UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------------
Commission file number 1-8483
UNOCAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3825062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2141 Rosecrans Avenue, Suite 4000, El Segundo, California 90245
---------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(310) 726-7600
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Number of shares of Common Stock, $1 par value, outstanding as of April 30,
1997: 249,628,317
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATED EARNINGS UNOCAL CORPORATION
(Unaudited)
For the Three Months
Ended March 31
-----------------------------------
Dollars in millions except per share amounts 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C>
Sales and operating revenues ........................................................... $ 1,408 $ 1,143
Gain on sales of assets and other revenues ............................................. 48 58
------------------------------
Total revenues ................................................................... 1,456 1,201
COSTS AND OTHER DEDUCTIONS
Crude oil and product purchases ........................................................ 459 275
Operating expense ...................................................................... 288 312
Selling, administrative and general expense ............................................ 28 43
Depreciation, depletion and amortization ............................................... 211 211
Dry hole costs ......................................................................... 16 14
Exploration expense .................................................................... 28 22
Interest expense ....................................................................... 61 78
Excise, property and other operating taxes ............................................. 20 21
Distribution on convertible preferred
securities of subsidiary trust ...................................................... 8 --
------------------------------
Total costs and other deductions ................................................. 1,119 976
------------------------------
Earnings from continuing operations
before income taxes ................................................................. 337 225
Income taxes ........................................................................... 149 94
------------------------------
Earnings from continuing operations .................................................... $ 188 $ 131
Discontinued operations
Loss from operations (net of a $4 million tax benefit) .............................. -- (7)
Loss on disposal (net of a $27 million tax benefit) ................................. (44) --
------------------------------
Loss from discontinued operations ................................................ (44) (7)
------------------------------
Net Earnings ........................................................................... $ 144 $ 124
Dividends on preferred stock ........................................................... -- 9
------------------------------
Earnings applicable to common stock .............................................. $ 144 $ 115
==============================
Earnings (loss) per share of common stock assuming no dilution (a)
Continuing operations ............................................................. $ 0.75 $ 0.50
Discontinued operations ........................................................... (0.18) (0.03)
------------------------------
Total earnings per share ....................................................... $ 0.57 $ 0.47
Cash dividends declared per share of common stock .................................... $ 0.20 $ 0.20
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Based on net earnings applicable to common stock divided
by weighted average shares outstanding (in thousands) ........................... 250,510 247,672
See Notes to Consolidated Financial Statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
March 31 December 31
--------------------------------
Millions of dollars 1997 * 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
<S> <C> <C>
Cash and cash equivalents ............................................................... $ 1,749 $ 217
Short-term investments .................................................................. 403 --
Accounts and notes receivable ........................................................... 1,111 1,027
Net assets of discontinued operations ................................................... -- 1,774
Inventories ............................................................................. 145 125
Deferred income taxes ................................................................... 54 57
Other current assets .................................................................... 34 28
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets ................................................................. 3,496 3,228
Investments and long-term receivables ...................................................... 1,232 1,206
Properties (net of accumulated depreciation and other
allowances of $9,672 in 1997 and $9,502 in 1996) ........................................ 4,577 4,590
Deferred income taxes ...................................................................... 25 21
Other assets ............................................................................... 100 78
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets ......................................................................... $ 9,430 $ 9,123
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ........................................................................ $ 1,126 $ 1,012
Taxes payable ........................................................................... 279 231
Current portion of long-term debt and capital lease obligations ......................... 406 118
Interest payable ........................................................................ 43 70
Current portion of environmental liabilities ............................................ 73 73
Other current liabilities ............................................................... 86 118
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities ............................................................ 2,013 1,622
Long-term debt ............................................................................. 2,814 2,940
Deferred income taxes ...................................................................... 286 348
Accrued abandonment, restoration and environmental liabilities ............................. 684 677
Other deferred credits and liabilities ..................................................... 781 739
Company-obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust holding solely 6-1/4%
convertible junior subordinated debentures of Unocal .................................... 522 522
Common stock ($1 par value) ................................................................ 251 251
Capital in excess of par value ............................................................. 424 412
Foreign currency translation adjustment .................................................... (14) (13)
Unearned portion of restricted stock issued ................................................ (21) (14)
Unrealized holding gain on investment ...................................................... 4 --
Retained earnings .......................................................................... 1,732 1,639
Treasury stock - at cost (1,182,000 shares in 1997) ....................................... (46) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ........................................................... 2,330 2,275
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ........................................ $ 9,430 $ 9,123
- -----------------------------------------------------------------------------------------------------------------------------------
* Unaudited
See Notes to the Consolidated Financial Statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED CASH FLOWS UNOCAL CORPORATION
(Unaudited)
For the Three Months
Ended March 31
-------------------------
Millions of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net earnings ..................................................................................... $ 144 $ 124
Adjustments to reconcile net earnings to
net cash provided by operating activities
Loss on disposal of discontinued operations (before-tax) ................................... 71 --
Depreciation, depletion and amortization ................................................... 211 244
Dry hole costs ............................................................................. 16 14
Deferred income taxes ...................................................................... 10 9
Gain on sales of assets (before-tax) ....................................................... (10) (23)
Other ...................................................................................... (27) 18
Working capital and other changes related to operations
Accounts and notes receivable ........................................................... (87) (15)
Inventories ............................................................................. (33) (13)
Accounts payable ........................................................................ 105 (12)
Taxes payable ........................................................................... 48 39
Other ................................................................................... (114) (127)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ............................................ 334 258
Cash Flows from Investing Activities
Capital expenditures (includes dry hole costs) ................................................ (286) (222)
Proceeds from sale of discontinued operations ................................................. 1,390 --
Proceeds from sales of assets ................................................................. 16 51
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities .................................. 1,120 (171)
Cash Flows from Financing Activities
Long-term borrowings .......................................................................... 341 154
Reduction of long-term debt and capital lease obligations ..................................... (166) (2)
Dividends paid on preferred stock ............................................................. -- (9)
Dividends paid on common stock ................................................................ (50) (50)
Repurchases of common stock ................................................................... (46) --
Other ......................................................................................... (1) 12
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............................................... 78 105
Increase in cash and cash equivalents ............................................................ 1,532 192
Cash and cash equivalents at beginning of year ................................................... 217 94
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period ....................................................... $ 1,749 $ 286
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest (net of amount capitalized) ....................................................... $ 86 $ 106
Income taxes (net of refunds) .............................................................. $ 62 $ 42
See Notes to the Consolidated Financial Statements.
</TABLE>
3
<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. Such financial statements are
presented in accordance with the Securities and Exchange Commission's
(Commission) disclosure requirements for Form 10-Q.
These interim consolidated financial statements should be read in
conjunction with the Consolidated Financial Statements and the Notes
thereto filed with the Commission in Unocal Corporation's 1996 Annual
Report on Form 10-K.
Results for the three months ended March 31, 1997, are not necessarily
indicative of future financial results.
Certain items in the prior year financial statements have been reclassified
to conform to the 1997 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, are referred to as "Unocal" or "the
company".
(3) Discontinued Operations
On March 31, 1997, the company sold its West Coast refining, marketing and
transportation assets to Tosco Corporation (Tosco). The company received
proceeds of $1.4 billion in cash and 14,092,482 shares of Tosco common
stock valued at $397 million, based on the average of the high and low
market prices of the Tosco stock for the last 10 trading days prior to the
sale. The company may also receive up to $250 million in possible
participation payments, which are contingent upon increased gasoline
margins in the next seven years. With the exception of inventories, the
sale excluded substantially all other working capital.
The company has accounted for its investment in the Tosco stock in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Under
the provisions of SFAS No. 115, the stock was considered available for
sale. This required that the company's investment in the stock be reported
at fair value, with the unrealized gain (loss) excluded from earnings and
reflected as a separate component of stockholders' equity. At March 31,
1997, the cost, fair value and unrealized gain related to the Tosco stock
were $397 million, $403 million and $4 million (net of deferred taxes of $2
million), respectively. On May 8, 1997, the company sold the stock back to
Tosco for $394 million (net of expenses).
For the year ended December 31, 1996, the company recorded a $491 million
(net of a $301 million tax benefit) estimated loss on disposal of the
discontinued operations. The provision included estimated operating losses
of $30 million (net of a $18 million tax benefit) and $42 million (net of a
$25 million tax benefit) for the phase-out periods of November 17, 1996
through December 31, 1996 and January 1, 1997 through March 31, 1997,
respectively, and $419 million (net of a $258 tax benefit) for the
estimated loss on the sale of assets.
During the first quarter of 1997, the company recorded an additional loss
on disposal of $44 million (net of a $27 million tax benefit). The
additional provision was required primarily due to adjustments in closing
inventory amounts and higher than anticipated termination costs. Included
in the $44 million amount is a favorable adjustment of $6 million (net of
$4 million tax) related to a lower than expected first quarter operating
loss.
The Consolidated Earnings Statement reflects the results for the refining,
marketing and transportation operations as discontinued operations for the
quarters ended March 31, 1997 and 1996. At December 31, 1996, the assets
have been reclassified in the Consolidated Balance Sheet from their
historical classifications to separately reflect them as net assets of
discontinued operations. Cash flows related to discontinued operations have
not been segregated in the Consolidated Statement of Cash Flows for 1996.
Consequently, amounts on the Consolidated Earnings Statement may not agree
with certain captions on the Consolidated Statement of Cash Flows for 1996.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(4) Other Financial Information
Sales and operating revenues are principally derived from the sale of crude
oil, natural gas, natural gas liquids, geothermal steam, specialty minerals
and nitrogen-based agricultural products produced by the company. Sales and
operating revenues also include amounts received from the sale of purchased
crude oil, natural gas and products. Related purchase costs are classified
as expense in the crude oil and product purchases category of the
Consolidated Income Statement.
Capitalized interest totaled $5 million and $3 million for the first
quarters of 1997 and 1996, respectively.
(5) Income Taxes:
The components of earnings from continuing operations and the provision for
income taxes were as follows:
For Three Months
Ended March 31
---------------------
Millions of Dollars 1997 1996
- --------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes
United States ............................. $ 142 $ 84
Foreign ................................... 195 141
- --------------------------------------------------------------------------------
Total ............................... $ 337 $ 225
Income Taxes
Current
Federal .................................... $ 62 $ 28
State ...................................... 7 5
Foreign .................................... 103 56
- --------------------------------------------------------------------------------
Total ............................... 172 89
Deferred
Federal .................................... (20) (4)
State ...................................... (1) (1)
Foreign .................................... (2) 10
- --------------------------------------------------------------------------------
Total ............................... (23) 5
- --------------------------------------------------------------------------------
Total income taxes ................ $ 149 $ 94
- --------------------------------------------------------------------------------
Reconciliation of income taxes:
For Three Months
Ended March 31
---------------------
Millions of Dollars 1997 1996
- --------------------------------------------------------------------------------
Federal statutory rate ............................. 35% 35%
Earnings from continuing operations
before income taxes ............................. $ 337 $ 225
Tax at federal statutory rate ...................... $ 118 $ 79
Foreign taxes in excess of statutory rate .......... 33 18
Dividend exclusion ................................. (3) (4)
Other .............................................. 1 1
- --------------------------------------------------------------------------------
Total ................................. $ 149 $ 94
- --------------------------------------------------------------------------------
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(6) Inventories
March 31 December 31
---------------------
Millions of dollars 1997 1996
- --------------------------------------------------------------------------------
Crude oil and other petroleum products ............... $ 22 $ 12
Agricultural products ................................ 62 41
Minerals ............................................. 23 21
Supplies, merchandise and other ...................... 38 51
- --------------------------------------------------------------------------------
Total ......................................... $145 $125
- --------------------------------------------------------------------------------
(7) Long Term Debt and Credit Agreements:
During the first quarter of 1997, financing activities primarily consisted
of: increased borrowings through the issuance of commercial paper of $341
million, bringing the outstanding balance to $404 million; refinancing of
$115 million in medium-term notes; and prepayment of a $50 million
revolving credit facility. Commercial paper was used to refinance the
medium-term notes and prepay the credit facility. The company also
reclassified approximately $300 million from long-term debt to current
liabilities in keeping with its intent to ultimately reduce long-term debt
by approximately $800 million, primarily with the proceeds from the sale of
its West Coast refining, marketing and transportation assets.
(8) Financial Instruments
The fair values of the company's financial instruments at March 31, 1997
are described below:
The Deutsche Mark currency swap agreement had a notional value of $110
million and a fair value of approximately $45 million based on dealer
quotes.
The company had outstanding commodity futures contracts covering the sale
of 540 thousand barrels of crude oil with a notional amount of $12 million
and 3 billion cubic feet of natural gas with a notional amount of $6
million. The fair values of the contracts, based on quoted market prices,
were insignificant.
The estimated fair value of the company's long-term debt and capital lease
obligations was $3,291 million. The estimated fair value of the mandatorily
redeemable convertible preferred securities of the company's subsidiary
trust was $566 million.
(9) Accrued abandonment, restoration and environmental liabilities:
At March 31, 1997, the company had accrued $505 million for the estimated
future costs to abandon and remove wells and production facilities. The
total costs for abandonments are predominately accrued for on a
units-of-production basis and are estimated to be approximately $675
million. This estimate was derived in large part from abandonment cost
studies performed by an independent firm and is used to calculate the
amount to be amortized.
At March 31, 1997, the company's reserve for environmental remediation
obligations totaled $252 million, of which $73 million was included in
current liabilities. The reserve included estimated probable future costs
of $27 million for federal Superfund and comparable state-managed
multiparty disposal sites; $28 million for formerly-operated sites for
which the company has remediation obligations; $93 million for sites
related to businesses or operations that have been sold with contractual
remediation or indemnification obligations; $75 million for company-owned
or controlled sites where facilities have been closed or operations shut
down; and $29 million for sites owned and/or controlled by the company and
utilized in its ongoing operations.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(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 may 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 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, 1997, the company had accrued $252
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 $170 million.
Between August 22 and September 6, 1994, a chemical known as "Catacarb" was
released into the environment at the company's former 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, fifty-three 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. Fifty-one 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. The
company has reached agreement with plaintiffs to certify a mandatory
non-opt out punitive damages class. Plaintiffs have withdrawn their class
claims for personal injury and property damage. In early
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
November 1996, the trial court issued an order declining to certify a
medical monitoring class. The company has reached an agreement to settle
the lawsuits with the payment of an aggregate of $80 million, subject to
the execution by the parties of appropriate documentation, including full
releases by all of the plaintiffs, and approval of the settlement by the
court.
TAX MATTERS
In December 1994, the company received a Notice of Proposed Deficiency
(Notice) from the Internal Revenue Service (IRS) related to the years 1985
through 1987. In February 1995, the company filed a protest of the proposed
tax deficiency with the Appeals section of the IRS. Discussions with the
Appeals Officer are ongoing, but it is possible that the most substantial
issues raised in the Notice will proceed to litigation. In an effort to
resolve these issues without litigation, in October 1996, the company and
the IRS entered into an Agreement to Mediate. While the parties have
selected a mediator, no date for the mediation has been set.
The most significant issue raised in the Notice 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 second largest issue raised in the Notice 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 total amount of tax and interest that the company would be required to
pay if the IRS was ultimately to prevail on both of the issues described in
the two preceding paragraphs, after application of foreign tax credits and
overpayments related to other issues, and assuming a full disallowance of
the claim for refund discussed below, is estimated at $405 million as of
March 31, 1997.
During the first quarter of 1997, the IRS examination team completed its
review of a claim for refund recently filed by the company relating to its
1985 tax liability. If the company ultimately prevails in its claim for
refund, the liability for the issues described above would be eliminated
and the company would be entitled to a refund for overpayment of tax.
Although the IRS has not formally disallowed the claim, the company has
been informed that the IRS examination team believes the claim should be
disallowed. In April 1997, the IRS examination team sent the issue raised
by the claim to the IRS National Office for technical advice. The company
intends to vigorously defend the claim and dispute the proposed deficiency
and hopes to resolve these matters during 1997. Should that effort fail,
final resolution of these matters is likely to be several years away as
they are not yet before a court.
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 these matters 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
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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) Sale of Accounts Receivable
In December 1995, the company entered into an agreement to sell an
undivided interest in a pool of its trade receivables. As collections
reduced the amount of receivables included in the pool, the company sold
new receivables bringing the amounts sold up to the $200 million maximum
permitted by the agreement. This amount of sold receivables has remained at
the $200 million maximum level. Effective January 1, 1997, Financial
Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", disqualified the
continued treatment of this transaction as a sale. Thus, at March 31, 1997,
$200 million was reflected in the financial statements as receivables with
an offsetting credit to accounts payable. In April 1997, the company
repurchased this interest in the receivables.
(12) 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 1997 1996
- --------------------------------------------------------------------------------
Total revenues ........................................... $ 1,455 $ 1,201
Total costs and other deductions
(including income taxes) .............................. 1,259 1,069
- --------------------------------------------------------------------------------
Earnings from continuing operations ...................... 196 132
Discontinued operations
Loss from operations (net of a $4 million tax benefits) -- (7)
Loss on disposal (net of a $27 million tax benefits) .. (44) --
- --------------------------------------------------------------------------------
Net earnings ............................................. $ 152 $ 125
- --------------------------------------------------------------------------------
At At
March 31 December 31
---------------------------
Millions of dollars 1997 1996
- --------------------------------------------------------------------------------
Current assets ............................... $3,495 $3,228
Noncurrent assets ............................ 5,950 5,905
Current liabilities .......................... 1,986 1,622
Noncurrent liabilities ....................... 4,564 4,704
Shareholder's equity ......................... 2,895 2,807
- --------------------------------------------------------------------------------
9
<PAGE>
<TABLE>
<CAPTION>
OPERATING HIGHLIGHTS UNOCAL CORPORATION
(Unaudited)
For the Three Months
Ended March 31
--------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
NET DAILY PRODUCTION
Crude oil and condensate (thousand barrels daily)
United States
<S> <C> <C>
Spirit Energy 76 .................................................................. 48.3 52.2
Other (a) ......................................................................... 33.7 69.1
-------------------------
Total United States ............................................................. 82.0 121.3
International
Far East (b) ...................................................................... 93.2 80.9
Other ............................................................................. 26.7 28.4
-------------------------
Total International ............................................................. 119.9 109.3
Worldwide ............................................................................ 201.9 230.6
-------------------------
Natural gas (million cubic feet daily)
United States
Spirit Energy 76 .................................................................. 909.7 903.9
Other (a) ......................................................................... 155.9 205.9
-------------------------
Total United States ............................................................. 1,065.6 1,109.8
International
Far East (b) ...................................................................... 805.1 597.6
Other ............................................................................. 67.6 81.9
-------------------------
Total International ............................................................. 872.7 679.5
Worldwide ............................................................................ 1,938.3 1,789.3
-------------------------
Natural gas liquids (thousand barrels daily) (a) ........................................ 19.4 19.7
Geothermal (million kilowatt-hours daily) ............................................... 15.9 13.8
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Includes production from California upstream properties of:
Crude oil and condensate ............................................................... -- 30.2
Natural gas ............................................................................ -- 51.7
Natural gas liquids .................................................................... -- 0.5
(b) Includes host country share in Indonesia of:
Crude oil and condensate ............................................................... 30.0 29.8
Natural gas ............................................................................ 32.6 25.6
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
OPERATING HIGHLIGHTS (continued) UNOCAL CORPORATION
(Unaudited)
For the Three Months
Ended March 31
------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE SALES PRICES
Crude oil and condensate (per barrel)
United States
<S> <C> <C>
Spirit Energy 76 .............................................................. $22.52 $ 18.59
Other ......................................................................... 18.51 15.08
Total United States ......................................................... 20.88 16.55
International
Far East ...................................................................... $21.03 $ 17.86
Other ......................................................................... 20.07 16.93
Total International ......................................................... 20.75 17.52
Worldwide ........................................................................ $20.81 $ 16.93
- -----------------------------------------------------------------------------------------------------------------------------------
United States
Spirit Energy 76 .............................................................. $ 2.83 $ 2.56
Other ......................................................................... 1.35 1.78
Total United States ......................................................... 2.61 2.35
International
Far East ...................................................................... $ 2.40 $ 2.18
Other ......................................................................... 2.22 1.76
Total International ......................................................... 2.38 2.13
Worldwide ........................................................................ $ 2.51 $ 2.27
- -----------------------------------------------------------------------------------------------------------------------------------
AGRICULTURAL PRODUCTS PRODUCTION VOLUMES (thousand tons)
Ammonia ............................................................................. 391 351
Urea ................................................................................ 275 293
Other products ...................................................................... 177 163
Total ............................................................................ 843 807
- ------------------------------------------------------------------------------------------------------------------------------------
AGRICULTURAL PRODUCTS SALES VOLUMES (thousand tons)
Ammonia ............................................................................. 156 94
Urea ................................................................................ 210 245
Other products ...................................................................... 252 231
- ------------------------------------------------------------------------------------------------------------------------------------
Total ............................................................................ 618 570
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
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 1997 1996
- --------------------------------------------------------------------------------
Reported net earnings .................................... $ 144 $ 124
Special items:
Litigation ........................................... -- (4)
Environmental remediation provisions ................. (9) (6)
Asset sales .......................................... 7 14
Net loss on disposal of discontinued operations ...... (44) --
- --------------------------------------------------------------------------------
Total special items ................................... (46) 4
- --------------------------------------------------------------------------------
Adjusted net earnings .................................... $ 190 $ 120
- --------------------------------------------------------------------------------
The company's first quarter 1997 adjusted net earnings increased by 58 percent
over the same period last year, primarily due to higher average sales prices for
worldwide crude oil and natural gas and increased international natural gas and
crude oil production. Partially offsetting these positive factors were lower
United States crude oil and natural gas production and increased depreciation,
depletion and amortization costs.
EXPLORATION AND PRODUCTION
For the Three Months
Ended March 31
-----------------------
Millions of Dollars 1997 1996
- --------------------------------------------------------------------------------
Reported net earnings
United States
Spirit Energy 76 ........................... $100 $ 76
Other ...................................... 21 20
International ................................. 103 70
- --------------------------------------------------------------------------------
Total ...................................... 224 166
Special items:
Asset sales ................................. 3 6
- --------------------------------------------------------------------------------
Total special items ..................... 3 6
- --------------------------------------------------------------------------------
Adjusted net earnings ............................ $221 $160
- --------------------------------------------------------------------------------
The Exploration and Production business segment's adjusted net earnings for the
first three months of 1997 reflected higher average sales prices for worldwide
crude oil and natural gas and increased international crude oil and natural gas
production. Partially offsetting these positive factors were declining United
States crude oil and natural gas production and increased depreciation,
depletion and amortization costs, due to increased international production,
primarily in Thailand.
During the first quarters of 1997 and 1996, Exploration and Production sales and
operating revenues (including intercompany amounts) were $768 million and $679
million, respectively.
Compared with the first quarter of 1996, average sales prices for worldwide
crude oil increased by $3.88 per barrel, or 23 percent, and average sales prices
for worldwide natural gas increased by $.24 per thousand cubic feet, or 11
percent.
The company's international crude oil and natural gas production increased by 10
percent and 28 percent, respectively, over the same period a year ago. The
increases were primarily due to activities in Southeast Asia. In Thailand, crude
oil production increased by 37 percent and natural gas production increased by
42 percent, following the start-up of a new pipeline system. In Indonesia,
natural gas production (including host country share)
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
increased by 14 percent, primarily from the Sepinggan field.
GEOTHERMAL OPERATIONS
First quarter 1997 net earnings were $6 million compared with $5 million in
1996. Improved 1997 earnings were the result of a 15 percent increase in steam
production and lower depreciation expense due to the sale of geothermal assets
in 1996. Partially offsetting these positive factors were decreased revenues in
the Philippines due to the deferral of 60 percent of the revenues and the
related earnings pending the resolution of a dispute regarding the extension of
the company's service contract.
DIVERSIFIED BUSINESS GROUP
For the Three Months
Ended March 31
-------------------
Millions of Dollars 1997 1996
- --------------------------------------------------------------------------------
Reported net earnings
Agricultural Products ......................... $20 $16
Carbon and Minerals ........................... 10 18
Pipelines ..................................... 14 23
Other ......................................... 1 1
- --------------------------------------------------------------------------------
Total ......................................... 45 58
Special items:
Pipelines (Asset sales) ....................... -- 7
Total special items ........................... -- 7
- --------------------------------------------------------------------------------
Adjusted net earnings ............................ $45 $51
- --------------------------------------------------------------------------------
The Diversified Business Group's decreased adjusted net earnings were primarily
the result of lower lanthanides earnings, increased expenses due to the start-up
of the Questa mine and lower urea sales prices. Partially offsetting these
negative factors were increased ammonia sales prices and increased production
and sales volumes for agricultural products.
CORPORATE AND UNALLOCATED
For the Three Months
Ended March 31
--------------------
Millions of Dollars 1997 1996
- --------------------------------------------------------------------------------
Reported net earnings effect
Administrative and general expense .................. $(13) $(18)
Net interest expense ................................ (42) (50)
Environmental and litigation expense ................ (11) (14)
New Ventures ........................................ (7) (2)
Other ............................................... (14) (14)
- --------------------------------------------------------------------------------
Total ............................................... (87) (98)
Special items:
Environmental and litigation provisions ........... (9) (10)
Asset sales (Other) ............................... 4 1
- --------------------------------------------------------------------------------
Total special items ................................. (5) (9)
- --------------------------------------------------------------------------------
Adjusted net earning effect ............................ $(82) $(89)
- --------------------------------------------------------------------------------
Compared to the first quarter of 1996, net interest expense decreased by 16
percent as a result of paying down debt. Asset sales for 1997 consisted
primarily of the sale of a company airplane.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
DISCONTINUED OPERATIONS
On March 31, 1997, the company completed the sale of its West Coast refining,
marketing and transportation assets to Tosco Corporation. The company received
$1.4 billion in cash and shares of Tosco common stock initially valued at $397
million. On May 8, 1997, the company sold the common stock back to Tosco for
$394 million (net of associated expenses). The proceeds from the sale will be
used to invest in new and existing, high-growth projects, reduce debt by
approximately $800 million and continue repurchases of up to $400 million of
Unocal's common stock. See Note 3 to the Consolidated Financial Statements for
additional information.
FINANCIAL CONDITION AND CAPITAL EXPENDITURES
For the first three months of 1997, cash flow from operating activities,
including working capital changes, was $334 million, compared with $258 million
in 1996. This increase was principally due to higher commodity prices.
Proceeds from asset sales were $1,406 million for the first three months of
1997. The total principally included: $1,390 million from the sale of the West
Coast refining, marketing and transportation assets, $6 million from the sale of
one of the company's airplanes and $10 million from the sale of miscellaneous
assets including various oil and gas properties.
Consolidated working capital at March 31, 1997 was $1,483 million, a decrease of
$123 million from the year-end 1996 level of $1,606 million.
The company's total debt was $3,220 million at March 31, 1997, an increase of
$162 million from the year-end 1996 level of $3,058 million. The debt-to-total
capitalization ratio increased to 53 percent from 52 percent at year-end 1996.
The company intends to reduce long-term debt by approximately $800 million with
a portion of the proceeds from the sale of its West Coast refining, marketing
and transportation assets. The company's long-term debt ratings have been
upgraded as a result of its exit from the refining and marketing sector and
because of the company's intent to reduce long-term debt. Duff & Phelps Credit
Rating Co., Moody's Investors Service, Inc. and Standard & Poor's have upgraded
the company's senior unsecured debt rating to A-, Baa1 and BBB+, respectively.
Duff & Phelps also raised the company's commercial paper rating to D-1-. See
Notes 7 and 8 to the Consolidated Financial Statements for related information.
During the first quarter of 1997, the company initiated its stock buy-back
program by repurchasing approximately 1.2 million shares of Unocal common stock
for a total cost of $46 million. The common stock is being repurchased through
open market or privately negotiated transactions at the discretion of
management, depending on the financial and market conditions or as otherwise
permitted under applicable rules. The company's board of directors has
authorized the repurchase of up to $400 million of the common stock. If the
entire authorized amount is repurchased, it would represent approximately four
percent of the company's outstanding 250 million shares of common stock, based
on the current market price. The company intends to use a portion of the net
proceeds from the sale of its West Coast refining, marketing and transportation
assets to fund the balance of the repurchase program.
Capital expenditures for the first three months of 1997 totaled $286 million, an
increase of $64 million from the 1996 level of $222 million, primarily due to
increased international oil and gas activity. Estimated expenditures for the
full year 1997 are expected to reach $1.4 billion.
ENVIRONMENTAL MATTERS
At March 31, 1997, the company's reserves for environmental remediation
obligations totaled $252 million, of which $73 million was included in current
liabilities. During the first quarter, cash payments of $12 million were applied
against the reserve and an additional $14 million in liabilities was recorded to
the reserve account, primarily due to the company's adoption of the provisions
of Statement of Position (SOP) 96-1, "Environmental Remediation
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Liabilities," recently issued by the American Institute of Certified Public
Accountants. Although the company's existing accounting policies were
substantially consistent with most of the provisions specified by SOP 96-1, some
modifications to the policies were made regarding cost measurement. The company
also estimates that it could incur additional remediation costs aggregating
approximately $170 million as discussed in Note 10 to the Consolidated Financial
Statements. The company's total environmental reserve amount is grouped into the
following five categories:
March 31
Millions of Dollars 1997
- --------------------------------------------------------------------------------
Superfund and similar sites ................................. $ 27
Former company-operated sites ............................... 28
Company facilities sold with
retained liabilities ...................................... 93
Inactive or closed company facilities ....................... 75
Active company facilities ................................... 29
- --------------------------------------------------------------------------------
Total reserves ........................................... $252
- --------------------------------------------------------------------------------
At year-end 1996, Unocal had received notification from the U.S. Environmental
Protection Agency that the company may be a potentially responsible party (PRP)
at 39 sites and may share certain liabilities at these sites. In addition,
various state agencies and private parties had identified 37 other similar PRP
sites that may require investigation and remediation. During the first quarter
of 1997, 5 sites were added and 4 sites were resolved resulting in a total of 77
sites. Of the total, the company has denied responsibility at 5 sites and at
another 8 sites the company's liability, although unquantified, appears to be de
minimis. The total also includes 23 sites which are under investigation or in
litigation, for which the company's potential liability is not presently
determinable. At another 2 sites, the company has made settlement payments and
is in the final process of resolving its liabilities. Of the remaining 39 sites,
where probable costs can be estimated, reserves of $27 million have been
established for future remediation and settlement costs. These 77 sites exclude
61 sites where the company's liability has been settled, or where the company
has both no evidence of liability and there has been no further indication of
liability by government agencies or third parties for at least a 12-month
period.
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 just 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. The solvency of other responsible parties and disputes regarding
responsibilities may also impact the company's ultimate costs.
The company is subject to a number of 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.
Corrective investigations and actions pursuant to RCRA are being performed at
the company's Beaumont, Texas, facility, its closed Colorado shale oil project,
and its 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.
On May 14, 1997, a draft environmental impact report (EIR) prepared by a
consultant to the County of San Luis Obispo, California, was issued for use by
the County, the Regional Water Quality Control Board--Central Coast Region and
others in evaluating the company's previously proposed remedial action plan, as
well as alternative courses of action, for remediation of the underground
petroleum hydrocarbon contamination at Avila Beach, California, resulting from
former company operations. Certain of the alternatives addressed in the draft
EIR would, if
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
implemented, entail remediation costs significantly higher than the costs for
the company's plan. The company is currently reviewing the draft EIR and the
potential financial implications to the company of the various alternatives
addressed therein. A final EIR is not expected to be issued until late 1997.
See Notes 9 and 10 for related information.
OTHER MATTERS
On May 1, 1997, the company and PDV America, a unit of Petroleos de Venezuela,
S. A., completed the restructuring of The UNO-VEN Company (UNO-VEN), a Midwest
refining and marketing partnership. In a separate transaction, the company sold
to PDV Midwest Refining, L.L.C. (PDV Midwest), an affiliate of PDV America, the
petrochemical business previously conducted by Unocal Hydrocarbon Sales, an
Illinois-based bulk distributor of solvents.
In restructuring the UNO-VEN partnership, PDV Midwest received substantially all
of the refining and marketing assets of UNO-VEN and assumed certain liabilities
associated with those assets. The transaction also included the transfer of a 25
percent interest in the Needle Coker Company from the partnership to PDV
Midwest.
Company affiliates now own 100 percent of the restructured partnership, renamed
Midwest Carbon Company, which retains $250 million for reinvestment in new
projects and continues to hold and operate other petroleum coke business
activities that were not part of the restructuring.
FUTURE ACCOUNTING CHANGE
The FASB recently issued SFAS No. 128, "Earnings Per Share," which establishes
standards for computing and presenting earnings per share (EPS). This statement
simplifies the previous standards for computing EPS and makes them comparable to
international EPS standards. The Statement is effective for financial statements
issued for periods ending after December 15, 1997 and requires restatement of
all prior-period EPS data presented. The company will adopt the new accounting
standard effective December 31, 1997. The effect of adoption of the standard and
restatement of all prior-period EPS data is not expected to be material.
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.
During the first quarter of 1997, the Clinton Administration imposed sanctions
against new investments in Myanmar. The company will review the order once it is
made available, however, the company does not expect the Administration's
directive to impact its current involvement in the Yadana natural gas project.
The company remains focused on investment in Central and Southeast Asia and the
Administration's action does not change the company's long-term strategic
direction of developing major energy-related projects throughout this region.
See Paragraph (5) of Item 1. Legal Proceedings in Part II for recent
developments in pending litigation regarding the company's involvement in
Myanmar.
On April 2, 1997, the company signed agreements authorizing construction of the
first independent power project in Thailand. The 700-megawatt power plant
project is being developed by Independent Power (Thailand) Company Limited, a
joint venture in which the company has a 24 percent interest. The $350 million
power plant is the first project being developed under the Electrical Generating
Authority of Thailand's independent power producer
16
<PAGE>
program. The project has been financed, non-recourse to the company, with loans
provided by Thai and international financial institutions covering 80 percent of
the project costs. The power plant will be built under a fixed-price, turnkey
contract which includes completion and performance guarantees. The power plant
is expected to come on-line in 1999.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is incorporated by reference the information previously reported in Item 3
of Unocal's Annual Report on Form 10-K for the year ended December 31, 1996
(1996 Form 10-K), 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) With reference to the "Catacarb" matters described in Paragraph (7) of Item
3 of the 1996 Form 10-K:
(a) The company has reached an agreement to settle the civil lawsuits
with the payment of an aggregate of $80 million, subject to the
execution by the parties of appropriate documentation, including
full releases by all of the plaintiffs, and approval of the
settlement by the court.
(b) The EPA Administrative Complaint has been settled for $375,000.
(2) With reference to the Citizens for a Better Environment action described
----------------------------------
in Paragraph (8) of Item 3 of the 1996 Form 10-K, on April 16, 1997, the
District Court granted the plaintiffs' motion for a partial summary
judgment against the company as to liability for its violations of the
selenium limitations in its National Pollution Discharge Elimination
System permit for its former San Francisco refinery. The case will
continue with respect to remedies, including civil penalties, injunctive
relief and attorneys' fees, which may be sought by the plaintiffs.
(3) With reference to the matters arising from past underground petroleum
pipeline leaks at Avila Beach, California, described in Paragraph (9) of
Item 3 of the 1996 Form 10-K, a total of 11 civil lawsuits, filed in the
California Superior Court for San Luis Obispo County, have been served on
the company. The complaints generally state claims for nuisance, trespass
and diminution in property values, and seek compensatory damages and, in
one case, injunctive relief.
(4) With reference to the allegations by the Illinois Attorney General of the
company's failure to comply with the State's environmental statue and air
pollution regulations at its carbon plant in Lemont, Illinois, described
in Paragraph (12) of Item 3 of the 1996 Form 10-K, on April 15, 1997, the
Attorney General filed suit against the company for alleged violations of
particulate emissions at the plant, seeking civil penalties and injunctive
relief. The Attorney General has indicated that the state wishes to
continue negotiations with the company to settle any concerns that the
U.S. Environmental Protection Agency may have on the matter.
(5) With reference to the litigation involving the Yadana gas project in
Myanmar, described in Paragraph (13) of Item 3 of the 1996 Form 10-K,
several developments have occurred that may affect the course of the
litigation.
In John Doe I, et al. v. Unocal Corp., et al., U.S. District Court for the
-------------------------------------------- Central District of
California, Civil No. 96-6959-RAP, the Court entered orders on March 26,
1997 and April 25, 1997, granting in part and denying in part the company's
motion to dismiss the action. The Court held, among other things, that the
plaintiffs had alleged sufficient facts to state a claim upon which relief
against the company could be granted, if proven at trial. The Court further
held that the State Law and Order Restoration Council (SLORC) and the
Myanma Oil and Gas Enterprise were not properly named as defendants because
they were immune from suit pursuant to the Foreign Sovereign Immunities
Act.
The plaintiffs filed an amended complaint, and on April 28, 1997, the
company filed its answer. In the answer, the company denied that it was a
party to a joint venture partnership for the Yadana gas pipeline
construction, as alleged by the plaintiffs, and stated that (1) the entity
that is constructing the pipeline is a corporation and not a joint venture
or partnership, and (2) the company's only legal connection to the pipeline
corporation is that one of its indirect wholly-owned subsidiaries is a
shareholder in that corporation. Based upon these and other facts, the
company denied that it was either properly named as a party or subject to
joint venture, partnership, or other liability with respect to the Yadana
pipeline.
17
<PAGE>
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
The plaintiffs also have filed a motion for a preliminary injunction. The
motion seeks to enjoin the company from making payments to SLORC and from
participating in the Yadana natural gas project until trial. The company
has submitted papers in opposition to the motion, which is scheduled to be
heard by the Court on June 9, 1997. In addition, the plaintiffs' motion for
class certification is scheduled to be heard later in the year.
In the other action referenced in Paragraph (13) of Item 3 of the 1996 Form
10-K, National Coalition Government of the Union of Burma, et al. v.
--------------------------------------------------------------------
Unocal, Inc., et al., U.S. District Court for the Central District of
----------------------
California, Civil No. 96-6112-RAP, the company filed a motion to dismiss
the case on several grounds. That motion, the hearing on which was held on
April 14, 1997, remains pending before the Court.
With respect to both of the above actions, the Court has solicited the
views of the United States Department of State as to whether the Court
should continue to entertain the actions in light of the foreign policy
issues involved.
(6) Over the past several years, the company's former San Francisco refinery
received a number of Violation Notices (VN's) from the Bay Area Air Quality
Management District (District) for alleged violations of various California
laws and District regulations relating to emissions, permit exceedences,
and public nuisances. In connection with the sale of the refinery on March
31, 1997, the company is endeavoring to reach a global settlement of all of
these claims. While none of the individual VN's involve penalties exceeding
$100,000, it is likely that the aggregate settlement will exceed that
amount.
(7) On June 7, 1996, the case of Aguilar, et al. v. Atlantic Richfield, et
---------------------------------------------
al.(Civil No. 00700810) was filed in the California Superior Court for San
---
Diego County against nine California oil companies, including the company,
which refine and market Phase 2 reformulated gasoline mandated by the
California Air Resources Board (CARB). The plaintiffs allege that the
defendants conspired to limit the supply and increase the price of CARB
gasoline in violation of California antitrust and unfair competition laws
and seek treble damages and injunctive relief on behalf of all purchasers
of CARB gasoline at retail since March 1, 1966. On May 1, 1997, the court
certified the case as a class action. Trial on the merits of the case is
tentatively scheduled for late 1997.
Item 2. Changes In Securities
During the first quarter of 1997, the company awarded 3,896 restricted stock
units to certain nonemployee directors pursuant to the terms of the company's
Directors' Restricted Stock Plan. The units were not registered under the
Securities Act of 1933 (the Act) in reliance upon the exemption contained in
Section 4(2) of the Act for transactions by an issuer not involving any public
offering. The units were awarded in consideration of the prior election by each
of the nonemployee directors to defer all or a portion of his or her cash fees
and upon the credit of dividend equivalents upon units previously issued. The
units will be paid out in an equal number of shares of Unocal common stock at
the end of a restriction period elected by each director.
On March 19, 1997, Unocal issued one share of its common stock upon the
conversion of one 6-1/4 trust convertible preferred security of Unocal Capital
Trust. The common share was not registered under the Act in reliance upon the
exemption contained in Section 3(a)9 of the Act for a security exchanged by the
issuer with its existing security-holders exclusively where no commission or
other remuneration is paid or given directly or indirectly for soliciting such
exchange.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The Exhibit Index on page 22 of this report lists the
exhibits that are filed as part of this report.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(b) Reports on Form 8-K
During the first quarter of 1997:
1. Current Report on Form 8-K dated December 16, 1996 and filed
January 3, 1997, for the purpose of reporting, under Item 5,
the signing of the definitive agreement by the company for
the sale its West Coast refining, marketing and
transportation assets to Tosco Corporation and filling, as
exhibits under Item 7, certain agreements relating to such
sale.
2. Current Report on Form 8-K dated and filed January 23, 1997,
for the purpose of reporting, under Item 5, the company's
fourth quarter and full year 1996 earnings and related
information.
3. Current Report on Form 8-K dated February 3, 1997 and filed
February 7, 1997, for the purpose of reporting, under Item
5, the amendment of the company's bylaws , and filing, as an
exhibit under Item 7, a copy of such bylaws, as so amended.
4. Current Report on Form 8-K dated February 13, 1997 and filed
February 14, 1997, for the purpose of reporting, under Item
5, the company's crude oil and natural gas reserve data.
During the second quarter of 1997 to the date hereof:
1. Current Report on Form 8-K dated April 1, 1997 and filed
April 10, 1997, for the purpose of reporting, under Item 2,
the completion of the sale of the company's West Coast
refining, marketing and transportation assets to Tosco
Corporation, and filing, as exhibits under Item 7, certain
agreements relating to such sale.
2. Current Report on Form 8-K dated April 11, 1997 and filed
April 14, 1997, for the purpose of reporting, under Item 5,
the signing of a definitive agreement for the restructuring
of The UNO-VEN Company.
3. Current Report on Form 8-K dated April 22, 1997 and filed
April 23, 1997, for the purpose of reporting, under Item 5,
Unocal's response to the Clinton Administration's Myanmar
sanctions.
4. Current Report on Form 8-K dated and filed April 24, 1997,
for the purpose of reporting, under Item 5, Unocal's first
quarter 1997 earnings and related information.
20
<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, 1997 By: /s/ CHARLES S. MCDOWELL
Charles S. McDowell
Vice President and Comptroller
(Duly Authorized Officer and
Principal Accounting Officer)
21
<PAGE>
EXHIBIT INDEX
2.1 Sale and Purchase Agreement for 76 Products Company, dated December
14, 1996, between Union Oil Company of California and Tosco
Corporation (without attachments or schedules) (incorporated by
reference to Exhibit 2.1 to Unocal's Current Report on Form 8-K dated
December 16, 1996 and filed January 3, 1997, File No. 1-8483).
2.2 Stock Purchase and Shareholder Agreement, dated as of January 15,
1997, by and between Tosco Corporation and Union Oil Company of
California, together with form of Supplement No. 1 thereto
(incorporated by reference to Exhibit 2.2 to Unocal's Current Report
on Form 8-K dated December 16, 1996 and filed January 3, 1997, File
No. 1-8483).
2.3 Amendment No. 1 and Supplement, dated as of March 31, 1997, to Stock
Purchase and Shareholder Agreement, dated as of January 15, 1997, by
and between Tosco Corporation and Union Oil Company of California
(incorporated by reference to Exhibit C to Unocal's and Union Oil
Company of California's statement on Schedule 13D relating to Tosco
Corporation, dated and filed April 10, 1997, File No. 1-7910).
2.4 Environmental Agreement, dated as of March 31, 1997, by and between
Union Oil Company of California and Tosco Corporation (without
schedules) (incorporated by reference to Exhibit 2.3 to Unocal's
Current Report on Form 8-K dated December 16, 1996 and filed January
3, 1997, File No. 1-8483).
11 Statement regarding computation of earnings per common share for the
three months ended March 31, 1997.
12.1 Statement regarding computation of ratio of earnings to fixed charges
of Unocal for three months ended March 31, 1997 and 1996.
12.2 Statement regarding computation of ratio of earnings to combined fixed
charges and preferred stock dividends of Unocal for the three months
ended March 31, 1997 and 1996.
12.3 Statement regarding computation of ratio of earnings to fixed charges
of Union Oil Company of California for the three months ended March
31, 1997 and 1996.
27 Financial data schedule for the period ended March 31, 1997 (included
only in the copy of this report filed electronically with the
Commission).
22
EXHIBIT 11
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For Three Months
Ended March 31
------------------------------------------
Dollars and shares in thousands, except per share amounts 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
Per Share Assuming No Dilution (a)
<S> <C> <C>
Earnings from continuing operations .................................................. $ 187,670 $ 131,261
Preferred stock dividend ............................................................. -- (8,969)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
applicable to common stock ..................................................... 187,670 122,292
Weighted average common stock outstanding ............................................ 250,510 247,672
per common share ............................................................ $ 0.75 $ 0.50
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations
Per Share Assuming No Dilution (a)
Loss applicable to common stock ...................................................... $ (44,243) $ (7,000)
Weighted average common stock outstanding ............................................ 250,510 247,672
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations
per common share ............................................................ $ (0.18) $ (0.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share ............................................ $ 0.57 $ 0.47
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
Per Share Assuming Full Dilution
Earnings from continuing operations .................................................. $ 187,670 $ 131,261
Distribution on convertible preferred securities (net of tax) ........................ 5,953 --
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
applicable to common stock ...................................................... 193,623 131,261
Weighted average common stock outstanding ............................................ 250,510 247,672
Dilutive common stock equivalents .................................................... 2,425 1,656
Conversion of preferred stock ........................................................ -- 16,667
Conversion of preferred securities ................................................... 12,263 --
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common stock and
stock equivalents outstanding .................................................... 265,198 265,995
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
per common share ........................................................... $ 0.73 $ 0.49
Loss from discontinued operations
Per Share Assuming Full Dilution
Loss applicable to common stock ...................................................... $ (44,243) $ (7,000)
Weighted average common stock outstanding ............................................ 250,510 247,672
Dilutive common stock equivalents .................................................... 2,425 1,656
Conversion of preferred stock ........................................................ -- 16,667
Conversion of preferred securities (b) ............................................... 12,263 --
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common stock and
stock equivalents outstanding .................................................... 265,198 265,995
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations
per common share ........................................................... $ (0.17) $ (0.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share ............................................... $ 0.56 $ 0.46
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The dilutive effect of common stock equivalents is less than 3 percent.
(b) The effect of assumed conversion of preferred securities is antidilutive.
</TABLE>
EXHIBIT 12.1
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For Three Months
Ended March 31
-----------------
Millions of dollars 1997 1996
- --------------------------------------------------------------------------------
Earnings from continuing operations ........................ $188 $131
Provision for income taxes ................................. 149 94
- --------------------------------------------------------------------------------
Earnings subtotal ................................. 337 225
Fixed charges included in earnings:
Interest expense ........................................ 61 78
Distribution on convertible preferred securities ........ 8 --
Interest portion of rentals ............................. 7 10
- --------------------------------------------------------------------------------
Fixed charges subtotal ............................ 76 88
Earnings from continuing operations
available before fixed charges .......................... $413 $313
- --------------------------------------------------------------------------------
Fixed charges:
Fixed charges included in earnings ...................... 76 88
Capitalized interest .................................... 5 3
- --------------------------------------------------------------------------------
Total fixed charges ............................... $ 81 $ 91
- --------------------------------------------------------------------------------
Ratio of earnings from continuing operations
to fixed charges ........................................ 5.1 3.4
- --------------------------------------------------------------------------------
EXHIBIT 12.2
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
For Three Months
Ended March 31
-----------------
Millions of dollars 1997 1996
- --------------------------------------------------------------------------------
Earnings from continuing operations .......................... $188 $131
Provision for income taxes ................................... 149 94
- --------------------------------------------------------------------------------
Earnings subtotal ................................... 337 225
Fixed charges included in earnings:
Interest expense .......................................... 61 78
Distribution on convertible preferred securities .......... 8 --
Interest portion of rentals ............................... 7 10
- --------------------------------------------------------------------------------
Fixed charges subtotal .............................. 76 88
Earnings from continuing operations available before
fixed charges and preferred stock dividends ............... $413 $313
- --------------------------------------------------------------------------------
Fixed charges:
Fixed charges included in earnings ........................ 76 88
Capitalized interest ...................................... 5 3
Preferred stock dividends (before-tax basis) ................. -- 15
- --------------------------------------------------------------------------------
Total fixed charges and preferred stock dividends ... $ 81 $106
- --------------------------------------------------------------------------------
Ratio of earnings from continuing operations to combined
fixed charges and preferred stock dividends ............... 5.1 3.0
- --------------------------------------------------------------------------------
EXHIBIT 12.3
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For Three Months
Ended March 31
--------------------
Millions of dollars 1997 1996
- --------------------------------------------------------------------------------
Earnings from continuing operations ...................... $196 $132
Provision for income taxes ............................... 149 94
- --------------------------------------------------------------------------------
Earnings subtotal .................................. 345 226
Fixed charges included in earnings:
Interest expense ...................................... 61 78
Interest portion of rentals ........................... 7 10
- --------------------------------------------------------------------------------
Fixed charges subtotal ............................. 68 88
Earnings from continuing operations
available before fixed charges ........................ $413 $314
- --------------------------------------------------------------------------------
Fixed charges:
Fixed charges included in earnings .................... 68 88
Capitalized interest .................................. 5 3
- --------------------------------------------------------------------------------
Total fixed charges ................................ $ 73 $ 91
- --------------------------------------------------------------------------------
Ratio of earnings from continuing operations
to fixed charges ..................................... 5.7 3.5
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,749
<SECURITIES> 403
<RECEIVABLES> 1,111
<ALLOWANCES> 0
<INVENTORY> 145
<CURRENT-ASSETS> 3,496
<PP&E> 14,249
<DEPRECIATION> (9,672)
<TOTAL-ASSETS> 9,430
<CURRENT-LIABILITIES> 2,013
<BONDS> 2,814
0
0
<COMMON> 251
<OTHER-SE> 2,160
<TOTAL-LIABILITY-AND-EQUITY> 9,430
<SALES> 1,408
<TOTAL-REVENUES> 1,456
<CGS> 747
<TOTAL-COSTS> 1,119
<OTHER-EXPENSES> 372
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 337
<INCOME-TAX> 149
<INCOME-CONTINUING> 188
<DISCONTINUED> (44)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 144
<EPS-PRIMARY> .57
<EPS-DILUTED> 0
</TABLE>
