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 MARCH 31, 1996
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 1-8483
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)
Registrant's telephone number, including area code: (310) 726-7600
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, $1 par value, outstanding as of
April 30, 1996: 248,293,673
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED EARNINGS UNOCAL CORPORATION
(Unaudited)
For the Three Months
Ended March 31
----------------------
Dollars in millions except per share amounts 1996 1995
-------------------------------------------------------------------------------
REVENUES
Sales and operating revenues (a) ..................... $ 2,217 $ 1,826
Gain on asset sales and other revenues ............... 61 80
- - --------------------------------------------------------------------------------
Total revenues ............................... 2,278 1,906
COSTS AND OTHER DEDUCTIONS
Crude oil and product purchases ...................... 897 675
Operating expense .................................... 427 427
Selling, administrative and general expense .......... 118 102
Depreciation, depletion and amortization ............. 244 228
Dry hole costs ....................................... 14 4
Exploration expense .................................. 22 29
Interest expense ..................................... 78 70
Excise, property and other operating taxes (a) ....... 264 240
- - --------------------------------------------------------------------------------
Total costs and other deductions ............. 2,064 1,775
Earnings before income taxes ......................... 214 131
Income taxes ......................................... 90 57
- - --------------------------------------------------------------------------------
NET EARNINGS ......................................... $ 124 $ 74
Dividends on preferred stock ......................... 9 9
- - --------------------------------------------------------------------------------
NET EARNINGS APPLICABLE TO COMMON STOCK .............. $ 115 $ 65
=====================
Earnings per share of common stock (b) ............... $ .47 $ .27
Cash dividends declared per share of common stock .... $ .20 $ .20
- - --------------------------------------------------------------------------------
(a)Includes consumer excise taxes of .............. $ 235 $ 210
(b)Based on net earnings applicable to
common stock divided by weighted average
shares outstanding (in thousands) ............. 247,672 244,791
See Notes to Consolidated Financial Statements.
1
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CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
(Unaudited)
March 31 December 31
-----------------------
Millions of Dollars 1996 1995
- - --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents ......................... $ 286 $ 94
Accounts and notes receivable ..................... 914 920
Inventories
Crude oil ...................................... 38 48
Refined products ............................... 172 161
Chemicals ...................................... 64 40
Minerals ....................................... 20 30
Supplies, merchandise and other ................ 79 81
Deferred income taxes ............................. 145 169
Other current assets .............................. 97 33
----- -----
Total current assets ...................... 1,815 1,576
Investments and long-term receivables .................. 1,044 1,101
Properties (net of accumulated depreciation
and other allowances of $11,656 in 1996
and $11,431 in 1995) ....................... 7,082 7,109
Deferred income taxes .................................. 27 25
Other assets ........................................... 123 80
- - --------------------------------------------------------------------------------
Total assets ....................... $ 10,091 $ 9,891
================================================================================
LIABILITIES
Current liabilities
Accounts payable .................................. $ 792 $ 804
Taxes payable ..................................... 232 193
Current portion of long-term debt
and capital lease obligations ................... 344 8
Interest payable .................................. 58 92
Other current liabilities ......................... 189 219
--- ---
Total current liabilities ................. 1,615 1,316
Long-term debt and capital lease obligations ........... 3,503 3,698
Deferred income taxes .................................. 711 722
Accrued abandonment, restoration
and environmental liabilities ......................... 612 607
Other deferred credits and liabilities ................. 636 618
- - --------------------------------------------------------------------------------
Total liabilities ...................... 7,077 6,961
- - --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock ($0.10 par value; stated
at liquidation value of $50 per share) ................ 513 513
Common stock ($1 par value) ........................... 248 247
Capital in excess of par value ......................... 340 319
Foreign currency translation adjustment ................ (9) (10)
Unearned portion of restricted stock issued ............ (17) (13)
Retained earnings ...................................... 1,939 1,874
----- ------
Total stockholders' equity ........................... 3,014 2,930
- - --------------------------------------------------------------------------------
Total liabilities and stockholders' equity ....... $ 10,091 $ 9,891
================================================================================
See Notes to Consolidated Financial Statements.
2
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CONSOLIDATED CASH FLOWS UNOCAL CORPORATION
(Unaudited)
For the Three Months
Ended March 31
---------------------
Millions of Dollars 1996 1995
- - --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ............................................. $ 124 $ 74
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation, depletion and amortization ............ 244 228
Dry hole costs ...................................... 14 4
Deferred income taxes ............................... 9 (6)
Gain on sales of assets (before-tax) ................ (23) (47)
Other ............................................... 18 (17)
Working capital and other changes
related to operations
Accounts and notes receivable ................... (15) 67
Inventories ..................................... (13) (8)
Accounts payable ................................ (12) (102)
Taxes payable ................................... 39 (8)
Other ........................................... (127) (71)
- - --------------------------------------------------------------------------------
Net cash provided by operating activities ..... 258 114
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (includes dry hole costs) ...... (222) (267)
Proceeds from sales of assets ....................... 51 94
- - --------------------------------------------------------------------------------
Net cash used in investing activities ......... (171) (173)
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term borrowings ................................ 154 266
Reduction of long-term debt and capital
lease obligations .................................. (2) (200)
Dividends paid on preferred stock ................... (9) (9)
Dividends paid on common stock ..................... (50) (49)
Other ............................................... 12 16
- - --------------------------------------------------------------------------------
Net cash provided by financing activities ..... 105 24
Increase (decrease) in cash and cash equivalents ......... 192 (35)
Cash and cash equivalents at beginning of year ........... 94 148
- - --------------------------------------------------------------------------------
Cash and cash equivalents at end of period ............... $ 286 $ 113
- - --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) ................ $ 106 $ 96
Income taxes (net of refunds) ....................... $ 42 $ 58
See Notes to Consolidated Financial Statements.
3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated financial statements included herein are unaudited and, in
the opinion of management, include all adjustments necessary for a fair
presentation of financial position and results of operations. All
adjustments are of a normal recurring nature. Such financial statements are
presented in accordance with the Securities and Exchange Commission's
disclosure requirements for Form 10-Q.
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 Unocal
Corporation's 1995 Annual Report on Form 10-K.
Results for the three months ended March 31, 1996, are not necessarily
indicative of future financial results.
Certain items in the prior year financial statements have been reclassified
to conform to the 1996 presentation.
(2) For the purpose of this report, Unocal Corporation and its consolidated
subsidiary, Union Oil Company of California (Union Oil), together with the
consolidated subsidiaries of Union Oil, will be referred to as "Unocal" or
"the company".
(3) As a result of the corporate staff reduction program initiated during the
fourth quarter of 1994, the company recorded in 1994 a pretax charge of $34
million in administrative and general expense for estimated benefits,
primarily termination allowance, to be paid to employees affected by the
program. At March 31, 1996, the amount of unpaid benefits remaining on the
consolidated balance sheet was $12 million. Approximately 100 employees
were terminated during the first quarter of 1996, bringing the total number
of terminated employees to approximately 640.
(4) Capitalized interest totaled $3 million and $8 million for the first
quarter of 1996 and 1995, respectively.
(5) CASH FLOW INFORMATION:
During the first three months of 1996 and 1995, shares of Unocal common
stock were purchased by the trustee of the Unocal Savings Plan (the "Plan")
from Unocal. The trustee used Unocal's matching contributions to the Plan,
which were expensed in Unocal's consolidated earnings statement, to
purchase the shares. In the consolidated cash flow statements, the issuance
of the Unocal common stock, as detailed below, and the matching
contribution expense were treated as noncash transactions since the
resulting effect on cash flow was zero.
For the Three Months
Ended March 31
---------------------------
1996 1995
- - -------------------------------------------------------------- ---- ----
Shares of Unocal common stock issued (in thousands) ......... 190 290
Fair value of common stock (in millions of dollars) .......... $ 6 $ 8
4
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(6) INCOME TAXES:
The components of pre-tax earnings and the provision for income taxes were
as follows:
For the Three Months
Ended March 31
----------------------------
Millions of Dollars 1996 1995
- - --------------------------------------------------------------------------------
Earnings before income taxes:
United States (a) ............................ $ 73 $ 6
Foreign ...................................... 141 125
- - --------------------------------------------------------------------------------
Total ..................................... $ 214 $ 131
Income Taxes:
Current
Federal ................................... $ 20 $ 7
State ..................................... 4 3
Foreign ................................... 56 53
- - --------------------------------------------------------------------------------
Total current ........................... 80 63
Deferred
Federal ................................... - (7)
State ..................................... - (6)
Foreign ................................... 10 7
- - --------------------------------------------------------------------------------
Total deferred .......................... 10 (6)
- - --------------------------------------------------------------------------------
Total income taxes .............................. $ 90 $ 57
(a) Includes corporate and unallocated expenses.
Reconciliation of income taxes at the federal statutory rate of 35% to tax
provision:
For the Three Months
Ended March 31
---------------------------
Millions of Dollars 1996 1995
- - --------------------------------------------------------------------------------
Earnings before income taxes ......................... $ 214 $ 131
Taxes on earnings at federal statutory rate .......... $ 75 $ 46
Foreign taxes in excess of statutory rate ............ 18 19
Dividend exclusion ................................... (4) (4)
Deferred California business tax credits ............. - (4)
Other ................................................ 1 -
- - --------------------------------------------------------------------------------
Total ........................................... $ 90 $ 57
(7) LONG TERM DEBT AND CREDIT AGREEMENTS:
During the first quarter of 1996, the company issued $100 million of
medium-term notes with interest rates ranging from 5.94 percent to 6.23
percent and maturity dates ranging from February 2003 to February 2006. The
company also increased its commercial paper borrowings by $44 million
bringing the outstanding balance to $694 million. In March 1996, the
company called for early redemption on May 15, 1996 seven pollution control
bond issues totaling $49 million with interest rates ranging from 6-1/8
percent to 7-7/8 percent. These issues are expected to be refinanced with
commercial paper.
During April 1996, the company terminated its $45 million Netherlands
revolving credit facility, which was undrawn since November 1995, and the
company's Swiss Franc bond issue matured and was refinanced with commercial
paper. The company also paid down a large portion of the commercial paper
balance with proceeds from the sale of its California oil and gas producing
properties.
5
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(8) FINANCIAL INSTRUMENTS
At March 31, 1996, the two currency swap agreements, entered into during
1986 to hedge foreign currency exchange exposures on the company's Swiss
Franc and Deutsche Mark bonds, had fair values of approximately $59 and $67
million, respectively, based on dealer quotes. In April 1996, the Swiss
Franc currency swap agreement matured concurrently with the maturity of the
Swiss Franc bond issue.
At March 31, 1996, there were 18 outstanding currency forward contracts to
purchase 30 million Pounds Sterling for $45 million to hedge a series of
known Pounds Sterling requirements. The fair market value of these currency
contracts at March 31, 1996, was approximately $0.3 million in liabilities.
In March 1996, the 10-year interest rate swap agreement with a notional
amount of $200 million matured. At March 31, 1996, the remaining interest
rate swap agreement to hedge $25 million of fixed rate medium-term notes
had a fair value of approximately $0.3 million in assets, based on quoted
market prices of comparable instruments, and a floating interest rate of
5.3 percent.
At March 31, 1996, the company had outstanding commodity futures contracts
covering the sale of 775 thousand barrels of crude oil with a notional
amount of $14 million. The fair value of the contracts, based on quoted
market prices, was insignificant.
At March 31, 1996, the estimated fair value of the company's long-term debt
was $4,000 million.
(9) ACCRUED ABANDONMENT, RESTORATION AND ENVIRONMENTAL LIABILITIES:
At March 31, 1996, the company had accrued $484 million for the estimated
future costs to abandon and remove wells and production facilities. The
total costs for abandonments are estimated to be $640 million to $780
million, of which the lower end of the range is used to calculate the
amount to be amortized.
At March 31, 1996, the company's reserves for environmental remediation
obligations totaled $211 million, of which $83 million was included in
other current liabilities. The reserve includes estimated probable future
costs of $30 million for federal Superfund and comparable state-managed
multiparty disposal sites; $34 million for formerly-operated sites for
which the company has remediation obligations; $67 million for sites
related to businesses or operations that have been sold with contractual
remediation or indemnification obligations; $61 million for company-owned
or controlled sites where facilities have been closed or operations shut
down; and $19 million for sites owned and/or controlled by the company and
utilized in its ongoing operations.
(10) CONTINGENT LIABILITIES:
The company has certain contingent liabilities with respect to material
existing or potential claims, lawsuits and other proceedings, including
those involving environmental, tax and other matters, certain of which are
discussed more specifically below. The company accrues liabilities when it
is probable that future costs will be incurred and such costs can be
reasonably estimated. Such accruals are based on developments to date, the
company's estimates of the outcomes of these matters and its experience in
contesting, litigating and settling other matters. As the scope of the
liabilities becomes better defined, there will be changes in the estimates
of future costs, which could have a material effect on the company's future
results of operations and financial condition or liquidity.
ENVIRONMENTAL MATTERS
The company is subject to loss contingencies pursuant to federal, state and
local environmental laws and regulations. These include existing and
possible future obligations to investigate the effects of the release or
disposal of certain petroleum, chemical and mineral substances at various
sites; to remediate or restore these sites; to compensate others for damage
to property and natural resources, for remediation and restoration costs
and for personal injuries; and to pay civil penalties and, in some cases,
criminal penalties and punitive damages. These obligations relate to sites
owned by the company or others and associated with past and present
operations, including sites at which the company has been identified as a
potentially responsible party (PRP) under the federal
6
<PAGE>
Superfund laws and comparable state laws. Liabilities are accrued when it
is probable that future costs will be incurred and such costs can be
reasonably estimated. However, in many cases, investigations are not yet at
a stage where the company is able to determine whether it is liable or, if
liability is probable, to quantify the liability or estimate a range of
possible exposure. In such cases, the amounts of the company's liabilities
are indeterminate due to the potentially large number of claimants for any
given site or exposure, the unknown magnitude of possible contamination,
the imprecise and conflicting engineering evaluations and estimates of
proper cleanup methods and costs, the unknown timing and extent of the
corrective actions that may be required, the uncertainty attendant to the
possible award of punitive damages, the recent judicial recognition of new
causes of action, the present state of the law, which often imposes joint
and several and retroactive liabilities on PRPs, and the fact that the
company is usually just one of a number of companies identified as a PRP.
As disclosed in Note 9, at March 31, 1996, the company had accrued $211
million for estimated future environmental assessment and remediation costs
at various sites where liabilities for such costs are probable. At those
sites where investigations or feasibility studies have advanced to the
stage of analyzing feasible alternative remedies and/or ranges of costs,
the company estimates that it could incur additional remediation costs
aggregating approximately $230 million.
Between August 22 and September 6, 1994, a chemical known as "Catacarb" was
released into the environment at the company's San Francisco Refinery near
Rodeo, California. Persons in the surrounding area have claimed that they
were exposed to the chemical in varying degrees. Since September 22, 1994,
forty-two lawsuits have been filed by or on behalf of all persons, alleged
to be several thousand, claiming that they or their property were adversely
affected by the releases. Thirty-nine of the lawsuits have been
consolidated in the Superior Court for Contra Costa County. The First
Amended Model Complaint in this consolidated action, filed February 1,
1995, on behalf of individual plaintiffs and purported classes of
plaintiffs, alleges personal injury, emotional distress and increased risk
of future illness on behalf of the named plaintiffs and all persons present
in and around or downwind from the San Francisco Refinery, and property
damage and loss or diminution of property value on behalf of all owners of
real and personal property in the vicinity of the Refinery, resulting from
the release of Catacarb by the Refinery. Certain individual plaintiffs
allege injury from alleged subsequent releases at the Refinery of hydrogen
sulfide and other chemicals. The Model Complaint seeks compensatory and
punitive damages in unspecified amounts, equitable relief including the
creation of a fund for medical monitoring and treatment of plaintiffs and
members of the purported classes, statutory penalties and other relief.
TAX MATTERS
In December 1994, the company received a Notice of Proposed Deficiency from
the Internal Revenue Service (IRS) related to the years 1985 through 1987.
In February 1995, the company filed a protest of the proposed tax
deficiency with the Appeals section of the IRS. Discussions with the
Appeals Officer are ongoing, but it appears that two substantial issues
will proceed to litigation.
The most significant issue relates to an IRS challenge of a $341 million
deduction taken by the company in its 1985 tax return for amounts paid
under a settlement agreement with Mesa Petroleum, T. Boone Pickens and
Drexel Burnham Lambert, Incorporated and certain others which ended a
hostile takeover attempt by that group. The IRS contends that the deduction
is not allowable because the payment was related solely to the purchase of
the company's common stock. Although the company did purchase shares under
the settlement agreement, it properly reflected the purchase in its records
at the fair market value of the shares purchased. The deduction at issue
relates to that portion of the payment made under the settlement agreement
that exceeded the value of the shares purchased. The company intends to
vigorously dispute the IRS' assertions in court. If the IRS were ultimately
to prevail, the company would owe $157 million of tax for 1985 plus tax
deductible interest estimated at $244 million as of March 31, 1996. As this
matter is not yet before a court, final resolution of this matter is likely
to be several years away.
The second issue relates to an IRS challenge of a continued deferral of
intercompany gains which arose from sales of property between subsidiaries
in 1982 and 1983. The IRS contends that the $201 million balance of
deferred gain must be recognized in the company's taxable income for 1985
when the subsidiaries contributed the property to a wholly owned master
limited partnership. The company intends to vigorously dispute the IRS'
7
<PAGE>
assertions in court. If the IRS were ultimately to prevail, the company
would owe $92 million in tax for 1985, but would receive credits or refunds
for offsetting deductions in later years. For 1986 and 1987 the credits or
refunds would total $35 million. In addition to tax, the company would owe
tax deductible interest estimated at $100 million as of March 31, 1996. As
this matter is not yet before a court, final resolution of this matter is
likely to be several years away.
The company believes it has adequately provided in its accounts for items
and issues not yet resolved. In the opinion of management, a successful
outcome of the litigation is reasonably likely. However, substantial
adverse decisions could have a material effect on the company's financial
condition, operating results and liquidity in a given quarter and year when
such matters are resolved.
OTHER MATTERS
The company also has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary
course of business. Although these contingencies could result in expenses
or judgments that could be material to the company's results of operations
for a given reporting period, on the basis of management's best assessment
of the ultimate amount and timing of these events, such expenses or
judgments are not expected to have a material adverse effect on the
company's consolidated financial condition or liquidity.
(11) Unocal guarantees certain indebtedness of Union Oil. Summarized below is
financial information for Union Oil and its consolidated subsidiaries:
For the Three Months
Ended March 31
------------------------------
Millions of Dollars 1996 1995
- - --------------------------------------------------------------------------------
Total revenues ................................... $2,278 $1,960
Total costs and other deductions, ................ 2,153 1,886
including income taxes ------ ------
Net earnings ..................................... $ 125 $ 74
- - --------------------------------------------------------------------------------
At March 31 At December 31
------------------------------
Millions of Dollars 1996 1995
- - --------------------------------------------------------------------------------
Current assets ......................................$1,807 $1,576
Noncurrent assets ................................... 8,292 8,328
Current liabilities ................................. 1,622 1,309
Noncurrent liabilities .............................. 5,462 5,645
Shareholder's equity ................................ 3,015 2,950
- - --------------------------------------------------------------------------------
(12) SUBSEQUENT EVENT
On April 9, 1996, the company completed the sale its California oil and gas
producing properties for $492 million to Nuevo Energy Company (Nuevo) of
Houston. The effective date of the sale was October 1, 1995. After
adjustments for revenues, operating expenses, capital expenditures and
accrued interest, the company received approximately $481 million in cash
from the transaction. Possible additional adjustments may be made pending
an audit by Nuevo. The transaction is currently being reviewed and a gain
from the sale will be recorded in the second quarter of 1996. See the
Outlook section of the Management Discussion and Analysis in Item 2 of this
report for additional information.
8
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OPERATING HIGHLIGHTS UNOCAL CORPORATION
(Unaudited)
For the Three Months
Ended March 31
-------------------------
1996 1995
-------------------------------------------------------------------------------
NET DAILY PRODUCTION (a)
Crude oil and condensate (thousand barrels):
United States (b) ........................... 121.3 131.2
Foreign:
Far East ............................ 80.9 87.5
Other ............................... 28.4 31.1
---- ----
Total Foreign .................. 109.3 118.6
Worldwide ................................... 230.6 249.8
===== =====
Natural gas (million cubic feet):
United States (b) ........................... 1,110 1,120
----- -----
Foreign:
Far East ............................ 597 615
Other ............................... 82 33
-- --
Total Foreign .................. 679 648
--- ---
Worldwide ................................... 1,789 1,768
===== =====
Natural gas liquids (thousand barrels) .......... 19.7 22.0
Geothermal (million kilowatt-hours) ............. 13.8 15.6
- - --------------------------------------------------------------------------------
AVERAGE SALES PRICES
Crude oil and condensate (per barrel):
United States (b) ........................... $ 16.55 $ 14.74
Foreign:
Far East ............................ $ 17.86 $ 16.19
Other ............................... $ 16.93 $ 15.62
Total Foreign .................. $ 17.52 $ 15.98
Worldwide ................................... $ 16.93 $ 15.22
Natural gas (per thousand cubic feet):
United States (b) ........................... $ 2.35 $ 1.45
Foreign:
Far East ............................ $ 2.18 $ 1.96
Other ............................... $ 1.76 $ 1.22
Total Foreign .................. $ 2.13 $ 1.92
Worldwide ................................... $ 2.27 $ 1.62
- - --------------------------------------------------------------------------------
(a) Includes production sharing agreements on a gross basis.
(b) Includes California production.
9
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OPERATING HIGHLIGHTS (continued) UNOCAL CORPORATION
(Unaudited)
For the Three Months
Ended March 31
--------------------
1996 1995
-------------------------------------------------------------------------------
Input to crude oil processing (thousand barrels per day) .... 239 190
Refinery production (thousand barrels per day)
Gasoline ................................................ 116 84
Jet fuel, kerosene and heating oil ...................... 43 19
Diesel fuel ............................................. 42 30
Other products (lubricants, gas oil, etc.) .............. 61 70
-----------
Total ........................................... 262 203
Petroleum product sales (thousand barrels per day)
Marketing (a)
Gasoline ................................................ 127 113
Diesel fuel ............................................. 25 25
Other (includes lube oil, kerosene and fuel oil) ........ 8 5
-----------
Total ........................................... 160 143
Product supply and refinery (b)
Gasoline ................................................ 19 13
Jet fuel, kerosene and heating oil ...................... 50 29
Diesel fuel ............................................. 31 11
Other products (includes petroleum coke, gas oil, etc.) . 34 56
-----------
Total ........................................... 134 109
-----------
Total petroleum product sales ................ 294 252
Agricultural products production volumes (thousand tons)
Ammonia ................................................. 351 351
Urea .................................................... 293 295
Other products .......................................... 163 197
Agricultural products sales volumes (thousand tons)
Ammonia ................................................. 94 128
Urea .................................................... 245 228
Other products .......................................... 231 272
(a) Primarily sold through retail channels.
(b) Primarily sold through wholesale or commercial channels.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CONSOLIDATED RESULTS
For the Three Months
Ended March 31
--------------------------
Millions of Dollars 1996 1995
- - --------------------------------------------------------------------------------
Net earnings excluding special items: ................ $ 120 $ 54
Special items:
Litigation provision ............................. (4) (4)
Environmental provision .......................... (6) (4)
Asset sales ...................................... 14 29
Other ............................................ - (1)
-------------------
Net earnings including special items .......... $ 124 $ 74
Compared to 1995, Unocal's first quarter 1996 earnings excluding special items
were higher primarily due to increased worldwide natural gas sales prices,
particularly in the United States.
OIL AND GAS EXPLORATION AND PRODUCTION
For the Three Months
Ended March 31
-------------------------
Millions of Dollars 1996 1995
- - --------------------------------------------------------------------------------
Net earnings excluding special items: $158 $ 96
Special items:
Asset sales 6 11
- - --------------------------------------------------------------------------------
Net earnings including special items $164 $ 107
This business segment's earnings reflected increased natural gas prices and
higher gas production from operations in the Louisiana/Gulf of Mexico region.
Natural gas production from the region averaged 700 million cubic feet per day
(mmcfd), a three percent increase over the first quarter of 1995, and the
average natural gas sales price was $2.81 per thousand cubic feet (mcf), an
increase of 87 percent from a year ago. The company's overall average domestic
natural gas sales price was up 62 percent at $2.35 per mcf compared to $1.45 in
1995.
The company's foreign natural gas production increased by approximately five
percent, due principally to new production in The Netherlands and Canada. In
Thailand, construction delays on the second pipeline caused natural gas
production to continue to be constrained averaging 438 mmcfd. The average sales
price for foreign natural gas increased 11 percent to $2.13 per mcf.
REFINING, MARKETING AND TRANSPORTATION - 76 PRODUCTS COMPANY
The 76 Products Company recorded a first quarter 1996 net loss of $7 million,
compared with a net loss in 1995 of $18 million. Lower margins for refined
products due to higher crude oil costs and additional expenses to manufacture
California reformulated gasolines contributed to the loss in 1996. Partially
offsetting these negative factors were increased production of light oil
products of 201,000 barrels per day, up 51 percent from 1995, and increased
gasoline retail sales of 127,000 barrels per day, up 12 percent from 1995.
GEOTHERMAL AND POWER OPERATIONS
First quarter 1996 net earnings were $5 million, compared with $4 million in
1995. The increase resulted from lower dry hole costs in Indonesia which were
partially offset by lower steam production in the Philippines due to typhoon
damage at the Tiwi facilities in November 1995.
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DIVERSIFIED BUSINESSES
Millions of Dollars 1996 1995
- - --------------------------------------------------------------------------------
Net earnings excluding special items
Agricultural Products $ 16 $ 16
Carbon and Minerals 18 17
Pipelines 16 18
Other - 1
- - --------------------------------------------------------------------------------
Total $50 $52
Special items:
Pipelines - asset sales 7 -
--------------------------------
Net earnings including special items $57 $52
--------------------------------
During the first quarter of 1996, Agricultural Products continued to benefit
from increased sales prices which were partially offset by lower sales volumes.
In February 1996, the company sold its 15 percent interest in the Platte
Pipeline Company resulting in an after-tax gain of $7 million.
Corporate and Unallocated
Millions of Dollars 1996 1995
- - --------------------------------------------------------------------------------
Net earnings effect excluding special items
Administrative and General expense $ (18) $ (18)
Net interest expense (50) (43)
Environmental and Litigation expense (4) (9)
Other (14) (10)
- - --------------------------------------------------------------------------------
Total (86) (80)
Special items:
Environmental and Litigation provisions (10) (8)
Write-downs of assets (Other) - (1)
Asset sales (Other) 1 18
- - --------------------------------------------------------------------------------
Net earnings effect including special items $(95) $(71)
---------------------------
Net interest expense represents interest income and expense, net of capitalized
interest. The increase in net interest expense in the first quarter of 1996 was
due primarily to lower capitalized interest. Asset sales for 1995 consisted
primarily of the sale of the company's Process, Technology and Licensing
business.
FINANCIAL CONDITION AND CAPITAL EXPENDITURES
For the first three months of 1996, cash flow from operating activities,
including working capital changes, was $258 million, compared to $114 million in
1995. The increase was due to higher earnings from operations.
Proceeds from asset sales were $51 million and $94 million in the first quarter
of 1996 and 1995, respectively. The 1996 total included proceeds of $20 million
from the 1995 sale of geothermal assets. The balance is primarily from the sale
of nonstrategic oil and gas properties and the sale of the company's interest in
the Platte Pipeline Company. The 1995 proceeds were mainly from the sale of
nonstrategic oil and gas properties and the Process, Technology and Licensing
business.
Consolidated working capital at March 31, 1996, was $200 million, down from $260
million at year-end 1995. This decrease was primarily due to an increase in the
current portion of long-term debt, which was partially offset by an increase in
cash. The current portion of long-term debt represents the amount of debt
expected to be retired within the next twelve months. The company's total debt
was $3,847 million at March 31,1996, an increase of $141 million from the
year-end 1995 level. See Notes 7 and 8 to the consolidated financial statements
for additional information.
Capital expenditures for the first quarter of 1996 totaled $222 million,
compared with $267 million a year ago. Capital expenditures were lower due to
reduced domestic exploration and production spending and the completion
12
<PAGE>
of upgrades to the Los Angeles and San Francisco refineries for the production
of reformulated gasolines. Estimated expenditures for the full year 1996 are
expected to reach $1.3 billion, depending upon the progress of various oil and
gas projects and product prices.
ENVIRONMENTAL MATTERS
At March 31, 1996, the company's reserves for environmental remediation
obligations totaled $211 million, of which $83 million was included in other
current liabilities. During the first quarter, cash payments of $13 million were
applied against reserves and an additional $10 million in liabilities was
recorded to the reserve account, primarily due to changes in estimated future
remediation costs for numerous sites. The company estimates that it could incur
additional remediation costs aggregating approximately $230 million as discussed
in Note 10 to the consolidated financial statements.
The company is subject to federal, state and local environmental laws and
regulations, including the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, and the Resource Conservation and
Recovery Act (RCRA). Under these laws, the company is subject to possible
obligations to remove or mitigate the environmental effects of the disposal or
release of certain chemical and petroleum substances at various sites.
At year-end 1995, Unocal had received notification from the Federal
Environmental Protection Agency that the company may be a potentially
responsible party (PRP) at 40 sites. In addition, various state agencies and
private parties had identified 30 other similar PRP sites that may require
investigation and remediation. During the first quarter of 1996, 4 sites were
added and 2 sites were resolved resulting in a total of 72 sites. Of the total,
the company has denied responsibility at 4 sites and at another 17 sites the
company's liability, although unquantified, appears to be de minimis. The total
also includes 27 sites which are under investigation or in litigation, for which
the company's potential liability is not determinable. Of the remaining 24
sites, where probable costs can be reasonably estimated, a reserve of $30
million was included in the total environmental remediation reserve as of March
31, 1996.
Unocal does not consider the number of sites for which it has been named a PRP
as a relevant measure of liability. Although the liability of a PRP is generally
joint and several, the company is usually only one of several companies
designated as a PRP. The company's ultimate share of the remediation costs at
those sites often is not determinable due to many unknown factors as discussed
in Note 10 to the consolidated financial statements. The solvency of other
responsible parties and disputes regarding responsibilities may also impact the
company's ultimate costs.
Corrective investigations and actions pursuant to RCRA are being performed at
the San Francisco and Los Angeles refineries, Beaumont facility and at the
company's closed shale oil project and Molycorp Inc., Washington, Pennsylvania
facility. The company also must provide financial assurance for future closure
and post-closure costs of its RCRA permitted facilities. Because these costs
will be incurred at different times and over a period of many years, the company
believes that these obligations are not likely to have a material adverse effect
on the company's results of operations or financial condition.
In the first quarter of 1996, the company submitted a preliminary draft remedial
action plan to the California Regional Water Quality Control Board and San Luis
Obispo County for the remediation of the Guadalupe oil field, located on the
central coast of California. The plan is for the cleanup of past underground
releases of a diesel-like additive formerly used to produce the field's heavy
crude oil. As a result, an additional $8.5 million was added to the reserve for
estimated costs associated with the implementation of the plan. The company
expects to incur additional costs for an environmental impact report, a natural
resource damage assessment and remedial operations. Estimates for these possible
additional expenses are included in the $230 million total of future estimated
remediation costs disclosed in Note 10 to the consolidated financial statements.
13
<PAGE>
The company is developing a remedial plan for the cleanup of petroleum
hydrocarbon contamination under the Front Street section of Avila Beach,
California. The plan will be used to determine the desired alternatives for the
final remediation of the site. The plan will be submitted to the Regional Water
Quality Control Board by mid-1996 for approval. The company is continuing with
interim remediation measures for the site. Estimates for possible additional
expenses are included in the $230 million total of future estimated remediation
costs disclosed in Note 10 to the consolidated financial statements.
As discussed below, on April 9, 1996, the company completed the sale of its
California oil and gas assets. The sale agreement requires Unocal to retain
certain environmental liabilities related to some of the properties that were
sold. During the course of the sale, the company identified possible
environmental liabilities for certain properties that were ultimately excluded
from the sale. The company is currently assessing the properties to determine
possible future environmental costs that may be incurred. Preliminary estimates
of these costs are included in the amount disclosed in Note 10 to the
consolidated financial statements as additional costs that could be incurred in
excess of accrued future remediation costs.
OTHER MATTERS
On April 9, 1996, the company sold nearly all of its California oil and gas
producing properties to Nuevo Energy Company of Houston. Beginning in 1998, the
company could receive payments that are contingent upon the price per barrel
from the properties' future oil production.
Net earnings from these properties during the first quarter of 1996 were
approximately $1 million. Net daily production averaged 30,200 barrels of oil
and 52 million cubic feet of gas. The proceeds from the sale are being applied
by the company to reduce debt pending the funding of core activities in
Southeast and Central Asia. See Note 12 to the consolidated financial statements
for additional information.
OUTLOOK
Certain of the statements in this discussion, as well as other forward-looking
statements within this document, contain estimates and projections of amounts of
or increases in future revenues, earnings, cash flows, capital expenditures,
assets, liabilities and other financial items and of future levels of or
increases in reserves, production, sales including related costs and prices, and
other statistical items; plans and objectives of management regarding the
company's future operations, products and services; and certain assumptions
underlying such estimates, projection plans and objectives. While these
forward-looking statements are made in good faith, future operating, market,
competitive, legal, economic, political, environmental, and other conditions and
events could cause actual results to differ materially from those in the
forward-looking statements.
The company's estimates for 1996 net daily production of crude oil and natural
gas have been revised to the following:
1996 1995
---------------------------
Revised Original
Net Daily Production Estimate Estimate Reported
- - --------------------------------------------------------------------------------
Crude oil and condensate (thousand barrels)
United States (a) ................................ 91 93 125
Far East ......................................... 88 92 85
Other ............................................ 27 27 30
----- ----- -----
Total ......................................... 206 212 240
Natural gas (million cubic feet)
United States (a) ................................ 1,043 1,035 1,103
Far East ......................................... 673 693 609
Other ............................................ 71 64 53
----- ----- -----
Total ......................................... 1,787 1,792 1,765
(a) 1996 estimates exclude production from the California properties sold.
14
<PAGE>
The company's estimated crude oil production in Indonesia has been reduced from
74 thousand barrels per day to 70 thousand barrels per day due to construction
delays at the Seguni field. The company's natural gas production in Thailand for
1996 is expected to be 525 mmcfd, down from the original estimate of 546 mmcfd
due to construction delays on the Petroleum Authority of Thailand's (PTT) second
pipeline.
The company has concluded negotiations with PTT for the sale of gas from the
Pailin field in the Gulf of Thailand. The agreement is subject to certain
governmental approvals. Based on drilling results to date in the Pailin field,
the company estimates the field contains approximately one trillion cubic feet
(tcf) of recoverable gas, and total recoverable gas potentially as high as two
tcf, subject to additional delineation work. Unocal is the operator of the field
with a 35 percent interest.
During the first quarter and into the second quarter of 1996, gasoline prices
increased throughout the United States due to several factors. The primary
factors were: winter heating oil requirements caused worldwide demand for crude
oil to increase; crude oil production was lower than expected due to delays in
the start-up of North Sea fields and weather related production problems; and
inventories were kept low in anticipation of Iraq's resumption of crude oil
sales. Worldwide crude oil supplies failed to increase as much as demand, and
this supply/demand pressure put upward pressure on crude oil and ultimately
gasoline prices. Furthermore, unpredictable problems at a number of refineries
resulted in lower gasoline production, particularly in California, causing
decreased gasoline supplies which put additional upward pressure on gasoline
prices. California gasoline prices are also affected by the introduction of
state-mandated reformulated gasolines. The company will continue to be affected
by the uncertainty and volatility of crude oil prices; however, the price of
gasoline is expected to moderate as gasoline supplies and inventories improve.
In the Philippines, the company's subsidiary, Philippine Geothermal Inc. (PGI),
has a service contract with the Philippine National Power Corporation (NPC) with
a term of 25 years, renewable at PGI's option for an additional 25 years under
the same terms and conditions. The initial 25-year term ends in September 1996.
PGI has notified NPC of its intention to exercise its option to renew the
contract for an additional 25 years. NPC has indicated that it will challenge
the company's right to renew, and the parties are currently in negotiations to
resolve the issue.
In 1995, NPC announced plans to privatize its Tiwi, Mak-Ban geothermal power
operations and selected PGI as its strategic partner to carry out that effort.
Current political forces may require NPC to submit this privitization effort for
public bid, in which case PGI intends to aggresively participate in the bidding
process.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is incorporated by reference the information regarding environmental
remediation reserves in Note 9 to the consolidated financial statements in Item
1 of Part I, the discussion thereof in the Environmental Matters section of
Management's' Discussion and Analysis in Item 2 of Part I, and the information
regarding contingent liabilities in Note 10 to the consolidated financial
Statements in Item 1 of Part I.
(1) A complaint alleging an unreasonable restraint of trade was filed in U. S.
District Court for the Southern District of Texas, Houston, Division on
April 10, 1996 (The McMahon Foundation, et al. v. Amerada Hess, et al.,
----------------------------------------------------------
including Unocal Corporation and Union Oil Company of California, Civil No.
H-96-1155). Plaintiffs seek to represent a nationwide class consisting of
private owners of royalty and working interests in the United States. They
allege that defendants purchase most of the crude oil produced on private
lands in the U. S. and that since October 1986, defendants have agreed,
combined and conspired to set and have paid artificially low prices for
crude oil purchased from leases in which the purported class members own
interests. Plaintiffs seek treble damages and attorney's fees.
(2) On May 13, 1996, following oral argument in the Citizens action described
---------
in Paragraph (8) under Item 3 - Legal Proceedings of the company's 1995
Annual Report on Form 10-K, the United States Ninth Circuit Court of
Appeals affirmed the trial court's decision denying the company's motion
to dismiss the action.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Unocal Corporation statement regarding computation of
earnings per common share for the three months ended
March 31, 1996 and 1995.
12.1 Unocal Corporation statement regarding computation of
ratio of earnings to fixed charges for the three months
ended March 31, 1996 and 1995.
12.2 Unocal Corporation statement regarding computation of
ratio of earnings to combined fixed charges and
preferred stock dividends for the three months ended
March 31, 1996 and 1995.
12.3 Union Oil Company of California statement regarding
computation of ratio of earnings to fixed charges for
the three months ended March 31, 1996 and 1995.
27 Financial data schedule for the quarter ended March 31,
1996 (included only in the copy of this report filed
electronically with the Commission).
(b) Reports on Form 8-K
During the first quarter of 1996:
1. Current Report on Form 8-K dated and filed January 25, 1996,
for the purpose of reporting, under Item 5, Unocal's 1995
fourth quarter and full year earnings.
2. Current Report on Form 8-K dated and filed February 20,
1996, for the purpose of reporting, under Item 5, Unocal's
sale of its California oil and gas producing properties.
3. Current Report on Form 8-K dated and filed February 23,
1996, for the purpose of reporting, under Item 5, Unocal's
crude oil and natural gas reserve data.
During the second quarter of 1996 to the date hereof:
1. Current Report on Form 8-K dated and filed April 9, 1996,
for the purpose of reporting, under Item 5, the completion
of Unocal's sale of its California oil and gas producing
properties.
2. Current Report on Form 8-K dated and filed April 24, 1996,
for the purpose of reporting, under Item 5, Unocal's 1996
first quarter earnings.
16
<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.
UNOCAL CORPORATION
(Registrant)
Dated: May 15, 1996 By: /s/ CHARLES S. MCDOWELL
-----------------------
Charles S. McDowell
Vice President and Comptroller
(Duly Authorized Officer and
Principal Accounting Officer)
17
EXHIBIT 11
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Three Months
Ended March 31
Dollars and shares in thousands, ----------------------------
except per share amounts 1996 1995
- - --------------------------------------------------------------------------------
Primary:
Net earnings ..................................... $ 124,261 $ 74,137
Preferred stock dividend ......................... (8,969) (8,969)
------ ------
Net earnings applicable to common stock .......... $ 115,292 $ 65,168
Weighted average common stock outstanding ........ 247,672 244,791
Dilutive common stock equivalents ................ 987 843
------- -------
248,659 245,634
- - --------------------------------------------------------------------------------
Net earnings per common share .................... $ .47 $ .27
================================================================================
Fully Diluted:
Net earnings ..................................... $ 124,261 $ 74,137
Weighted average common stock outstanding ........ 247,672 244,791
Dilutive common stock equivalents ................ 1,656 1,348
Conversion of preferred stock * .................. 16,667 16,667
------ ------
265,995 262,806
- - --------------------------------------------------------------------------------
Net earnings per common share .................... $ .47 $ .28
================================================================================
* The effect of assumed conversion of preferred stock on earnings per share is
antidilutive.
EXHIBIT 12.1
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Three Months
Ended March 31
-----------------------
Dollars in millions 1996 1995
- - --------------------------------------------------------------------------------
Net earnings ......................................... $124 $ 74
Provision for income taxes ........................... 90 57
-- --
Earnings subtotal..................................... 214 131
Fixed charges included in earnings: ..
Interest expense ..................................... 78 70
Interest portion of rentals .......................... 10 13
-- --
Subtotal ..................................... 88 83
Earnings available before fixed charges............... $302 $214
==== ====
Fixed charges:
Fixed charges included in earnings ................... $ 88 $ 83
Capitalized interest.................................. 3 8
- -
Total fixed charges................................... $ 91 $ 91
==== ====
Ratio of earnings to fixed charges................... 3.3 2.3
EXHIBIT 12.2
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
For the Three Months
Ended March 31
--------------------
Dollars in millions 1996 1995
- - --------------------------------------------------------------------------------
Net earnings ............................................... 124 $ 74
Provision for income taxes ................................. 90 57
---- ----
Earnings subtotal .......................................... 214 131
Fixed charges included in earnings:
Interest expense ........................................... 78 70
Interest portion of rentals ................................ 10 13
---- ----
Subtotal ................................................... 88 83
Earnings available before fixed charges .................... $302 $214
==== ====
Fixed charges and preferred stock dividends:
Fixed charges included in earnings ......................... $ 88 $ 83
Capitalized interest ....................................... 3 8
Preferred stock dividends * ................................ 15 15
---- ----
Total fixed charges and preferred stock dividends .......... $106 $106
==== ====
Ratio of earnings to fixed charges and preferred
stock dividends .......................................... 2.8 2.0
* For purposes of this ratio, preferred stock dividends are adjusted to a
pre-tax basis
EXHIBIT 12.3
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Three Months
Ended March 31
-----------------------------
Dollars in millions 1996 1995
- - --------------------------------------------------------------------------------
Net earnings ......................................... $125 $ 74
Provision for income taxes ........................... 90 57
-- --
Earnings subtotal .................................... 215 131
Fixed charges included in earnings:
Interest expense ..................................... 78 70
Interest portion of rentals .......................... 10 13
-- --
Subtotal ..................................... 88 83
Earnings available before fixed charges .............. $303 $214
==== ====
Fixed charges:
Fixed charges included in earnings ................... $ 88 $ 83
Capitalized interest ................................. 3 8
- -
Total fixed charges .................................. $ 91 $ 91
==== ====
Ratio of earnings to fixed charges ................... 3.3 2.3
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