year. The company expects to take
a one-time pretax charge of approximately $25 million in the fourth quarter
of 1994 for costs associated with the staff reductions that will occur over
the next 12 months. This charge represents essentially all of the costs
associated with the company's corporate staff reductions.
-10-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. On November 23, 1993, the California EPA, Department of Toxic
Substances Control, filed a civil action against the company's
Molycorp subsidiary for its plant at Mountain Pass, California,
for alleged continuing hazardous waste permitting and management
violations. The complaint seeks unspecified civil penalties. Any
settlement with the state could involve penalties in excess of
$100,000.
2. On September 13, 1994, the U.S. Minerals Management Service
("MMS") issued an administrative compliance order assessing the
company approximately $21 million in royalty fees and interest
associated with FERC Order No. 94. The company is presently in
informal negotiations with the MMS for a settlement of outstanding
issues which could include this MMS assessment.
3. Although Union Oil has not yet received an administrative or
civil complaint, initial meetings with EPA Region 10 suggest that
an enforcement action will be forthcoming regarding alleged NPDES
permit violations at platforms operated by Union Oil in the Cook
Inlet, Alaska. Any fine or penalty involved may be in excess of
$100,000. Union Oil has received from several environmental groups
statutory notices of intent to file citizens' action with respect
to these alleged violations.
4. On August 18, 1994, Molycorp's Mountain Pass facility and two
of its current employees received a misdemeanor criminal complaint
from the District Attorney, County of San Bernardino, involving
seven alleged releases into the environment. The complaint
contains nine counts alleging the failure to timely report
releases, the unlawful deposit of hazardous materials into the
environment, and violation of the Regional Water Quality Control
Board Waste Discharge Order. (People of the State of California
-----------------------------------
v. Molycorp, Inc., et al., Case No. MSB 10746).
--------------------------
5. On September 22, 1994, a complaint captioned Calli Santos, et
-----------------
al. v. Unocal Corporation, et al. was filed in California Superior
---------------------------------
Court for Contra Costa County alleging damages on behalf of a
purported class of individuals who were allegedly exposed to
chemicals, including the chemical known as "Catacarb", released
from Union Oil's San Francisco Refinery in Rodeo, California,
between August 22 and September 6, 1994. Union Oil has determined
that an airborne chemical release did occur. The complaint
asserts more than $1 billion in actual and compensatory damages
and seeks punitive damages, as well as other relief. The
complaint has not yet been served.
6. On September 9, 1994, the Regional Water Quality Control Board
issued a Cleanup or Abatement Order relating to past underground
petroleum pipeline leaks along Front Street and vicinity in the
town of Avila Beach, California. The company initiated an
administrative appeal proceeding and a related civil suit for
declaratory and injunctive relief and writ of mandate on October
7, 1994, with respect to the soil and shallow ground water
standard to be applied to the remediation. The company has been
working with local agencies for several years regarding the
hydrocarbon presence in this location, and with property owners.
An environmental and health risk assessment is currently being
conducted. A vapor extraction system and monitoring and reporting
programs have been in place for several years. Various related
civil suits have been filed or threatened.
7. Four California truckstop operators filed a complaint captioned
Forty-Niner Truck Plaza Inc., et al. v. Unocal Corporation, et al.
------------------------------------------------------------------
on January 28, 1993 in California Superior Court for Sacramento
County. It alleged primarily that Union Oil and Unocal had
violated a franchise statute, California Business and Professions
Code ss20999.25(a), by failing to offer each of the operators a
right of first refusal of a bona fide offer by National Auto
Truckstops, Inc. for Union Oil's interest in the truckstops,
during the course of the sale of Union Oil's nationwide network of
truckstops to National in April, 1993. The operators also
asserted various tort claims against Union Oil, Unocal and
National, seeking compensatory and punitive damages. Under the
terms of the sale, National
-11-
<PAGE>
ITEM 1. LEGAL PROCEEDINGS (continued)
is indemnified for certain such third-party compensatory damages.
The discovery process is concluding and a trial is scheduled.
8. The Bay Drums, Florida, superfund site, the PAB superfund site
at Abbeville, Louisiana, and Avila Beach, California, should be
added to the list of sites reported as item 1 in the Legal
Proceedings section of the 1993 Form 10-K. The San Diego Terminal
in California should be deleted.
9. In the Exxon Valdez litigation of private damage claims
------------
against Alyeska and its owner companies (reported as item No. 2 in
the Legal Proceedings section of the 1993 Form 10-K), Exxon's
appeals seeking to enjoin the settlement were dismissed.
10. The approximate $80 million judgment in Angelina Hardwood
-----------------
Lumber Company v. Prairie Producing Co., awarded in the District
---------------------------------------
Court of Angelina County, Texas, (reported as item No. 3 in the
Legal Proceedings section of the 1993 Form 10-K) was reversed by
the Court of Appeals, Ninth District of Texas at Beaumont (No. 09-
93-184 CV), on August 25, 1994. Under the appellate court's
decision, Angelina is not entitled to any recovery against the
company. Angelina has filed a petition for discretionary appeal
to the Texas Supreme Court.
11. With respect to the Guadalupe oil field hydrocarbon
contamination and remediation (reported as item No. 4 in the Legal
Proceedings section of the 1993 Form 10-K), related civil
litigation has been filed or threatened by various organizations
and individuals, each seeking damages and various other forms of
relief similar to those sought by the Attorney General. The
company continues to concentrate on the beach cleanup at the
field. It became apparent that the cleanup standard imposed by
the California Regional Water Quality Control Board in September
1994 would require the excavation, transportation, stockpiling,
thermal treatment and replacement of approximately three times the
amount of sand previously anticipated.
See also Note 4 to the consolidated financial statements in Part 1
hereof, which Note 4 is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Statement re computation of ratio of earnings to fixed charges.
27 Financial data schedule (provided with the Securities and
Exchange Commission "EDGAR" filing only).
(b) Reports on Form 8-K
During the third quarter of 1994:
1. Current Report on Form 8-K dated August 25, 1994 and filed
September 1, 1994, for the purpose of reporting, under Item 5,
the reversal of the Angelina Hardwood judgment.
-----------------
2. Current Report on Form 8-K dated and filed September 30,
1994, for the purpose of reporting, under Item 5, and filing,
under Item 7, the Calli Santos lawsuit involving the San
-------------
Francisco refinery.
-12-
<PAGE>
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.
UNION OIL COMPANY OF CALIFORNIA
-------------------------------
(Registrant)
Dated: November 14, 1994 By: CHARLES S. MCDOWELL
- ------------------------ -------------------------------
Charles S. McDowell,
Vice President and Comptroller
-13-
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Nine Months
Ended September 30
-------------------
Dollars in millions 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Earnings before cumulative effect of accounting changes $165 $300
Provision for income taxes 157 255
---- ----
Earnings subtotal 322 555
Fixed charges included in earnings:
Interest expense 209 229
Interest portion of rentals 41 46
---- ----
Subtotal 250 275
Earnings available before fixed charges $572 $830
===== =====
Fixed charges:
Fixed charges included in earnings $250 $275
Capitalized interest 26 25
----- -----
Total fixed charges $276 $300
===== =====
Ratio of earnings to fixed charges 2.1 2.8
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated earnings statement and consolidated balance sheet and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 193
<SECURITIES> 0
<RECEIVABLES> 956
<ALLOWANCES> 0
<INVENTORY> 328
<CURRENT-ASSETS> 1526
<PP&E> 18218
<DEPRECIATION> 11128
<TOTAL-ASSETS> 9586
<CURRENT-LIABILITIES> 1006
<BONDS> 3445
<COMMON> 0
0
0
<OTHER-SE> 3177
<TOTAL-LIABILITY-AND-EQUITY> 9586
<SALES> 5841
<TOTAL-REVENUES> 5981
<CGS> 2133
<TOTAL-COSTS> 3372
<OTHER-EXPENSES> 1695
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 209
<INCOME-PRETAX> 322
<INCOME-TAX> 157
<INCOME-CONTINUING> 165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 165
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
