3rd Quarter 1999
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 September 30, 1999
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 September 30,
1999: 242,417,532
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED EARNINGS UNOCAL CORPORATION
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------- -----------------------
Millions of dollars except per share amounts 1999 1998 1999 1998
- ------------------------------------------------------------------------ ----------------------- -----------------------
Revenues
<S> .................................................................... <C> <C> <C> <C>
Sales and operating revenues ........................................... $ 1,546 $ 1,286 $ 4,230 $ 3,683
Interest, dividends and miscellaneous income ........................... 16 12 72 74
Equity in earnings of affiliated companies ............................. 24 23 72 75
Gain/(loss) on sales of assets ......................................... 2 73 -- 166
----------------------- -----------------------
Total revenues ................................................... 1,588 1,394 4,374 3,998
Costs and other deductions
Crude oil, natural gas and product purchases ........................... 891 604 2,329 1,535
Operating expense ...................................................... 270 313 807 993
Selling, administrative and general expense ............................ 34 34 118 73
Depreciation, depletion and amortization ............................... 205 186 588 566
Dry hole costs ......................................................... 33 58 107 150
Exploration expense .................................................... 44 53 117 139
Interest expense ....................................................... 52 48 145 131
Property and other operating taxes ..................................... 13 13 40 44
Distributions on convertible preferred
securities of subsidiary trust ...................................... 8 8 24 24
Minority interests ..................................................... 4 2 8 7
----------------------- -----------------------
Total costs and other deductions ................................. 1,554 1,319 4,283 3,662
----------------------- -----------------------
Earnings (loss) from operations before income taxes .................... 34 75 91 336
Income taxes ........................................................... 10 39 51 177
----------------------- -----------------------
Net earnings (loss) .............................................. $ 24 $ 36 $ 40 $ 159
======================= =======================
Basic earnings (loss) per share of common stock (a) .................... $ 0.10 $ 0.15 $ 0.17 $ 0.66
Diluted earnings (loss) per share of common stock (b) .................. $ 0.10 $ 0.15 $ 0.17 $ 0.66
Cash dividends declared per share of common stock ...................... $ 0.20 $ 0.20 $ 0.60 $ 0.60
<FN>
(a) Basic weighted average shares outstanding (in thousands) ......... 242,404 241,362 241,905 241,621
(b) Diluted weighted average shares outstanding (in thousands) ........ 244,022 242,535 243,050 242,916
</FN>
See notes to the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET UNOCAL CORPORATION
September 30 December 31
--------------- ---------------
Millions of dollars 1999(a) 1998
- ------------------------------------------------------------------------ --------------- ---------------
Assets
Current assets
<S> .................................................................... <C> <C>
Cash and cash equivalents ........................................... $ 209 $ 238
Accounts and notes receivable ....................................... 798 807
Inventories ......................................................... 197 179
Deferred income taxes ............................................... 130 142
Other current assets ................................................ 26 22
--------------- ---------------
Total current assets ............................................. 1,360 1,388
Investments and long-term receivables .................................. 1,269 1,143
Properties (b) ......................................................... 5,868 5,276
Deferred income taxes .................................................. 71 23
Other assets ........................................................... 120 122
--------------- ---------------
Total assets ..................................................... $ 8,688 $ 7,952
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable .................................................... $ 899 $ 709
Taxes payable ....................................................... 128 260
Interest payable .................................................... 46 52
Current portion of environmental liabilities ........................ 145 142
Other current liabilities ........................................... 128 213
--------------- ---------------
Total current liabilities ........................................ 1,346 1,376
Long-term debt ......................................................... 2,834 2,558
Deferred income taxes .................................................. 268 132
Accrued abandonment, restoration and environmental liabilities ......... 566 622
Other deferred credits and liabilities ................................. 599 514
Minority interests ..................................................... 421 26
Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely parent debentures ... 522 522
Common stock ($1 par value) ............................................ 253 252
Shares authorized: 750,000,000 (c)
Capital in excess of par value ......................................... 492 460
Unearned portion of restricted stock issued ............................ (22) (24)
Retained earnings ...................................................... 1,854 1,959
Accumulated other comprehensive income (loss) .......................... (34) (34)
Treasury stock - at cost (d) .......................................... (411) (411)
--------------- ---------------
Total stockholders' equity ....................................... 2,132 2,202
--------------- ---------------
Total liabilities and stockholders' equity .................... $ 8,688 $ 7,952
=============== ===============
<FN>
(a) Unaudited
(b) Net of accumulated depreciation ................................... $ 10,395 $ 10,193
(c) Number of shares outstanding (in thousands) ....................... 242,419 241,378
(d) Number of shares (in thousands) ................................... 10,623 10,623
</FN>
See notes to the consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED CASH FLOWS UNOCAL CORPORATION
(UNAUDITED)
For the Nine Months
Ended September 30
-------------------------------------
Millions of dollars 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
<S> .................................................................... <C> <C>
Net earnings (loss) .................................................... $ 40 $ 159
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation, depletion and amortization ......................... 588 566
Dry hole costs ................................................... 107 150
Deferred income taxes ............................................ (54) (34)
(Gain) loss on sales of assets (before-tax) ...................... -- (166)
Other ............................................................ (54) 18
Working capital and other changes related to operations
Accounts and notes receivable ................................. 12 96
Inventories ................................................... (18) 18
Accounts payable .............................................. 92 (10)
Taxes payable ................................................. (132) 50
Other ......................................................... (64) (136)
-------------------------------------
Net cash provided by (used in) operating activities ........ 517 711
Cash Flows from Investing Activities
Capital expenditures (includes dry hole costs) ...................... (761) (1,248)
Acquisition of Northrock Resources Ltd. ............................. (184) --
Proceeds from sales of assets ....................................... 163 299
-------------------------------------
Net cash provided by (used in) investing activities ........ (782) (949)
Cash Flows from Financing Activities
Long-term borrowings ................................................ 833 666
Reduction of long-term debt ......................................... (708) (381)
Dividends paid on common stock ...................................... (145) (145)
Repurchases of common stock ......................................... -- (48)
Minority interests .................................................. 234 (9)
Other ............................................................... 22 --
-------------------------------------
Net cash provided by (used in) financing activities ........... 236 83
Increase (decrease) in cash and cash equivalents ....................... (29) (155)
Cash and cash equivalents at beginning of year ......................... 238 338
-------------------------------------
Cash and cash equivalents at end of period ............................. $ 209 $ 183
=====================================
<FN>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized).............................. $ 159 $ 148
Income taxes (net of refunds)..................................... $ 218 $ 166
</FN>
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 1998 Annual
Report on Form 10-K.
Results for the nine months ended September 30, 1999, are not necessarily
indicative of future financial results.
Certain items in the prior year financial statements have been reclassified
to conform to the 1999 presentation.
(2) For the purpose of this report, Unocal Corporation (Unocal) and its
consolidated subsidiaries, including Union Oil Company of California (Union
Oil), are referred to as the company.
The consolidated financial statements of the company include the accounts
of subsidiaries in which a controlling interest is held. Investments in
affiliates without a controlling interest are accounted for by the equity
method. Under the equity method, the investments are stated at cost plus
the company's equity in undistributed earnings and losses after
acquisition. Income taxes estimated to be payable when earnings are
distributed are included in deferred taxes.
(3) Other Financial Information
During the third quarters of 1999 and 1998, approximately 51 percent and 40
percent, respectively, of total sales and operating revenues were
attributed to the resale of crude oil, natural gas and natural gas liquids
purchased from others in connection with the company's trading and
marketing activities. For the nine months ended September 30, 1999 and
1998, approximately 48 percent and 34 percent, respectively, of total sales
and operating revenues were attributed to the resale of crude oil, natural
gas and natural gas liquids purchased from others. Related purchase costs
are classified as expense in the crude oil, natural gas and product
purchases category on the consolidated earnings statement.
Capitalized interest totaled $4 million and $5 million for the third
quarters of 1999 and 1998, respectively. Capitalized interest totaled $13
million and $22 million for the first nine months of 1999 and 1998,
respectively.
(4) Income Taxes
Income taxes on earnings from operations for the third quarter and first
nine months of 1999 were $10 million and $51 million, respectively,
compared with $39 million and $177 million for the comparable periods of
1998. The effective income tax rate for the third quarter of 1999 was 29
percent compared with 52 percent for the third quarter of 1998. The lower
tax rate for the third quarter of 1999 was primarily due to
currency-related tax adjustments in Thailand partially offset by the mix
effect of domestic losses versus foreign earnings.
The effective income tax rate for the first nine months of 1999 was 56
percent compared with 53 percent for the first nine months of 1998.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) Comprehensive Income
The company's comprehensive earnings were as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings (loss) ........................................................... $ 24 $ 36 $ 40 $159
Change in foreign currency translation adjustments (net of tax) ............... (1) (5) -- (5)
----------------------------------------------------
Comprehensive earnings (loss) ........................................... $ 23 $ 31 $ 40 $154
====================================================
</TABLE>
(6) Earnings Per Share
The following are reconciliations of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations for net earnings
for the third quarters and the nine months ended September 30, 1999 and
1998:
<TABLE>
Earnings Shares Per Share
Millions except per share amounts (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1999
<S> <C> <C> <C>
Net Earnings ............................................................ $ 24 242.4
Basic EPS ............................................................ $0.10
=====
Effect of Dilutive Securities
Options/common stock equivalents ..................................... 1.6
-----------------------------
Diluted EPS .......................................................... 24 244.0 $0.10
=====
Distributions on subsidiary trust preferred securities (after-tax) ... 6 12.3
-----------------------------
Antidilutive ......................................................... $ 30 256.3 $0.12
Three Months Ended September 30, 1998
Net Earnings ........................................................... $ 36 241.4
Basic EPS ........................................................... $0.15
=====
Effect of Dilutive Securities
Options/common stock equivalents .................................... 1.1
-----------------------------
Diluted EPS ......................................................... 36 242.5 $0.15
=====
Distributions on subsidiary trust preferred securities (after-tax) .. 6 12.3
-----------------------------
Antidilutive ........................................................ $ 42 254.8 $0.16
Nine Months Ended September 30, 1999
Net Earnings ........................................................... $ 40 241.9
Basic EPS ........................................................... $0.17
=====
Effect of Dilutive Securities
Options/common stock equivalents .................................... 1.1
-----------------------------
Diluted EPS ......................................................... 40 243.0 $0.17
=====
Distributions on subsidiary trust preferred securities (after-tax) .. 19 12.3
-----------------------------
Antidilutive ........................................................ $ 59 255.3 $0.23
Nine Months Ended September 30, 1998
Net Earnings ........................................................... $ 159 241.6
Basic EPS ........................................................... $0.66
=====
Effect of Dilutive Securities
Options/common stock equivalents .................................... 1.3
-----------------------------
Diluted EPS ......................................................... 159 242.9 $0.66
=====
Distributions on subsidiary trust preferred securities (after-tax) .. 18 12.3
-----------------------------
Antidilutive ........................................................ $ 177 255.2 $0.69
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Not included in the computation of diluted EPS were options outstanding at
September 30, 1999 to purchase approximately 2.2 million shares of common
stock. These options were not included in the computation as the exercise
prices were greater than the year-to-date average market price of $37.51
for the common shares. The exercise prices of these options range from
$37.69 to $51.01 per share and they expire in 2007 through 2009.
(7) Sale of Accounts Receivable
In the second quarter of 1999, the company, through a non-consolidated
subsidiary Unocal Receivables Corp. ("URC"), entered into a sales agreement
with an outside party under which it will sell up to a $204 million
undivided interest in domestic crude oil and natural gas trade receivables.
The company continues to manage the collection and administrative
responsibilities for accounts receivable including the sold interest. The
effect to the company of the interests sold in its domestic trade
receivables under this agreement is $95 million as of September 30, 1999.
The amount sold is reflected as a reduction of accounts receivable in the
consolidated balance sheet and in net cash provided by operating activities
in the consolidated statement of cash flows.
(8) Long Term Debt and Credit Agreements
During the third quarter, the company increased its commercial paper
borrowings by $85 million to a total outstanding balance of $125 million at
September 30, 1999. In addition, the company also increased its borrowings
under its limited recourse project financing for its Azerbaijan activities
by $11 million to an outstanding balance of $55 million at September 30,
1999.
Proceeds from the issuance of commercial paper were used for general
corporate purposes including the refinancing of existing debt. The company
retired $22 million in maturing medium-term notes and reduced its
borrowings under its $1 billion bank credit agreement by $40 million to an
outstanding balance of $60 million at September 30, 1999.
(9) Financial Instruments
The estimated fair value of the company's long-term debt was $2,869 million
on September 30, 1999. The fair values of the debt instruments were based
on the discounted amounts of future cash outflows using rates offered to
the company for debt with similar maturities. The estimated fair value of
the mandatorily redeemable convertible preferred securities of the
company's subsidiary trust was $566 million. The fair value of the
preferred securities was based on the trading prices of the preferred
securities on September 30, 1999.
The company's financial instruments at September 30, 1999 are described
below:
Foreign exchange contracts - The company and its subsidiaries have assorted
currency swap agreements outstanding that are designed to hedge the impacts
of foreign-currency exchange-rate fluctuations on US dollar- denominated
debt. In the third quarter of 1999, the company received income tax refunds
in Canada equivalent to approximately US$49 million as a result of the
company's reinvestment of the proceeds from the 1998 sale of its investment
in the stock of Tarragon Oil and Gas Limited into the stock of Northrock
Resources Ltd. The refund was used to retire approximately US$40 million of
the US$100 million debt outstanding of one of the company's Canadian
subsidiaries. As a result of the debt retirement, the subsidiary reduced
its related currency swap agreement from US$100 million to US$60 million.
The agreement now requires the subsidiary to pay approximately C$88 million
at maturity in exchange for US$60 million. The parent company also reduced
its corresponding currency swap agreement from US$100 million to US$ 60
million. This agreement, which effectively offsets the subsidiary's
agreement, now requires the parent company to pay US$60 million in exchange
for C$88 million at maturity. The combined fair values of the swap
agreements outstanding at the end of the period were approximately zero.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Other outstanding currency swap agreements require the company's Northrock
subsidiary to pay approximately C$115 million at maturity in exchange for
US$75 million. The fair values of these agreements were US$72 million and
were determined by comparing the swap rates to the forward rates in effect
at September 30, 1999. The company's share of the estimated pre-tax
deferred losses related to the US$75 million currency swap agreements was
US$1 million at September 30, 1999 (net of minority interests). The US$75
million to be received by Northrock will be used to retire US
dollar-denominated debt at maturity.
Northrock also has US dollar forward contracts outstanding that are
designed to mitigate its exposure to the US dollar-indexed prices it
receives for the sale of its crude oil. These contracts are subject, in
some cases, to extensions at the counterparty's option and require
Northrock to sell approximately US$200 million in exchange for
approximately C$285 million at maturity. At September 30, 1999, contracts
of US$8 million were scheduled to mature in 1999 with the remaining
contracts scheduled to mature periodically through the year 2005. The fair
values of the contracts were approximately US$194 million. The fair values
were determined by comparing the contract rates to the forward rates in
effect at September 30, 1999. The company's share of estimated pre-tax
unrealized losses relating to these US dollar forward contracts was
approximately US$3 million at September 30, 1999 (net of minority
interests).
During the quarter, the company entered into two forward contracts to
purchase Thai baht. The contracts are designed to hedge the company's
foreign-currency exchange-rate exposure related to expected income tax
payments to be paid to Thailand in 2000. The contracts require the company
to purchase 802 million baht at maturity in exchange for US$20 million. The
fair value of the contracts at September 30, 1999 approximated the notional
amounts.
Other commodity-based contracts - Northrock had various fixed-price and
fixed-price differential sales contracts outstanding at September 30, 1999,
related to the future sale of its natural gas production. The contracts
cover production, which averages 40 million cubic feet per day (mmcfpd) for
the remainder of 1999, 54 mmcfpd in 2000, 52 mmcfpd in 2001 and 52 mmcfpd
in 2002. Northrock also has various fixed-price and fixed-price
differential natural gas purchase contracts outstanding at September 30,
1999, which require the purchase of 63 mmcfpd for the remainder of 1999 and
23 mmcfpd in 2000. The company's pre-tax share of estimated unrealized
losses for these contracts was approximately $13 million at September 30,
1999, (net of minority interests) and primarily relate to contracts with
delivery dates scheduled for the years 2001 through 2002.
At September 30, 1999, the company had futures contracts outstanding with
several couterparties to purchase and sell approximately 19 million and 15
million barrels of crude oil, respectively. The fair values of these
contracts, based on quoted market prices, were approximately $104 million.
The company also had futures contracts outstanding at September 30, 1999 to
purchase and sell approximately 19 million and 18 million thousand cubic
feet (mcf) of natural gas, respectively. The fair values of these
contracts, based on quoted market prices, were approximately $3 million.
These contracts which were purchased as part of the company's overall risk
management strategy were marked to market. Approximately 2 percent of the
company's outstanding crude oil and natural gas futures contracts were
related to the company's non-trading activities. At September 30, 1999, the
company's share of pre-tax unrealized gains related to its non-trading
futures contract activity was approximately $2 million.
The company had various hydrocarbon option contracts (options) outstanding
with several counterparties at September 30, 1999. Generally, options have
been used to limit the company's exposure to adverse commodity price
fluctuations. In some cases, the instruments may also limit the company's
ability to participate fully in future gains from favorable price
movements. These options are generally accounted for as hedges, with gains
and losses deferred and recognized as a component of crude oil and natural
gas revenues upon the sale of the underlying production.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
At September 30, 1999, the company had outstanding purchased natural gas
options covering approximately 31 million mcf and sold natural gas options
covering approximately 73 million mcf. The options consisted of put and
call contracts that related to the company's remaining 1999 US lower 48
production, to the future production of the company's Northrock subsidiary
for the remainder of 1999 through the year 2004, and to the company's
overall risk management activities. At September 30, 1999, the fair value
of these options were approximately $(6) million. The fair values of the
options were determined by dealer quotes, where available, or by financial
modeling using underlying commodity prices. Net premiums paid for the
options totaled $1 million. Approximately 90 percent of the options were
related to the company's non-trading activities. At September 30, 1999, the
company's share (net of minority interests) of pre-tax unrealized losses
related to its non-trading natural gas option activity was approximately
$14 million. Approximately $6 million of the $14 million relates to the
company's interest in Northrock.
The company had purchased crude oil options covering approximately 43
million barrels and sold crude oil options covering approximately 73
million barrels outstanding at September 30, 1999. The options consisted of
put and call contracts that related to the company's remaining 1999 and
early 2000 production, to the production of the company's Northrock
subsidiary for the remainder of 1999 through the year 2002 and to the
company's overall risk management activities. At September 30, 1999, these
options had fair values of approximately $(18) million. The fair values of
the options were determined by dealer quotes where available, or by
financial modeling using underlying commodity prices. Net premiums paid for
the options totaled $2 million. Approximately 70 percent of the options
were related to the company's non-trading activities. At September 30,
1999, the company's share (net of minority interests) of pre-tax unrealized
losses related to its non-trading crude oil option activity was
approximately $21 million. Approximately $3 million of the $21 million
relates to the company's interest in Northrock.
At September 30, 1999, the company had a ten-year natural gas price swap
agreement outstanding. The agreement effectively refloats the fixed price
the company received in January 1999 for a ten-year natural gas pre-paid
forward sale. As the counterparty to the swap agreement remits a
current-index-price payment amount to the company based upon volumes in the
swap agreement, the company remits a fixed-price payment amount to the
counterparty. The pre-tax deferred gain related to the swap agreement at
September 30, 1999, was approximately $16 million. This gain is offset by a
corresponding loss on the fixed price physical sales contract.
The company's Global Trade segment recorded pre-tax losses of approximately
$10 million and $5 million on its trading activities for the third quarter
and first nine months of 1999, respectively.
(10) Accrued Abandonment, Restoration and Environmental Liabilities
At September 30, 1999, the company had accrued $464 million for the
estimated future costs to abandon and remove wells and production
facilities. The total costs for abandonments are predominantly accrued for
on a unit-of-production basis and are estimated to be approximately $655
million. This estimate was derived in large part from abandonment cost
studies performed by outside firms and is used to calculate the amount to
be amortized. The company's reserve for environmental remediation
obligations at September 30, 1999 totaled $247 million, of which $145
million was included in current liabilities.
(11) 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
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
andare associated with past and present operations, including sites at
which the company has been identified as a potentially responsible party
(PRP) under the federal Superfund laws and comparable state laws.
Liabilities are accrued when it is probable that future costs will be
incurred and such costs can be reasonably estimated.
However, in many cases, investigations are not yet at a stage where the
company is able to determine whether it is liable or, even if liability is
determined to be probable, to quantify the liability or estimate a range of
possible exposure. In such cases, the amounts of the company's liabilities
are indeterminate due to the potentially large number of claimants for any
given site or exposure, the unknown magnitude of possible contamination,
the imprecise and conflicting engineering evaluations and estimates of
proper clean-up methods and costs, the unknown timing and extent of the
corrective actions that may be required, the uncertainty attendant to the
possible award of punitive damages, the recent judicial recognition of new
causes of action, the present state of the law, which often imposes joint
and several and retroactive liabilities on PRPs, the fact that the company
is usually just one of a number of companies identified as a PRP, or other
reasons.
As disclosed in note 10, at September 30, 1999, the company had accrued
$247 million for estimated future environmental assessment and remediation
costs at various sites where liabilities for such costs are probable. At
those sites where investigations or feasibility studies have advanced to
the stage of analyzing feasible alternative remedies and/or ranges of
costs, the company estimates that it could incur possible additional
remediation costs aggregating approximately $195 million.
Tax matters - The company believes it has adequately provided in its
accounts for tax items and issues not yet resolved.
Other matters - In February 1996, Bridas Corporation filed a petition
against the company and others in the District Court of Fort Bend County,
Texas, alleging that the defendants conspired to and did tortiously
interfere with Bridas' rights under agreements with the government of
Turkmenistan to develop the Yashlar Field and to transport gas from that
field to Pakistan. The petition also alleged that the defendants interfered
with Bridas' exclusive right to lay a gas pipeline in Afghanistan. Bridas
sought actual damages, as well as punitive damages, plus interest. Bridas'
expert witnesses stated in pre-trial discovery that Bridas' total actual
damages for loss of future profits were approximately $1.7 billion. In the
alternative, Bridas was expected to seek an award of approximately $430
million with respect to its total expenditures in Turkmenistan. In October
1998, the court granted the defendants' motion for summary judgement and
dismissed the action. In March 1999, Bridas filed a notice of appeal of the
dismissal.
In May 1999, a Canadian subsidiary of the company acquired an approximately
46 percent controlling interest in Northrock Resources Ltd. (Northrock)
(see note 13). Northrock has the right, until December 31, 1999, to require
that the company purchase additional Northrock common shares from treasury
shares at a price of C$15 per share, up to a maximum ownership level of
49.9 percent.
In 1998, the company signed a letter agreement regarding the Transocean
Discoverer Spirit deepwater drill ship with a minimum daily rate of $210
thousand for five years. The drill ship is scheduled for delivery in the
Gulf of Mexico in 2000.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
(12) Unocal guarantees certain indebtedness of Union Oil. Summarized below is
financial information for Union Oil and its consolidated subsidiaries:
<TABLE>
<CAPTION>
Summarized Financial Data of Union Oil
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues ............................................................... $1,589 $1,394 $4,375 $3,998
Total costs and other deductions
(including income taxes) .................................................. 1,558 1,349 4,314 3,819
----------------------------------------------------
Net Earnings.................................................................. $ 31 $ 45 $ 61 $ 179
====================================================
At September 30 At December 31 (a)
----------------------------------------------------
Millions of dollars 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Current assets ............................................................... $1,360 $1,388
Noncurrent assets ............................................................ 7,344 6,583
Current liabilities .......................................................... 1,345 1,406
Noncurrent liabilities ....................................................... 4,688 3,852
Shareholder's equity ......................................................... 2,671 2,713
<FN>
(a) Audited
</FN>
</TABLE>
(13) Acquisition of Assets
In May 1999, a Canadian subsidiary of the company acquired an approximate
46-percent controlling interest in Northrock Resources Ltd. (Northrock), a
Canadian oil and gas exploration and production company, for approximately
$184 million. The acquisition was accounted for as a purchase. The
investment was effected by the acquisition of 10 million shares of
Northrock common stock at C$14 per share pursuant to a partial tender offer
to Northrock's shareholders and 7.64 million shares of Northrock common
stock at C$16 per share pursuant to a private placement. The acquisition is
part of the company's overall North American natural gas strategy.
Northrock is fully consolidated in the company's financial results as of
the acquisition date.
(14) Minority Interests
In April 1999, the company contributed fixed-price overriding royalty
interests from its working interest shares in certain oil and gas producing
properties in the Gulf of Mexico to Spirit Energy 76 Development, L.P.
(Spirit LP), a limited partnership. In exchange for its overriding royalty
contributions, valued at $304 million, the company received an initial
general partnership interest of approximately 55 percent in Spirit LP. An
unaffiliated investor contributed $250 million in cash to the partnership
in exchange for an initial limited partnership interest of approximately 45
percent. Minority interests increased by approximately $244 million at the
close of this transaction. The fixed-price overrides are subject to
economic limitations of production from the affected fields. The limited
partner is entitled to receive a priority allocation of profits and cash
distributions. The partnership has a maximum term of 20 years, but may
terminate after six years, subject to certain conditions.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
As discussed in note 13, in May 1999, a Canadian subsidiary of the company
acquired an approximate 46-percent of Northrock. The net result of this
transaction was to increase minority interests by approximately $145
million as of the acquisition date.
(15) Restructuring Costs
The company adopted a restructuring plan during the second quarter of 1999
that resulted in the accrual of a $18 million pre-tax restructuring charge.
This amount included the costs of terminating approximately 250 employees.
The charge was included in selling, administrative and general expense on
the consolidated earnings statement. The plan involves the blending of
several International and Geothermal organizations, a manpower optimization
program in Thailand, cost cutting and efficiency initiatives in the
company's Diversified Business and Exploration and Production Technology
groups and a company-wide shared resources initiative.
Approximately 100 of the affected employees were from the company's
International operations, 95 were from the Diversified Business group and
55 were from other organizations, including corporate staff. The
restructuring charge included approximately $16 million for termination
costs to be paid to the employees over time and about $2 million related to
outplacement and other costs.
At October 26, 1999, 207 employees had been terminated or had received
termination notices as the result of the plan with additional terminations
scheduled during the remainder of 1999 and early 2000.
In the fourth quarter of 1998, the company adopted a restructuring plan
that resulted in the accrual of a $27 million pre-tax restructuring charge.
This amount included the costs of terminating approximately 475 employees.
The charge was included in selling, administrative and general expense on
the consolidated earnings statement. The plan involves the suspension of
mining and manufacturing operations at the Mountain Pass, California
lanthanide facility, a change in mining operations at the Questa, New
Mexico molybdenum facility, the withdrawal from non-strategic activities in
Central Asia and a reduction in activities of various business units.
Approximately 240 of the affected employees were from the company's mining
operations, 95 were from various exploration and production business units
and 140 were support personnel at various locations. The restructuring
charge included approximately $23 million for termination costs to be paid
to the employees over time, about $2 million in benefit plan curtailment
costs and about $2 million related to outplacement and other costs.
At October 26, 1999, 414 employees had been terminated or had received
termination notices as a result of the plan, with additional terminations
scheduled during the remainder of 1999 and early 2000.
The amount of unpaid benefits remaining on the consolidated balance sheet
at September 30, 1999 was $20 million for the two plans combined.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(16) Segment Information
The company's reportable segments are: Exploration and Production, Global
Trade, Geothermal & Power Operations and Diversified Businesses.
Unallocated corporate administrative and general expenses and other
miscellaneous operations are included under the Corporate and Unallocated
heading. Effective January 1, 1999, the Pipelines business unit was
transferred from the Diversified Business segment to the Global Trade
segment. For an expanded description of the activities conducted by the
company's business segments, see pages 74 and 75 of the company's 1998
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Segment Information Exploration & Production Geothermal
For the Three Months United States International Global Trade & Power
ended September 30, 1999 Spirit Far Operations
Millions of dollars Energy 76 Alaska East Other Global Trade Pipelines
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
External sales & operating revenues ......... $ 1 $ 33 $ 188 $ 69 $ 1,097 $ 9 $ 36
Other revenue (loss) ........................ -- -- (3) 5 4 12 3
Inter-segment revenues ...................... 277 13 40 26 2 3 --
--------------------------------------------------------------------------------
Total revenues ............................. 278 46 225 100 1,103 24 39
Operating profit (loss) before income taxes
and minority interest in earnings ......... 32 10 107 (8) (11) 15 11
Income taxes (benefit) .................. 11 4 29 (2) (6) 2 5
Minority interest in earnings ........... 4 -- -- 1 -- -- --
--------------------------------------------------------------------------------
Net earnings (loss) ......................... 17 6 78 (7) (5) 13 6
Assets (at September 30, 1999) .............. 2,106 304 1,875 1,530 396 249 511
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Diversified Corporate & Unallocated Totals
Business
Ag Carbon & Admn & Net Int Env & New
Products Minerals General Exp Litigation Ventures Other(a)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External sales & operating revenue........... $ 69 $ 42 $ -- $ -- $ -- $ -- $ 2 $ 1,546
Other revenue (loss) ........................ -- 6 -- 6 -- -- 9 42
Inter-segment revenues ...................... -- -- -- -- -- -- (361) --
--------------------------------------------------------------------------------
Total revenues ............................. 69 48 -- 6 -- -- (350) 1,588
Operating profit (loss) before income taxes
and minority interest in earnings ......... (14) 7 (33) (45) (21) (5) (7) 38
Income taxes (benefit) .................. (6) -- (10) (7) (9) (1) -- 10
Minority interest in earnings ........... -- 1 -- (2) -- -- -- 4
--------------------------------------------------------------------------------
Net earnings (loss) ......................... (8) 6 (23) (36) (12) (4) (7) 24
Assets (at September 30, 1999) .............. 276 272 -- -- -- 3 1,166 8,688
<FN>
(a) Includes eliminations and consolidation adjustments.
</FN>
</TABLE>
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Segment Information Exploration & Production Geothermal
For the Three Months United States International Global Trade & Power
ended September 30, 1998 Spirit Far Operations
Millions of dollars Energy 76 Alaska East Other Global Trade Pipelines
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
External sales & operating revenues ......... $ 26 $ 25 $ 181 $ 36 $ 815 $ 10 $ 44
Other revenue (loss) ........................ 1 -- (6) 77 -- 11 13
Inter-segment revenues ...................... 219 17 63 4 -- 3 --
--------------------------------------------------------------------------------
Total revenues ............................. 246 42 238 117 815 24 57
Operating profit (loss) before income taxes
and minority interest in earnings ......... (14) 3 108 38 5 16 22
Income taxes (benefit) .................. (6) 1 68 11 2 2 6
Minority interest in earnings ........... 1 -- -- -- -- -- --
--------------------------------------------------------------------------------
Net earnings (loss) ......................... (9) 2 40 27 3 14 16
Assets (at December 31, 1998) ............... 2,094 329 1,848 641 317 298 598
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Diversified Corporate & Unallocated Totals
Business
Ag Carbon & Admn & Net Int Env & New
Products Minerals General Exp Litigation Ventures Other(a)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External sales & operating revenue........... $ 84 $ 52 $ -- $ -- $ -- $ -- $ 13 $ 1,286
Other revenue (loss) ........................ -- 5 -- 7 -- (5) 5 108
Inter-segment revenues ...................... -- -- -- -- -- -- (306) --
--------------------------------------------------------------------------------
Total revenues ............................. 84 57 -- 7 -- (5) (288) 1,394
Operating profit (loss) before income taxes
and minority interest in earnings ......... 9 (1) (37) (40) (19) (7) (6) 77
Income taxes (benefit) .................. (3) (1) (13) (7) (7) (3) (11) 39
Minority interest in earnings ........... -- 1 -- -- -- -- -- 2
--------------------------------------------------------------------------------
Net earnings (loss) ......................... 12 (1) (24) (33) (12) (4) 5 36
Assets (at December 31, 1998) ............... 305 419 -- -- -- -- 1,103 7,952
<FN>
(a) Includes eliminations and consolidation adjustments.
</FN>
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Segment Information Exploration & Production Geothermal
For the Nine Months United States International Global Trade & Power
ended September 30, 1999 Spirit Far Operations
Millions of dollars Energy 76 Alaska East Other Global Trade Pipelines
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
External sales & operating revenues ......... $ 62 $ 86 $ 523 $ 161 $ 2,887 $ 28 $ 113
Other revenue (loss) ........................ 6 -- (5) 15 4 43 8
Inter-segment revenues ...................... 695 46 127 40 5 8 --
--------------------------------------------------------------------------------
Total revenues ............................. 763 132 645 216 2,896 79 121
Operating profit (loss) before income taxes
and minority interest in earnings ......... 57 19 272 (33) (8) 53 35
Income taxes (benefit) .................. 19 7 105 (14) (5) 7 14
Minority interest in earnings ........... 7 -- -- 2 -- -- --
--------------------------------------------------------------------------------
Net earnings (loss) ......................... 31 12 167 (21) (3) 46 21
Assets (at September 30, 1999)............... 2,106 304 1,875 1,530 396 249 511
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Diversified Corporate & Unallocated Totals
Business
Ag Carbon & Admn & Net Int Env & New
Products Minerals General Exp Litigation Ventures Other(a)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External sales & operating revenue........... $ 245 $121 $ -- $ -- $ -- $ -- $ 4 $ 4,230
Other revenue (loss) ........................ -- 22 -- 17 -- -- 34 144
Inter-segment revenues ...................... -- -- -- -- -- -- (921) --
--------------------------------------------------------------------------------
Total Revenues ............................. 245 143 -- 17 -- -- (883) 4,374
Operating profit (loss) before income taxes
and minority interest in earnings ......... (11) 21 (94) (127) (39) (12) (34) 99
Income taxes (benefit) .................. (9) -- (29) (23) (15) (3) (3) 51
Minority interest in earnings ........... -- 2 -- (3) -- -- -- 8
--------------------------------------------------------------------------------
Net earnings (loss) ......................... (2) 19 (65) (101) (24) (9) (31) 40
Assets (at September 30, 1999) .............. 276 272 -- -- -- 3 1,166 8,688
<FN>
(a) Includes eliminations and consolidation adjustments.
</FN>
</TABLE>
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Segment Information Exploration & Production Geothermal
For the Nine Months United States International Global Trade & Power
ended September 30, 1998 Spirit Far Operations
Millions of dollars Energy 76 Alaska East Other Global Trade Pipelines
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
External sales & operating revenues ......... $ 72 $ 82 $ 519 $ 122 $ 2,230 $ 30 $ 121
Other revenue (loss) ........................ 1 -- (25) 178 -- 39 42
Inter-segment revenues ...................... 699 56 192 8 1 7 --
--------------------------------------------------------------------------------
Total revenues ............................. 772 138 686 308 2,231 76 163
Operating profit (loss) before income taxes
and minority interest in earnings ......... 26 24 320 84 21 53 66
Income taxes (benefit) .................. 9 9 194 27 8 9 22
Minority interest in earnings ........... 2 -- -- -- -- -- --
--------------------------------------------------------------------------------
Net earnings (loss) ......................... 15 15 126 57 13 44 44
Assets (at December 31, 1998) ............... 2,094 329 1,848 641 317 298 598
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Diversified Corporate & Unallocated Totals
Business
Ag Carbon & Admn & Net Int Env & New
Products Minerals General Exp Litigation Ventures Other(a)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External sales & operating revenues.......... $ 299 $171 $ -- $ -- $ -- $ -- $ 37 $ 3,683
Other revenue (loss) ........................ 1 23 -- 24 -- (5) 37 315
Inter-segment revenues ...................... -- -- -- -- -- -- (963) --
--------------------------------------------------------------------------------
Total revenues ............................. 300 194 -- 24 -- (5) (889) 3,998
Operating profit (loss) before income taxes
and minority interest in earnings ......... 40 26 (87) (106) (119) (26) 21 343
Income taxes (benefit) .................. 7 2 (29) (23) (44) (10) (4) 177
Minority interest in earnings ........... -- 5 -- -- -- -- -- 7
--------------------------------------------------------------------------------
Net earnings (loss) ......................... 33 19 (58) (83) (75) (16) 25 159
Assets (at December 31, 1998) ............... 305 419 -- -- -- -- 1,103 7,952
<FN>
(a) Includes eliminations and consolidation adjustments.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
OPERATING HIGHLIGHTS UNOCAL CORPORATION
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------
1999 1998 1999 1998
-----------------------------------------------
NET DAILY PRODUCTION
Crude oil and condensate (thousand barrels daily)
United States
<S> ...................................................................... <C> <C> <C> <C>
Spirit Energy 76 ................................................ 40 44 40 44
Alaska .......................................................... 27 27 27 29
-----------------------------------------------
Total United States ........................................... 67 71 67 73
International (a)
Far East ........................................................ 73 81 72 83
Other (b) ....................................................... 40 31 35 31
-----------------------------------------------
Total International ........................................... 113 112 107 114
-----------------------------------------------
Worldwide .......................................................... 180 183 174 187
===============================================
Natural gas (million cubic feet daily)
United States
Spirit Energy 76 ................................................ 729 808 756 795
Alaska .......................................................... 106 118 124 126
-----------------------------------------------
Total United States ........................................... 835 926 880 921
International (a)
Far East ........................................................ 884 828 859 851
Other (b) ....................................................... 149 37 93 53
-----------------------------------------------
Total International ........................................... 1,033 865 952 904
-----------------------------------------------
Worldwide .......................................................... 1,868 1,791 1,832 1,825
===============================================
<FN>
(a) Includes host countries' shares of:
Crude oil and condensate ........................................... 30 6 23 11
Natural gas ........................................................ 95 44 86 44
(b) Production includes 100% of Northrock Resources Ltd. in Canada of:
Crude oil and condensate ........................................... 8 -- 4 --
Natural gas ........................................................ 110 -- 56 --
</FN>
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
OPERATING HIGHLIGHTS UNOCAL CORPORATION
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-----------------------------------------------
1999 1998 1999 1998
-----------------------------------------------
AVERAGE PRICES (a)
Crude oil (per barrel)
United States
<S> ...................................................................... <C> <C> <C> <C>
Spirit Energy 76 ................................................ $ 18.32 $ 12.20 $ 14.87 $ 12.80
Alaska .......................................................... 14.50 9.35 11.43 9.69
Total United States ........................................... 16.77 11.11 13.43 11.56
International
Far East ........................................................ $ 16.43 $ 12.28 $ 13.75 $ 13.02
Other ........................................................... 16.69 10.58 13.96 11.07
Total International ........................................... 16.55 11.82 13.83 12.48
Worldwide .......................................................... $ 16.65 $ 11.54 $ 13.65 $ 12.09
Natural gas (per thousand cubic feet)
United States
Spirit Energy 76 ................................................ $ 2.26 $ 1.97 $ 2.09 $ 2.08
Alaska .......................................................... 1.20 1.20 1.20 1.38
Total United States ........................................... 2.12 1.87 1.96 1.98
International
Far East ........................................................ $ 2.02 $ 2.23 $ 1.97 $ 2.10
Other ........................................................... 2.09 2.38 1.99 2.26
Total International ........................................... 2.03 2.23 1.98 2.10
Worldwide .......................................................... $ 2.07 $ 2.04 $ 1.97 $ 2.04
<FN>
(a) average prices include hedging gains and losses, but exclude other Global Trade margins.
</FN>
</TABLE>
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the consolidated financial condition
and results of operations of Unocal should be read in conjunction with
Management's Discussion and Analysis in Item 7 of the company's 1998 Annual
Report on Form 10-K. Unless otherwise specified, the following discussion
pertains to the company's continuing operations.
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
After-tax earnings (loss) ...................................................... $ 24 $ 36 $ 40 $ 159
Less: special items (net of tax)
Environmental and litigation provisions/proceeds............................ (12) (10) (14) (71)
Kenai plant accident........................................................ ( 6) -- ( 6) --
Asset sales ................................................................ -- 49 (10) 102
Deferred tax adjustments ................................................... -- ( 7) -- (21)
Restructuring provision .................................................... -- -- (11) --
Insurance settlement ....................................................... -- -- -- 11
----------------------------------------------------
Total special items ........................................................ (18) 32 (41) 21
----------------------------------------------------
Adjusted after-tax earnings (loss) ............................................. $ 42 $ 4 $ 81 $ 138
====================================================
</TABLE>
Adjusted after-tax earnings increased $38 million in the third quarter of 1999
compared with the same period last year. The third quarter 1999 results
benefited from higher worldwide average crude oil prices, which increased by 44
percent from the third quarter of 1998. In addition, the third quarter of 1999
benefited from lower dry hole costs and a lower effective tax rate primarily due
to a change in the Thailand foreign exchange rate. These factors were partially
offset by lower crude oil and natural gas sales volumes and reduced earnings
from non-exploration and production businesses. In the third quarter of 1999,
the hedge program lowered sale realizations for crude oil and natural gas by $23
million after-tax.
Adjusted after-tax earnings decreased $57 million in the first nine months of
1999 compared with the first nine months of 1998. The major factors contributing
to the decrease were lower worldwide crude oil and natural gas sales volumes,
lower natural gas prices, lower agricultural products prices, reduced earnings
from other non-exploration and production businesses and higher corporate net
interest expense. These factors were partially offset by higher worldwide crude
oil prices, a lower effective tax rate primarily due to a change in the Thailand
foreign exchange rate and lower dry hole costs. For the first nine months of
1999, the hedge program lowered sale realizations for crude oil and natural gas
by $16 million after-tax.
EXPLORATION AND PRODUCTION
The company engages in oil and gas exploration, development, and production
worldwide.
United States - Included in the United States category are Spirit Energy 76 and
Alaska oil and gas operations. The Spirit Energy 76 business unit is responsible
for oil and gas operations in the Lower 48 United States with emphasis on the
shelf and deepwater areas in the Gulf of Mexico and the Permian Basin in West
Texas. A substantial portion of the crude oil and natural gas produced in the
United States is sold to the company's Global Trade segment. The remainder is
sold to third parties or, in the case of Alaska natural gas production, used in
the company's agricultural products operations.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
After-tax earnings (loss)
Spirit Energy 76 ............................................................ $ 17 $ ( 9) $ 31 $ 15
Alaska ...................................................................... 6 2 12 15
----------------------------------------------------
Total ....................................................................... 23 ( 7) 43 30
Less: special items (net of tax)
Litigation provision/proceeds (Spirit Energy 76)............................ -- -- 7 --
Litigation provisions (Alaska)............................................... (2) -- (4) --
----------------------------------------------------
Total special items ......................................................... (2) -- 3 --
----------------------------------------------------
Adjusted after-tax earnings (loss) ............................................. $ 25 $ ( 7) $ 40 $ 30
====================================================
</TABLE>
Adjusted after-tax earnings increased $32 million in the third quarter of 1999
compared with the same period last year. The increase was primarily due to
higher United States average crude oil and natural gas prices, which increased
by $5.66 per barrel and $0.25 per MCF, respectively. In addition to the higher
prices, dry hole costs were lower than the same period last year. These factors
were partially offset by lower United States natural gas sales volumes and lower
Spirit Energy 76 crude oil sales volumes. In the third quarter of 1999, the
hedge program lowered sale realizations for crude oil and natural gas by $17
million after-tax.
Adjusted after-tax earnings increased $10 million in the first nine months of
1999 compared with the first nine months of 1998. The increase was primarily due
to higher United States crude oil prices, lower dry hole costs and lower
operating expenses. These factors were partially offset by lower United States
crude oil and natural gas sales volumes, increased exploratory land amortization
and lower Alaska natural gas prices. For the first nine months of 1999, the
hedge program lowered sale realizations for crude oil and natural gas by $10
million after-tax.
International - Includes the company's international exploration and production
activities and related business development activities. The company is engaged
in oil and gas production activities in eight foreign countries: Thailand,
Indonesia, Canada, The Netherlands, Azerbaijan, Myanmar, the Democratic Republic
of Congo and Bangladesh.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
After-tax earnings (loss)
Far East .................................................................. $ 78 $ 40 $ 167 $ 126
Other ..................................................................... ( 7) 27 (21) 57
----------------------------------------------------
Total ..................................................................... 71 67 146 183
Less: special items (net of tax)
Asset sales (Other) ....................................................... -- 49 -- 102
Deferred tax adjustment (Far East) ........................................ -- ( 7) -- (21)
Litigation proceeds (Far East) ............................................ -- -- 2 --
----------------------------------------------------
Total special items ....................................................... -- 42 2 81
----------------------------------------------------
Adjusted after-tax earnings (loss) ............................................. $ 71 $ 25 $ 144 $ 102
====================================================
</TABLE>
Adjusted after-tax earnings increased $46 million in the third quarter of 1999
compared with the same period last year. The increase was primarily due to
higher average crude oil prices, lower dry hole costs, lower exploration and
operating expenses, and a lower effective tax rate primarily due to a change in
the Thailand foreign exchange rate. Partially offsetting these factors were
lower Far East crude oil sales volumes, primarily in Indonesia, and lower
International natural gas prices.
Adjusted after-tax earnings increased $42 million in the first nine months of
1999 compared with the first nine months of 1998. The major factors contributing
to the increase were higher average crude oil prices, lower exploration and
operating expenses, lower dry hole costs, lower depreciation, depletion and
amortization expense, and a lower effective tax rate primarily due to a change
in the Thailand foreign exchange rate. These factors were partially offset by
lower crude oil sales volumes, primarily in Indonesia, and lower international
natural gas prices.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
For the third quarter and the first nine months of 1999, the hedge program
lowered sale realizations for crude oil by $6 million after-tax.
GLOBAL TRADE
The Global Trade segment conducts most of the company's worldwide crude oil,
condensate and natural gas trading and marketing activities and is responsible
for commodity-specific risk management activities on behalf of most of the
company's exploration and production segment. Global Trade also purchases crude
oil, condensate and natural gas from certain of the company's royalty owners,
joint venture partners and other unaffiliated oil and gas producers for resale.
In addition, Global Trade takes pricing positions in hydrocarbon derivative
instruments. Global Trade also manages the company's Pipelines business unit,
which holds the company's equity interests in affiliated pipeline companies.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
After-tax earnings (loss)
Global Trade ................................................................ $ ( 5) $ 3 $ ( 3) $ 13
Pipelines ................................................................... 13 14 46 44
----------------------------------------------------
Total ..................................................................... 8 17 43 57
Less: special items (net of tax) ............................................... -- -- -- --
----------------------------------------------------
Adjusted after-tax earnings (loss) ............................................. $ 8 $ 17 $ 43 $ 57
====================================================
</TABLE>
Adjusted after-tax earnings decreased $9 million in the third quarter of 1999
compared with the same period last year. The decrease was primarily due to lower
margins on domestic natural gas trading.
Adjusted after-tax earnings decreased $14 million for the first nine months of
1999 compared with the same period last year. The decrease was primarily due to
lower margins on domestic natural gas and crude oil trading.
GEOTHERMAL AND POWER OPERATIONS
The Geothermal and Power Operations segment supplies geothermal steam for power
generation, with operations in the Philippines and Indonesia. The segment's
current activities also include the operation of power plants in Indonesia and
an interest in a gas-fired power plant under construction in Thailand.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
After-tax earnings (loss) ...................................................... $ 6 $ 16 $ 21 $ 44
Less: special items (net of tax)
Asset sales (a) ............................................................ -- -- (10) --
----------------------------------------------------
Adjusted after-tax earnings .................................................... $ 6 $ 16 $ 31 $ 44
====================================================
<FN>
(a) Represents the first quarter sale of a geothermal production operation at The Geysers
in Northern California
</FN>
</TABLE>
Adjusted after-tax earnings decreased $10 million in the third quarter of 1999
compared with the same period last year. Lower affiliate earnings, higher
foreign exchange losses in Indonesia and the loss of earnings from The Geysers
assets in Northern California contributed to the lower results. These factors
were partially offset by lower Indonesia receivable provisions.
Adjusted after-tax earnings decreased $13 million in the first nine months of
1999 compared with the first nine months of 1998. This decrease was primarily
due to the difference in the recognition of cash received related to the
construction of the Salak power plant units 4 through 6, lower affiliate
earnings and the loss of earnings from The Geysers assets in Northern
California. These factors were partially offset by lower Indonesia receivable
provisions.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
DIVERSIFIED BUSINESS GROUP
The Agricultural Products business unit manufactures, transports and markets
nitrogen-based products for agricultural and industrial uses. The Carbon and
Minerals business unit manufactures and markets petroleum coke, graphites and
specialty minerals.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
After-tax earnings (loss)
Agricultural Products ....................................................... $ ( 8) $ 12 $ ( 2) $ 33
Carbon and Minerals ......................................................... 6 ( 1) 19 19
----------------------------------------------------
Total ....................................................................... ( 2) 11 17 52
Less: special items (net of tax)
Kenai plant accident (Agricultural Products)................................. (6) -- ( 6) --
Environmental and litigation provisions (Carbon and Minerals) ............... -- (2) ( 3) (4)
----------------------------------------------------
Total special items ........................................................ ( 6) (2) ( 9) (4)
----------------------------------------------------
Adjusted after-tax earnings (loss) ............................................. $ 4 $ 13 $ 26 $ 56
====================================================
</TABLE>
Adjusted after-tax earnings decreased $9 million in the third quarter of 1999
compared with the same period last year. The decrease was primarily due to lower
agricultural products prices and lower tax benefits, the effect of which was
partially offset by decreased mining costs and increased affiliate earnings.
Adjusted after-tax earnings decreased $30 million in the first nine months of
1999 compared with the first nine months of 1998. This decrease was primarily
due to lower agricultural products prices.
CORPORATE AND UNALLOCATED
Corporate and Unallocated includes all unallocated corporate administrative and
general items, miscellaneous operations, including real estate, and
non-exploration and production new ventures activities. Net interest expense
represents interest expense, net of interest income and capitalized interest.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------------------------------------
Millions of dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
After-tax earnings (loss)
Administrative and general expense .......................................... $ (23) $ (24) $ (65) $ (58)
Net interest expense ........................................................ (36) (33) (101) (83)
Environmental and litigation expense ........................................ (12) (12) (24) (75)
New ventures ................................................................ (4) (4) (9) (16)
Other ....................................................................... ( 7) 5 (31) 25
----------------------------------------------------
Total ....................................................................... (82) (68) (230) (207)
Less: special items (net of tax)
Environmental and litigation provisions .................................... (10) ( 8) (16) (67)
Restructuring provision (Other) ............................................ -- -- (11) --
Insurance settlement (Other) ............................................... -- -- -- 11
----------------------------------------------------
Total special items ........................................................ (10) ( 8) (27) (56)
----------------------------------------------------
Adjusted after-tax earnings (loss) ............................................. $ (72) $ (60) $(203) $(151)
====================================================
</TABLE>
The adjusted after-tax loss increased by $12 million in the third quarter of
1999 compared with the same period last year. The third quarter of 1998 included
a net benefit related to certain tax adjustments, in the Other category. In
addition, the third quarter of 1999 had higher interest expense due to lower
capitalized interest and increased debt levels.
The adjusted after-tax loss increased by $52 million in the first nine months of
1999 compared with the same period last year. The negative factors included
higher interest expense due to lower capitalized interest and increased
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
debt levels, lower pension income and higher employee benefit-related expenses,
both in the Other category. The first nine months of 1998 included a net benefit
related to certain tax adjustments and higher earnings and dividends from a
petroleum industry mutual insurance company, both in the Other category. Those
factors were partially offset by lower new ventures expenditures and gains
related to miscellaneous asset sales, in the Other category.
FINANCIAL CONDITION AND CAPITAL EXPENDITURES
For the first nine months of 1999, net cash flow provided by operating
activities was $517 million compared with $711 million in the same period a year
ago. This decrease reflects the effects of lower worldwide crude oil and natural
gas sales volumes, lower natural gas prices, lower agricultural products prices
and reduced earnings from other non-exploration and production businesses. These
factors were partially offset by higher worldwide crude oil prices. Working
capital and other changes included the effects of increased net foreign income
tax payments over refunds, the delivery of crude oil under a 1998 pre-paid
forward sale and increased inventories. Working capital changes benefited from
the receipt of $120 million in the first quarter of 1999 for a ten-year natural
gas pre-paid forward sale and the advance sale of certain domestic trade
receivables in the third quarter of 1999.
Proceeds from asset sales for the first nine months of 1999 were $163 million,
consisting primarily of $101 million from the sale of the company's interest in
a geothermal operation at The Geysers in Northern California, completed in the
first quarter, $27 million from the sale of Michigan oil and gas assets and $35
million from the sale of other miscellaneous domestic oil and gas and real
estate properties.
Capital expenditures for the first nine months of 1999 totaled $761 million
compared with $1,248 million in the same period a year ago. The decrease was
primarily due to lower worldwide drilling activities and lower lease
acquisitions in the Gulf of Mexico. The company also spent $184 million in the
second quarter of 1999 to acquire an approximate 46-percent ownership interest
in Northrock Resources Ltd. (Northrock). Total capital expenditures are expected
to be approximately $1.17 billion for 1999, excluding the Northrock acquisition.
The company will continue to focus on deepwater exploration programs in
Indonesia and the Gulf of Mexico.
In the second quarter of 1999, the company contributed fixed-price overriding
royalty interests from its working interest shares in certain oil and gas
producing properties in the Gulf of Mexico to Spirit Energy 76 Development, L.P.
(Spirit LP), a limited partnership. The fixed-price overrides are subject to
economic limitations of production from the affected fields. In exchange for its
overriding royalty contributions, valued at $304 million, the company received
an initial general partnership interest of approximately 55 percent in Spirit
LP. An unaffiliated investor contributed $250 million in cash to the partnership
in exchange for an initial limited partnership interest of approximately 45
percent. The limited partner is entitled to receive a priority allocation of
profits and cash distributions.
The company's long-term debt was $2.83 billion at September 30, 1999, compared
with $2.56 billion at year-end 1998. Most of this increase reflects the
consolidation of the company's investment in Northrock, including its
outstanding debt. The company's debt-to-total capitalization ratio was 52
percent at September 30, 1999, compared with 48 percent at year-end 1998.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
ENVIRONMENTAL MATTERS
At September 30, 1999, the company's reserves for environmental remediation
obligations totaled $247 million, of which $145 million was included in current
liabilities. During the third quarter of 1999, cash payments of $30 million were
applied against the reserve. The company also estimates that it possibly could
incur additional remediation costs aggregating approximately $195 million, as
discussed in note 11 to the consolidated financial statements. The company's
total environmental reserve amount is grouped into the following five
categories:
<TABLE>
<CAPTION>
Reserve Summary
September 30,
Millions of dollars 1999
- --------------------------------------------------------------------------------
<S> <C>
Superfund and similar sites $ 11
Former company-operated sites 14
Company facilities sold with retained liabilities 50
Inactive or closed company facilities 125
Active company facilities 47
- --------------------------------------------------------------------------------
Total reserves $247
================================================================================
</TABLE>
OUTLOOK
Certain of the statements in this discussion, as well as other forward-looking
statements within this document, contain estimates and projections of amounts of
or increases / decreases in future revenues, earnings, cash flows, capital
expenditures, assets, liabilities and other financial items and of future levels
of or increases / decreases in reserves, production, sales including related
costs and prices, and other statistical items; plans and objectives of
management regarding the company's future operations, products and services; and
certain assumptions underlying such estimates, projection plans and objectives.
While these forward-looking statements are made in good faith, future operating,
market, competitive, legal, economic, political, environmental, and other
conditions and events could cause actual results to differ materially from those
in the foward-looking statements. See pages 40 and 41 of Management's Discussion
and Analysis in Item 7 of the company's 1998 Annual Report on Form 10-K for a
discussion of certain of such conditions and events, as well as pages 24 through
26 of this report.
The company's Spirit Energy 76 (Spirit) business unit averaged 729 MMCF per day
of net natural gas production in the third quarter of 1999. The company
estimates that, because of the current drilling activity and the return to
production of key wells after repairs, Spirit's net natural gas production will
average approximately 750 MMCF per day in the fourth quarter of 1999.
The company drilled a deepwater well in the Sumatra sub-salt prospect in Garden
Banks block 941 in the Gulf of Mexico during the third quarter of 1999. The well
encountered mechanical difficulties before reaching its primary objective and
has been suspended until next year, when the larger Discoverer Spirit drillship
will be delivered and drilling will be resumed. During the third quarter, oil
was discovered on the K-2 deepwater well, on Green Canyon block 562 in the Gulf
of Mexico, in which the company was participating. The joint interest
participants decided to temporarily suspend the well and develop plans for
appraisal of the hydrocarbon zone. The company was drilling an appraisal well of
the McKinley discovery on Garden Banks block 416 at the end of the third
quarter. The company is participating in the drilling of an appraisal well on
the Mad Dog discovery which began at the end of the third quarter. The company
is currently evaluating the Mirage discovery and no additional drilling is
expected this year.
During the third quarter of 1999, the company was the apparent successful high
bidder for interests in 15 lease blocks in the western Gulf of Mexico, including
seven deepwater blocks and eight shelf blocks. The company has been awarded nine
out of the fifteen blocks with the remaining blocks yet to be awarded.
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The economic situation in Asia, where much of the company's international
activity is centered, remained largely unchanged from year-end 1998. The company
believes that the governments in the region are committed to undertaking the
reforms and restructuring necessary to enable their nations to recover from the
downturn.
In Thailand, net natural gas sales are expected to average approximately 600
MMCF per day in the fourth quarter of 1999, as compared with an average of 643
MMCF per day for the third quarter of 1999. Production from the Pailin field in
the Gulf of Thailand started in August of 1999 and is currently producing
approximately 185 MMCF (gross) per day in the fourth quarter. Unocal Thailand,
Ltd., is operator of the Pailin field and holds a 35 percent working interest.
In Myanmar, commercial production from the Yadana field is now expected to begin
very late in 1999 or in early 2000.
The company received approvals from Indonesia's national oil company to begin
initial development activities on the West Seno and Merah Besar oil and gas
fields in the deepwater Kutei Basin, offshore East Kalimantan. Unocal Makassar,
Ltd., a wholly owned subsidiary, is operator of the West Seno discovery in the
Makassar Strait production-sharing contract (PSC) area and has a 50-percent
working interest. The Merah Besar field is located on the Makassar Strait PSC
and the East Kalimantan PSC areas. Unocal Indonesia Company, also a wholly owned
subsidiary, holds a 100-percent working interest in the East Kalimantan PSC.
Development activity is planned in two phases, with phase one production from
the West Seno field expected in 2002. With this approval, the two fields now
qualify to supply gas for the latest package of LNG sales and natural gas is
also available for LPG extraction. In November, the company announced
discoveries of oil and gas in the Bangka and Aton prospects in the Rapak PSC
area which further confirm the hydrocarbon resource potential of the Kutei Basin
deepwater properties. The company has a 60-percent working interest in the Rapak
PSC.
The company completed, in October, an exchange of its interest in a subsidiary
holding a 28.57 percent stake in three producing fields in Yemen for the stock
of two Occidental Petroleum Corporation subsidiaries holding 50-percent working
interests in three blocks in northeast Bangladesh. These Bangladesh assets,
received by the company in July 1999, include two production sharing contracts
in which the company already held 50-percent working interests. In addition, the
assets include the Bibiyana gas field, discovered in 1998. The company
transferred to Occidental Petroleum Corporation its working interest in the
production-sharing contract of the East Shabwa contract area in Yemen in the
fourth quarter of 1999.
As of September 30, 1999, the company had a gross receivable balance of
approximately $158 million related to its geothermal operations in Indonesia.
Approximately $61 million related to Salak electric generating Units 1, 2, and 3
and is due by November 27, 1999, of which $53 million represents past due
amounts and accrued interest resulting from partial payments for March 1998
through July 1999. Although invoices have generally not been paid in full,
amounts that have been paid have been received in a timely manner per the steam
sales contract. The remaining $97 million relates to Salak electric generating
Units 4, 5 and 6 which the company has received partial payments for the period
of March 1998 through July 1999. Provisions covering a portion of these
receivables were recorded in 1998 and 1999. The company is vigorously pursuing
collection of the outstanding receivables.
The company, at times, employs a commodity price option program that establishes
a price floor, while retaining most of the benefits of higher price movements.
This program is designed to protect cash flow and the capital spending program
against the effects of severe commodity price deterioration. For the first nine
months of 1999, the program resulted in lower realizations for crude oil and
natural gas totaling about $16 million after-tax. For the full-year 1999, based
on recent NYMEX oil and gas futures prices, the company anticipates this program
will lower earnings by approximately $29 million after-tax. This program's
results exclude hedging activities by Northrock. In 1999, Northrock's hedging
activities are expected to lower the company's share of Northrock's earnings by
approximately $3 million after-tax. Most of the company's existing non-trading
positions close out in the fourth quarter, with the exception of certain options
and fixed-price contracts for Northrock which extend to the year 2004. For more
information, refer to note 9 to the consolidated financial statements.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The company adopted two separate restructuring plans in the second quarter of
1999 and the fourth quarter of 1998that will result in the termination of
approximately 250 and 475 employees, respectively. For more information, refer
to note 15 to the consolidated financial statements. The company expects
implementation of the plans to reduce future annualized salaries and benefits by
an estimated $32 million after-tax. Cash expenditures related to the plans are
estimated to be $19 million and $8 million for the years 1999 and 2000,
respectively.
YEAR 2000
The company is essentially complete in addressing the Year 2000 (Y2K) issue for
critical systems and applications.
Many existing computer programs were designed and developed to use only two
digits to identify a year in the date field. If not addressed, these programs
could result in system failures with possible material adverse effects on the
company's operations at the beginning of the year 2000.
The company's Y2K efforts are divided into three general categories: information
technology (IT) systems and applications, non-IT embedded systems in process
controls, and its relationships with critical business partners. The company
appointed a program manager and assembled various teams of professionals,
principally at the business unit level, which developed plans to implement these
efforts. The plans established a methodology and schedule to identify, assess,
correct and test the company's IT systems, applications, non-IT embedded systems
(such as microcontrollers and other devices used for process control), system
interfaces with vendors, suppliers, customers and other outside parties, as well
as to assess the Y2K readiness of such third parties. The company contracted
with systems consulting firms to assist with the assessment, correction and
testing of the company's internal systems and their interfaces with third
parties. To ensure independent review and validation of the implementation of
the company's Y2K plans, internal auditors, assisted by contract auditors, are
auditing the Y2K projects of key business units within the company and reporting
their findings to senior management.
A company-wide initial awareness campaign was completed in June 1998. The
identification, assessment, and planning phases of the internal systems portion
of the project have been completed. The company has written and tested business
contingency and recovery plans for 99 percent of its "mission critical" systems,
applications and processes. These systems, applications and processes, if not
operable, could materially adversely impact cash flow, operations, safety or the
environment.
The company's Y2K project work includes the writing and updating of existing
contingency plans to address material Y2K issues. The company has existing
processes for managing emergency situations and intends to have its Crisis
Management Center operating at the time of the century rollover to assist with
implementing any contingency plans if required.
The company has completed the inventory and assessment of its IT and non-IT
embedded systems and detailed planning to correct or work around the anticipated
problems in these systems. The remediation/renovation and validation/testing of
its IT and non-IT embedded systems were approximately 98 percent complete as of
September 30, 1999.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The following schedule sets forth the company's estimated timetable for
achieving Y2K readiness of its IT and embedded systems:
<TABLE>
<CAPTION>
Project Phases Target Completion Dates
- ------------------------------------------ ------------------------------------------
<S> <C>
Worldwide inventory of systems Completed
Worldwide assessment Completed
Initial plan for corrections/work arounds Completed
Remediation/renovation 98% Completed; Finish fourth quarter 1999
Contingency planning 99% Completed; Finish fourth quarter 1999
Validation/testing 98% Completed; Finish fourth quarter 1999
Implementation 98% Completed; Finish fourth quarter 1999
Continuous system review Ongoing-through first quarter 2000
</TABLE>
The company has identified approximately 400 "critical business partners". The
overall assessment of the Year 2000 readiness of these partners has been
positive. Work in this area will continue and contingency plans will incorporate
the possibility of performance failures by multiple critical business partners.
The company estimates the total expenditures on its Y2K project will be
approximately $25 million. These expenditures are recorded at the business unit
and corporate levels and are funded from cash provided by operating activities.
Expenditures as of September 30, 1999, were approximately $21 million. Most of
the remaining expenditures are expected to be incurred in the remainder of 1999.
The company is not aware of any IT projects that have been delayed due to the
Y2K project.
The Y2K problem is real and there is a risk of Y2K related failures. These
failures could result in an interruption in, or a failure of, certain business
activities or functions. Such failures could materially and adversely affect the
company's results of operations, liquidity or financial condition. Due to the
uncertainty surrounding the Y2K problem, including the uncertainty of the Y2K
readiness of the company's customers, suppliers, and partners, the company is
unable at this time to determine the true impact of the Y2K problem to Unocal.
The principal areas of risk are thought to be oil and gas production control
systems, other embedded operations control systems and third party Y2K
readiness. The company's Y2K project is expected to reduce this uncertainty. The
company believes that with the completion of the project as planned, the
possibility of significant interruptions of normal operations should be reduced.
There can be no assurance, however, that such changes will prove 100 percent
effective in resolving all Y2K related issues. Furthermore, there can be no
assurance that critical business partners will not experience failures,
irrespective of the Y2K readiness representations they may have made. A likely
worst case scenario is that despite the company's efforts, there could be
failures of control systems, which might cause some processes to be shut down.
Such failures could have a material adverse impact on the company's operations.
The company is particularly concerned about the status of key critical business
partners' Y2K readiness in Indonesia, Bangladesh, Thailand and The Philippines.
Their failure due to a Year 2000 problem could prevent Unocal from delivering
product and cause a material adverse impact to the company's cash flows.
Future Accounting Changes
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 137, which delayed the effective
date of SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 required that companies recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative instrument depends upon the intended use of the instrument and its
resulting designation. Unless designated as a hedge, changes in the fair value
of a derivative instrument are to be accounted for as gains or losses in the
period of change. In the case of certain hedging activities, changes in the fair
values of derivative instruments that are effective as hedges, are deferred and
reported as part of other comprehensive income.
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Changes in the fair value of derivative instruments that are not effective as
hedges are reported in earnings in the period of the change.
SFAS No. 133 had required companies to adopt its provisions for all fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS 137 delays the
effective date to all fiscal quarters of fiscal years beginning after June 15,
2001. The company is planning to adopt SFAS 133 in the first quarter of the year
2001 and is currently evaluating the impact the statement will have on its
reporting for derivative instruments and hedging activities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the values of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices. As part of its overall risk-
management strategies, the company uses derivative financial instruments to
manage and reduce risks associated with these factors. The company also pursues
outright pricing positions in certain hydrocarbon derivative financial
instruments, such as futures and options contracts.
Interest Rate Risk - From time to time the company temporarily invests its
excess cash in interest-bearing securities issued by high-quality issuers.
Company policies limit the amount of investment in securities of any one
financial institution. Due to the short time the investments are outstanding and
their general liquidity, these instruments are classified as cash equivalents in
the consolidated balance sheet and do not represent a material interest rate
risk to the company. The company's primary market-risk exposure for changes in
interest rates relates to the company's long-term debt obligations. The company
manages its exposure to changing interest rates principally through the use of a
combination of fixed and floating-rate debt. Interest-rate risk-sensitive
derivative financial instruments, such as swaps, options, floors, caps, and
collars may also be used depending upon market conditions.
The company evaluated the potential effect that near-term changes in interest
rates would have had on the fair value of its interest-rate risk-sensitive
financial instruments at September 30, 1999. Assuming a ten-percent decrease in
the company's weighted average borrowing costs at September 30, 1999, the
potential increase in the fair value of the company's debt obligations and
associated derivative instruments, including the company's net interests in the
debt obligations and associated derivative instruments of its subsidiaries,
would have been approximately $118 million.
Foreign Exchange Rate Risk - The company conducts business in various parts of
the world and in various foreign currencies. To limit the company's foreign
currency exchange-rate risk related to operating income, foreign sales
agreements generally contain price provisions designed to insulate the company's
sales revenues against adverse foreign-currency exchange rates. In most
countries, energy products are valued and sold in U.S. dollars and foreign
currency operating cost exposures have not been significant. In other countries,
the company is paid for product deliveries in local currencies but at prices
indexed to the U.S. dollar. These funds, less amounts retained for operating
costs, are converted to U.S. dollars as soon as practicable. The company's
Canadian subsidiaries are paid in Canadian dollars for crude oil and natural gas
sales. Excess Canadian funds generally have been invested in other Unocal
foreign operations.
From time to time the company may purchase foreign-currency options or enter
into foreign-currency forward contracts to limit the exposure related to its
foreign-currency obligations. At September 30, 1999, the company evaluated the
effect that near term changes in foreign-exchange rates would have had on the
fair value of the company's foreign-currency position related to its outstanding
foreign-currency forward contracts. Assuming an adverse change of ten percent in
foreign-currency exchange rates at September 30, 1999, the potential decrease in
fair value of the company's foreign-currency forward contracts, including the
company's net interests in the foreign-currency forward contracts of its
subsidiaries, would have been approximately $13 million.
26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
Commodity Price Risk - The company is a producer, purchaser, marketer and trader
of certain hydrocarbon commodities such as crude oil and condensate, natural gas
and petroleum-based products and is subject to the associated price risks. The
company uses hydrocarbon derivative financial instruments, such as futures
contracts, swaps and options generally with maturities of 24 months or less, to
mitigate its exposure to commodity price fluctuations. However, these
instruments may also limit some of the future gains otherwise available from
favorable commodity price movements.
When these instruments are used to hedge the company's future production, the
impacts are reflected in the average sales prices of the associated commodities
at the time of sale. As a result, the company's reported crude oil and natural
gas revenues may be higher or lower than what would have been reported if the
company had not employed the use of these instruments. From time to time, the
company also enters into longer-term derivative instruments, such as swap
contracts, to refloat its long term fixed-price commitments. The company also
takes pricing positions in hydrocarbon derivative financial instruments
(primarily futures and options contracts).
The company uses a variance-covariance value-at-risk model to assess the market
risk of its hydrocarbon-price-sensitive derivative instruments. Value-at-risk
represents the potential loss in fair value the company would experience on its
hydrocarbon-price-sensitive derivative instruments, using calculated
volatilities and correlations over a specified time period with a given
confidence level. The company's model is based upon historical data and uses a
three-day time interval with a 95-percent confidence level. The model includes
offsetting physical positions for hydrocarbon-price-sensitive derivative
instruments related to the company's pre-paid crude oil and natural gas forward
sales, as well the company's net interests in its subsidiaries' crude oil and
natural gas derivative instruments including offsetting physical positions of
forward sales contracts to which those contracts relate. Based upon the
company's model, the value at risk related to hydrocarbon-price-sensitive
derivative financial instruments held for purposes other than trading was
approximately $7 million at September 30 (refer to note 9 to the consolidated
financial statements for information on pre-tax unrealized losses as of
September 30, 1999 relating to hydrocarbon price-sensitive derivative financial
instruments held for purposes other than trading). The value at risk related to
hydrocarbon-price-sensitive derivative financial instruments held for trading
purposes was approximately $1 million at September 30, 1999.
27
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There is incorporated by reference the information with respect to certain legal
proceedings previously reported in Item 3 of Unocal's Annual Report on Form 10-K
for the year ended December 31, 1998 (1998 Form 10-K) and in Item 1 of Part II
of Unocal's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
(First Quarter 1999 Form 10-Q) and Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (Second Quarter Form 10-Q), the information regarding
environmental remediation reserves in note 10 to the consolidated financial
statements in Item 1 of Part I of this report , the discussion of such reserves
in the Environmental Matters section of Management's Discussion and Analysis in
Item 2 of Part I, and the information regarding certain legal proceedings and
other contingent liabilities in note 11 to the consolidated financial
statements. Information with respect to certain recent developments is set forth
below:
1. In connection with the Notices of Preliminary Determination of
Underpaid Royalties received from the MMS, described in Paragraph 6 of
Item 3 of the 1998 Form 10-K, in Paragraph 4 of Item 1 of Part II of
the First Quarter 1999 Form 10-Q and in Paragraph 3 of Item 1 of Part
II of the Second Quarter Form 10-Q, the settlement amount of $7 million
was paid by the company in August 1999.
2. In the lawsuits captioned Aguilar, et al. v. Atlantic Richfield, et al.
and Gilley, et al. v. Atlantic Richfield, et al., described in
Paragraph 7 of Item 3 of the 1998 Form 10-K and in Paragraph 4 of Item
1 of Part II of the Second Quarter Form 10-Q, the Aguilar settlement
amount of $3,000,000 was approved by the court and paid by the company
in September 1999 and the Gilley settlement amount of $525,000 received
the preliminary approval of the court in October 1999.
Certain Environmental Matters Involving Civil Penalties
3. In connection with the company's negotiations with the South Coast Air
Quality Management District concerning issues involving the company's
former Los Angeles Refinery, described in Paragraph 14 of Item 3 of the
1998 Form 10-K and in Paragraph 7 of Item 1 of Part II of the Second
Quarter Form 10-Q, the company settled the past emissions fees issues
for an aggregate of $290,000, which was paid in September 1999.
4. On November 2, 1999, the District Attorney for San Joaquin County,
California filed a lawsuit against the company and Tosco Corporation
(The People of the State of California v. Union Oil Company of
California, et al., Superior Court of California, San Joaquin County
No. CV009241) alleging that company has failed to take appropriate
corrective action with respect to releases from underground fuel
storage tanks at six former company service stations in San Joaquin
County. The complaint seeks civil penalties as well as an injunction
requiring further remedial action and restraining violations of
applicable requirements. As of November 12, 1999, the company had not
been served with the complaint. The company intends to vigorously
contest the allegations of the complaint.
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: The Exhibit Index on page 31 of this report lists the
exhibits that are filed as part of this report.
(b) Reports on Form 8-K:
Filed during the third quarter of 1999:
1. Current Report on Form 8-K dated July 6, 1999, and
filed July 9, 1999, for the purpose of reporting, under
Item 5, the results of wells drilled by the company's
Spirit Energy 76 business unit in the Gulf of Mexico.
2. Current Report on Form 8-K dated July 27, 1999, and
filed July 29, 1999, for the purpose of reporting,
under Item 5, the company's second quarter 1999
earnings and related information.
3. Current Report on Form 8-K dated September 29, 1999,
and filed September 30, 1999, for the purpose of
reporting, under Item 5, the results of wells drilled
by the company's Spirit Energy 76 business unit in the
Gulf of Mexico.
Filed during the fourth quarter of 1999 to the date hereof:
1. Current Report on Form 8-K dated October 26, 1999, and
filed October 29, 1999, for the purpose of reporting,
under Item 5, the company's third quarter 1999 earnings
and related information.
29
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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: November 12, 1999 By: /s/ JOE D. CECIL
------------------------------
Joe D. Cecil
Vice President and Comptroller
(Duly Authorized Officer
Principal Accounting Officer)
30
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EXHIBIT INDEX
3. Restated Certificate of Incorporation of Unocal Corporation, dated October
1, 1999.
10. Termination and Employment Agreement and Release, by and between John Imle,
Union Oil Company of California and Unocal Corporation, effective as of
September 11, 1999.
12.1 Statement regarding computation of ratio of earnings to fixed charges of
Unocal Corporation for the nine months ended September 30, 1999 and 1998.
12.2 Statement regarding computation of ratio of earnings to fixed charges of
Union Oil Company of California for the nine months ended September 30,
1999 and 1998.
27. Financial data schedule for the period ended September 30, 1999 (included
only in the copy of this report filed electronically with the Commission).
31
RESTATED CERTIFICATE OF INCORPORATION
OF
UNOCAL CORPORATION
(Originally incorporated on March 18, 1983)
FIRST: The name of this corporation is:
UNOCAL CORPORATION
SECOND: The name and address of the registered agent of the corporation in
the State of Delaware is:
The Corporation Trust Company
Corporation Trust Center
1209 Orange Street
Wilmington, New Castle County, Delaware 19801
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: The total number of shares of stock which the corporation shall
have authority to issue is eight hundred fifty million (850,000,000) shares,
consisting of seven hundred fifty million (750,000,000) shares of Common Stock,
having a par value of $1.00 per share, and one hundred million (100,000,000)
shares of Preferred Stock, having a par value of $0.10 per share. The board of
directors is authorized, subject to any limitations prescribed by law, to
provide for the issuance of the shares of Preferred Stock in one of more series,
and by filing a certificate pursuant to the applicable law of the State of
Delaware, to establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences, and rights of
the shares of each such series and any qualifications, limitations or
restrictions thereof. The number of authorized shares of Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the Common
Stock, without a vote of the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is required pursuant to the
certificate or certificates establishing the series of Preferred Stock.
Pursuant to the authority vested in the board of directors by the preceding
paragraph of this Article FOURTH, the following series of Preferred Stock has
been created, and the designation and amount thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of such series, and the qualifications, limitations or restrictions
thereof are as set forth in the exhibit attached hereto as specified below and
incorporated herein by reference:
Exhibit I Series A Junior Participating Cumulative Preferred Stock
FIFTH: New bylaws may be adopted or the bylaws may be amended or repealed
by a vote of seventy-five percent of the outstanding stock of the corporation
entitled to vote thereon. Bylaws may also be adopted, amended or repealed by the
Board of Directors as provided or permitted by law; however, any bylaw amendment
adopted by the Board of Directors increasing or reducing the authorized number
of directors shall require a resolution adopted by the affirmative vote of not
less than seventy-five percent of the directors.
SIXTH: The number of directors which shall constitute the whole Board of
Directors of the corporation shall be as specified in the bylaws of the
corporation, subject to the provisions of Article FIFTH hereof and this Article
SIXTH. The board is divided into three classes, Class I, Class II and Class III.
Such classes shall be as nearly equal in number of directors as possible. Each
director shall serve for a term ending on the third annual meeting following the
annual meeting at which such director was elected; provided, however, that the
directors first elected to Class I shall serve for a term ending on the annual
meeting next following the end of the calendar year 1983, the directors first
elected to Class II shall serve for a term ending on the second annual meeting
next following the end of the calendar year 1983, and the directors first
elected to Class III shall serve for a term ending on the third annual meeting
next following the
<PAGE>
end of the calendar year 1983. The foregoing notwithstanding, each director
shall serve until his successor shall have been duly elected and qualified,
unless he shall resign, become disqualified, disabled or shall otherwise be
removed.
At each annual election, the directors chosen to succeed those whose terms
then expire shall be of the same class as the directors they succeed, unless, by
reason of any intervening changes in the authorized number of directors, the
Board shall designate one or more directorships whose term then expires as
directorships of another class in order more nearly to achieve equality of
number of directors among the classes.
Notwithstanding the rule that the three classes shall be as nearly equal in
number of directors as possible, in the event of any change in the authorized
number of directors each director then continuing to serve as such shall
nevertheless continue as a director of the class of which he is a member until
the expiration of his current term, or his prior death, resignation or removal.
If any newly created directorship may, consistent with the rule that the three
classes shall be as nearly equal in number or directors as possible, be
allocated to one or two or more classes, the Board shall allocate it to that of
the available classes whose term of office is due to expire at the earliest date
following such allocation.
SEVENTH: The affirmative vote of the holders of not less than seventy-five
percent of the outstanding stock of the corporation entitled to vote shall be
required for approval if (1) this corporation merges or consolidates with any
other corporation if such other corporation and its affiliates singly or in the
aggregate are directly or indirectly the beneficial owners of more than ten
percent (10%) of the total voting power of all outstanding shares of the voting
stock of this corporation (such other corporation being herein referred to as a
"Related Corporation"), or if (2) this corporation sells or exchanges all or a
substantial part of its assets to or with such Related Corporation, or if (3)
this corporation issues or delivers any stock or other securities of its issue
in exchange or payment for any properties or assets of such Related Corporation
or securities issued by such Related Corporation, or in a merger of any
affiliate of this corporation with or into such Related Corporation or any of
its affiliates; provided, however, that the foregoing shall not apply to any
such merger, consolidation, sale or exchange, or issuance or delivery of stock
or other securities which was (i) approved by resolution of the Board of
Directors adopted by the affirmative vote of not less than seventy-five percent
of the directors prior to the acquisition of the beneficial ownership of more
than ten percent (10%) of the total voting power of all outstanding shares of
the voting stock of the corporation by such Related Corporation and its
affiliates, nor shall it apply to any such transaction solely between this
corporation and another corporation fifty percent (50%) or more of the voting
stock of which is owned by this corporation. For the purposes hereof, an
"affiliate" is any person (including a corporation, partnership, trust, estate
or individual) who directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified. "Control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract, or otherwise;
and in computing the percentage of outstanding voting stock beneficially owned
by any person the shares outstanding and the shares owned shall be determined as
of the record date fixed to determine the stockholders entitled to vote or
express consent with respect to such proposal. The stockholder vote, if any,
required for mergers, consolidations, sales or exchanges of assets or issuances
of stock or other securities not expressly provided for in this Article, shall
be such as may be required by applicable law. A "substantial part" of the
corporation's assets shall mean assets comprising more than ten percent of the
book value of fair market value of the total assets of the corporation and its
subsidiaries taken as a whole.
EIGHTH: No action shall be taken by the stockholders except at an annual or
special meeting of stockholders. No action shall be taken by stockholders by
written consent.
NINTH: Special meetings of the stockholders of the corporation for any
purpose or purposes may be called at any time by the Board of Directors, or by a
majority of the members of the Board of Directors, or by a committee of the
Board of Directors which has been duly designated by the Board of Directors and
whose powers and authority, as provided in a resolution of the Board of
Directors or in the by-laws of the corporation, include the power to call such
meetings, but such special meetings may not be called by any other person or
persons; provided, however, that, if and to the extent that any special meeting
of stockholders may be called by any other person or persons specified in any
provisions of this Certificate of Incorporation or any amendment thereto, then
such special meeting may also be called by the person or persons, in the manner,
at the times and for the purposes so specified.
2
<PAGE>
TENTH: The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred on stockholders
herein are granted subject to this reservation. Notwithstanding the foregoing,
the provisions set forth in Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH and
this Article TENTH may not be repealed or amended in anyrespect unless such
repeal or amendment is approved by the affirmative vote of the holders of not
less than seventy-five percent of the total voting power of all outstanding
shares of voting stock of this corporation.
ELEVENTH: A director of the corporation shall not be personally liable to
the corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the shareholders of this article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the shareholders
of the corporation shall not adversely affect any right or protection of a
director of the corporation existing at the time of such repeal or modification.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which only
restates and integrates and does not further amend the provisions of the
corporation's Certificate of Incorporation as heretofore amended or
supplemented, there being no discrepancy between those provisions and the
provisions of this Restated Certificate of Incorporation except as permitted by
Section 245 of the General Corporation Law of Delaware, having been duly adopted
by the corporation's Board of Directors in accordance with Section 245 of the
General Corporation Law, has been executed by its duly authorized officer this
1st day of October, 1999.
UNOCAL CORPORATION
By: /s/ Dennis P.R. Codon
-----------------------
Name: Dennis P.R. Codon
Title: Vice President
3
<PAGE>
EXHIBIT I
SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK
Section 1. Designation and Amount. The shares of such series shall be
designated as Series A Junior Participating Cumulative Preferred Stock, par
value $.10 per share (the "Series A Preferred Stock"), and the number of shares
constituting such series shall be 3,000,000.
Section 2. Dividends and Distributions.
(a) The holders of shares of Series A Preferred Stock, in preference to the
holders of shares of Common Stock, $1.00 per share, of the Corporation (the
"Common Stock") and of any other junior stock of the Corporation that may be
outstanding, shall be entitled to receive, when, as and if declared by the Board
of Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the tenth day of January, April, July and October in each
year (each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series A Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (i) $0.25
per share ($1.00 per annum), or (ii) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions, other than a dividend payable in
shares of Common Stock, or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Preferred Stock. In the event that the
Corporation shall at any time declare or pay any dividend on Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise) into a greater or lesser number of shares of Common Stock, then and
in each such event, the amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under clause (ii) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event, and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (a) of this Section 2 immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided, however, that in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $0.25 per share ($1.00
per annum) on the Series A Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which cases such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
cumulate but shall not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
4
<PAGE>
Section 3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(a) Each share of Series A Preferred Stock shall entitle the holder thereof
to 100 votes (and each one one-hundredth of a share of Series A Preferred Stock
shall entitle the holder thereof to one vote) on all matters submitted toa vote
of the stockholders of the Corporation. In the event that the Corporation shall
at any time declare or pay any dividend on Common Stock payable in shares of
Common Stock or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then and in each such event, the number of votes per
share to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such number by
a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event, and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(b) Except as otherwise provided in the Certificate of Incorporation of the
Corporation or herein or by law, the holders of shares of Series A Preferred
Stock and the holders of shares of Common Stock shall vote together as one class
on all matters submitted to a vote of stockholders of the Corporation.
(c) In addition, the holders of shares of Series A Preferred Stock shall
have the following special voting rights:
In the event that at any time dividends on Series A Preferred Stock,
whenever accrued and whether or not consecutive, shall not have been paid
or declared and a sum sufficient for the payment thereof set aside, in an
amount equivalent to six quarterly dividends on all shares of Series A
Preferred Stock at the time outstanding, then and in each such event, the
holders of shares of Series A Preferred Stock and each other series of
preferred stock now or hereafter issued that shall be accorded such class
voting right by the Board of Directors and that shall have the right to
elect three directors as the result of a prior or subsequent default in
payment of dividends on such series (each such other series being
hereinafter called "Other Series of Preferred Stock"), voting separately as
a class without regard to series, shall be entitled to elect three
directors at the next annual meeting of stockholders of the Corporation, in
addition to the directors to be elected by the holders of all shares of the
Corporation entitled to vote for the election of directors, and the holders
of all shares (including the Series A Preferred Stock) otherwise entitled
to vote for directors, voting separately as a class, shall be entitled to
elect the remaining members of the Board of Directors, provided that the
Series A Preferred Stock and each Other Series of Preferred Stock, voting
as a class, shall not have the right to elect more than three directors.
Such special voting right of the holders of shares of Series A Preferred
Stock may be exercised until all dividends in default on the Series A
Preferred Stock shall have been paid in full or declared and funds
sufficient therefor set aside, and when so paid or provided for, such
special voting right of the holders of shares of Series A Preferred Stock
shall cease, but subject always to the same provisions for the vesting of
such special voting rights in the event of any such future dividend default
or defaults. At any time after such special voting rights shall have so
vested in the holders of shares of Series A Preferred Stock, the Secretary
of the Corporation may, and upon the written request of the holders of
record of 10% or more in number of the shares of Series A Preferred Stock
and each Other Series of Preferred Stock then outstanding addressed to the
Secretary at the principal executive office of the Corporation shall, call
a special meeting of the holders of shares of Preferred Stock so entitled
to vote, for the election of the directors to be elected by them as herein
provided, to be held within 60 days after such call and at the place and
upon the notice provided by law and in the Bylaws for the holding of
meetings of stockholders; provided, however, that the Secretary shall not
be required to call such special meeting in the case of any such request
received less than 90 days before the date fixed for any annual meeting of
stockholders, and if in such case such special meeting is not called or
held, the holders of shares of Preferred Stock so entitled to vote shall be
entitled to exercise the special voting rights provided in this paragraph
at such annual meeting. If any such special meeting required to be called
as above provided shall not be called by the Secretary within 30 days after
receipt of any such request, then the holders of record of 10% or more in
number of the shares of Series A Preferred Stock and each Other Series of
Preferred Stock then outstanding may designate in writing one of their
number to call such meeting, and the person so designated may, at the
expense of the Corporation, call such meeting to be held at the place and
upon the notice given by such person, and for that purpose shall have
access to the
5
<PAGE>
stock books of the Corporation. No such special meeting and no adjournment
thereof shall be held on a date later than 60 days before the annual
meeting of stockholders. If, at any meeting so called or at any annual
meeting held while the holders of shares of Series A Preferred Stock have
the special voting rights provided for in this paragraph, the holders of
not less than 40% of the shares of Series A Preferred Stock and each Other
Series of Preferred Stock then outstanding are present in person or by
proxy, which percentage shall be sufficient to constitute a quorum for the
election of additional directors as herein provided, the then authorized
number of directors of the Corporation shall be increased by three, as of
thetime of such special meeting or the time of the first such annual
meeting held while such holders have special voting rights and such quorum
is present, and the holders of shares of Series A Preferred Stock and each
Other Series of Preferred Stock, voting as a class, shall be entitled to
elect the additional directors so provided for. If the directors of the
Corporation are then divided into classes under provisions of the
Certificate of Incorporation of the Corporation or the Bylaws, the three
additional directors shall be members of those respective classes of
directors in which a vacancy is created as a result of such increase in the
authorized number of directors. If the foregoing expansion of the size of
the Board of Directors shall not be valid under applicable law, then the
holders of shares of Series A Preferred Stock and of each Other Series of
Preferred Stock, voting as a class, shall be entitled, at the meeting of
stockholders at which they would otherwise have voted, to elect directors
to fill any then existing vacancies on the Board of Directors, and shall
additionally be entitled, at such meeting and each subsequent meeting of
stockholders at which directors are elected, to elect all of the directors
then being elected until by such class vote three members of the Board of
Directors have been so elected. Upon the election at such meeting by the
holders of shares of Series A Preferred Stock and each Other Series of
Preferred Stock, voting as a class, of the directors they are entitled so
to elect, the persons so elected, together with such persons as may be
directors or as may have been elected as directors by the holders of all
shares (including Series A Preferred Stock) otherwise entitled to vote for
directors, shall constitute the duly elected directors of the Corporation.
The additional directors so elected by holders of shares of Series A
Preferred Stock and each Other Series of Preferred Stock, voting as a
class, shall serve until the next annual meeting or until their respective
successors shall be elected and qualified, or if any such director is a
member of a class of directors under provisions dividing the directors into
classes, each such director shall serve until the annual meeting at which
the term of office of such director's class shall expire or until such
director's successor shall be elected and shall qualify, and at each
subsequent meeting of stockholders at which the directorship of any
director elected by the vote of holders of shares of Series A Preferred
Stock and each Other Series of Preferred Stock under the special voting
rights set forth in this paragraph is up for election, said special class
voting rights shall apply in the reelection of such director or in the
election of such director's successor; provided, however, that whenever the
holders of shares of Series A Preferred Stock and each Other Series of
Preferred Stock shall be divested of the special rights to elect three
directors as above provided, the terms of office of all persons elected as
directors by the holders of shares of Series A Preferred Stock and each
Other Series of Preferred Stock, voting as a class, or elected to fill any
vacancies resulting from the death, resignation, or removal of directors so
elected by the holders of shares of Series A Preferred Stock and each Other
Series of Preferred Stock, shall forthwith terminate and, if applicable,
the number of directors shall be reduced accordingly. If, at any time after
a special meeting of stockholders or an annual meeting of stockholders at
which the holders of shares of Series A Preferred Stock and each Other
Series of Preferred Stock, voting as a class, have elected directors as
provided above, and while the holders of shares of Series A Preferred Stock
and each Other Series of Preferred Stock shall be entitled so to elect
three directors, the number of directors who have been elected by the
holders of shares of Series A Preferred Stock and each Other Series of
Preferred Stock (or who by reason of one or more resignations, deaths or
removals have succeeded any directors so elected) shall by reason of
resignation, death or removal be less than three but at least one, the
vacancy in the directors so elected by the holders of shares of the Series
A Preferred Stock and each Other Series of Preferred Stock may be filled by
the remaining director elected by such holders, and in the event that such
election shall not occur within 30 days after such vacancy arises, or in
the event that there shall not be incumbent at least one director so
elected by such holders, the Secretary of the Corporation may, and upon the
written request of the holders of record of 10% or more in number of the
shares of Series A Preferred Stock and each Other Series of Preferred Stock
then outstanding addressed to the Secretary at the principal office of the
Corporation shall, call a special meeting of the holders of shares of
Series A Preferred Stock and each Other Series of Preferred Stock so
entitled to vote, for an election to fill such vacancy or vacancies, to be
held within 60 days after such call and at the place and upon the notice
provided by law and in the Bylaws for the holding of meetings of
6
<PAGE>
stockholders; provided, however, that the Secretary shall not be required
to call such special meeting in the case of any such request received less
than 90 days before the date fixed for any annual meeting of stockholders,
and if in such case such special meeting is not called, the holders of
shares of Preferred Stock so entitled to vote shall be entitled to fill
such vacancy or vacancies at such annual meeting. If any such special
meeting required to be called as above provided shall not be called by the
Secretary within 30 days after receipt of any such request, then the
holders of record of 10% or more in number of the shares of Series A
Preferred Stock and each Other Series of Preferred Stock then outstanding
may designate in writing one of their number to call such meeting, and the
person so designated may, at the expense of the Corporation, call such
meeting to be held at the place and upon the notice above provided, and for
that purpose shall have access to the stock books of the Corporation; no
such special meeting and no adjournment thereof shall be held on a date
later than 60 days before the annual meeting of stockholders.
(d) Nothing herein shall prevent the directors or stockholders from taking
any action to increase the number of authorized shares of Series A Preferred
Stock, or increasing the number of authorized shares of Preferred Stock of the
same class as the Series A Preferred Stock or the number of authorized shares of
Common Stock, or changing the par value of the Common Stock or Preferred Stock,
or issuing options, warrants or rights to any class of stock of the Corporation
as authorized by the Certificate of Incorporation of the Corporation, as it may
hereafter be amended.
(e) Except as set forth herein, holders of shares of Series A Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote as set forth in the
Certificate of Incorporation of the Corporation or herein or by law) for taking
any corporate action.
Section 4. Certain Restrictions.
(a) Whenever any dividends or other distributions payable on the Series A
Preferred Stock as provided in Section 2 hereof are in arrears, thereafter and
until all accrued and unpaid dividends and distributions, whether or not
declared, on shares of Series A Preferred Stock outstanding shall have been paid
in full, the Corporation shall not and shall cause its subsidiaries not to,
directly or indirectly:
(i) declare or pay dividends on, or make any other distributions with
respect to, any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends on, or make any other distributions with
respect to, any shares of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with the Series A Preferred
Stock, except dividends paid ratably on shares of the Series A Preferred
Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, provided that
the Corporation may at any time redeem, purchase or otherwise acquire
shares of any such junior stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series A Preferred Stock, or any shares of stock ranking on a parity with
the Series A Preferred Stock, except in accordance with a Purchase offer
made in writing or by publication (as determined by the Board of Directors)
to all holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
7
<PAGE>
(b) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (a) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
preferred stock, without designation as to series, and may be reissued as part
of any series of preferred stock created by resolution or resolutions of the
Board of Directors (including Series A Preferred Stock), subject to the
conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made to:
(a) the holders of shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A Preferred Stock shall
have received the greater of (i) $100.00 per share ($1.00 per one one-hundredth
of a share), plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment, or
(ii) an aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount to be distributed
per share to holders of shares of Common Stock; or
(b) the holders of shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all other such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event that the Corporation shall at any time
declare or pay any dividend on Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise) into a greater or
lesser number of shares of Common Stock, then and in each such event, the
aggregate amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under the proviso in clause (a) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event, and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In the event that the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, or otherwise changed, then and in
each such event, the shares of Series A Preferred Stock shall at the same time
be similarly exchanged or changed in an amount per share (subject to the
provision for adjustment hereinafter set forth) equal to 100 times the aggregate
amount of stock, securities, cash and/or any other property (payable in kind),
as the case may be, into which or for which each share of Common Stock is
changed or exchanged. In the event that the Corporation shall at any time
declare or pay any dividend on Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise) into a greater or
lesser number of shares of Common Stock, then and in each such event, the amount
set forth in the preceding sentence with respect to the exchange or change of
shares of Series A Preferred Stock shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event, and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall not
be redeemable. Notwithstanding the foregoing, the Corporation may acquire shares
of Series A Preferred Stock in any other manner permitted by law, the
Certificate of Incorporation of the Corporation or herein.
Section 9. Rank. Unless otherwise provided in the Certificate of
Incorporation of the Corporation or a Certificate of Designations relating to a
subsequent series of preferred stock of the Corporation, the Series A Preferred
Stock shall rank junior to all other series of the Corporation's preferred stock
as to the payment of dividends and the distribution of assets on liquidation,
dissolution or winding up, and senior to the Common Stock of the Corporation.
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Section 10. Amendment. The Certificate of Incorporation of the Corporation
shall not be amended in any manner that would materially and adversely alter or
change the powers, preferences or special rights of the Series A Preferred Stock
without the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Series A Preferred Stock, voting together as a single
series.
Section 11. Fractional Shares. Series A Preferred Stock maybe issued in
fractions of a share (in one one-hundredths (1/100) of a share and integral
multiples thereof) that shall entitle the holder thereof, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and have the benefit of all other rights of holders
of shares of Series A Preferred Stock.
9
TERMINATION AND EMPLOYMENT AGREEMENT AND RELEASE
This Termination and Employment Agreement and Release ("Agreement"), is
made and entered into as of the Effective Date, as defined herein, by and
between John Imle ("Employee"), Union Oil Company of California ("Company") and
Unocal Corporation ("Unocal"). The Company and Unocal are sometimes referred to
herein jointly as "Companies".
WHEREAS, Employee (i) presently serves as a director of each of
Companies, (ii) is Vice Chairman of Unocal, and (iii) is an employee of Company.
WHEREAS, effective as of December 31, 1999, Employee hereby resigns his
positions as a director of the Companies.
NOW, THEREFORE, in consideration of the mutual promises contained in
this Agreement and other valuable consideration, the sufficiency of which is
hereby acknowledged, Companies and Employee agree as follows:
1. Termination of Employment. In the best interests of the Company
and its shareholders, upon execution of this agreement, the
Companies hereby terminate Employee from all of his current
employment-related positions with the Companies, effective as of
December 31, 1999. Employee shall be on vacation from October 15,
1999 through December 31, 1999. Employee shall receive a cash
payment for all accrued but not taken vacation determined as of
January 2, 2000 - such payment, less Applicable Withholding, to
be made by January 15, 2000.
2. Services to be Rendered by Employee On and After Effective Date.
(a) Term of Employment.
Employee shall be employed by the Companies continuously as a
Consulting Employee, commencing January 2, 2000 and continuing
through March 31, 2001. Such employment may be terminated
earlier, provided that such termination shall be exclusively in
accordance with Section 9(2) of this Agreement.
(b) Duties to be Performed.
Employee shall make himself available during regular business
hours at Employee's reasonable convenience to perform telephonic
consultation on matters not involving Confidential Information of
the Companies, provided that such telephonic consultation shall
not be required of Employee at times which interfere with
Employee's ability to conduct employment or business activities
and in any case not more than 80 hours per month. In addition,
Employee shall make himself available during regular business
hours to provide testimony in litigation to which any of the
Companies is a party, but such time shall reduce his obligation
under the preceding sentence (unless Employee is otherwise
compelled by judicial process).
(c) Non-Exclusive Employment.
Employee may, without restrictions as to time, place or nature of
undertaking, perform services for others during the term of
employment described in Section 2(a) as long as such services do
not compromise Employee's obligations under Sections 6 or 7 of
this Agreement or are not with respect to the oil and gas
exploration and production business in a country in which the
Companies are currently conducting significant oil and gas
exploration or production activities or are currently in
negotiations with respect to such activities. Following execution
of this Agreement, and the Effective Date of same, and during the
term of employment described in Section 2(a), Employee agrees to
inform Companies in writing within 10 days of commencing other
employment, consulting assignments or any other position for
which he receives compensation for his services.
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(d) Expense Reimbursement.
Company will reimburse Employee for all reasonable and documented
travel and out-of-pocket expenses incurred by Employee while
traveling on behalf of Company when such travel or expenses have
been authorized by Company.
3. Compensation.
(a) Salary.
During the period January 1, 2000 through December 31, 2000 term
of employment described in Section 2(a), and in consideration of
Employee services as a Consulting Employee and his agreement to
the restrictions on other employment set forth in Section 2(c),
Employee shall receive a salary, payable in semi-monthly
installments, of $525,000 less Applicable Withholding. Employee
shall receive the sum of $65,625 less Applicable Withholding for
the term of employment for January 1, 2001 through March 31,
2001, payable in semi-monthly installments. Employee shall not
accrue any vacation pay for the period of his status as a
Consulting Employee.
(b) Revised Incentive Compensation Plan.
Employee shall receive distribution of the cash portion of
deferred RICP awards made with respect to years prior to 1999 in
accordance with his existing deferral elections on a 100% vested
and non-forfeitable basis. Employee shall receive an RICP award
for calendar year 1999 equal to that which he would have received
had the Companies not terminated his employment under Section 1.
Employee's "target award" 50% (fifty percent) of base annual
salary shall be adjusted only for the Company's performance. With
respect to such adjustments, Employee shall be treated at least
as well as employees at or above his salary grade level. There
shall be no adjustment, neither increase nor decrease for
Employee's individual performance. If the RICP is interpreted,
modified, amended or terminated, or the Management Development
and Compensation Committee ("Committee") thereunder acts, in a
manner which would result in the foregoing award (after having
been rendered in a manner that is non-discriminatory relative to
Employee) being reduced, Employee shall receive a bonus, less
Applicable Withholding, in the amount of such reduction, payable
at the time the RICP award is payable, or would have been
payable.
(c) Long Term Incentive Plans of 1991 and 1998.
(1) Performance Shares.
The parties acknowledge and agree that Employee has been awarded,
under the LTIP, with respect to the Performance Cycles set forth
in Column A below, the number of Performance Shares appearing to
the right of each Performance Cycle in Column B below, and that
under the terms of the LTIP, such Performance Share awards will
be pro-rated as set forth in Column C below, assuming Employee's
employment continues through March 31, 2001:
A. B. C.
Performance Performance Proration
Cycle Share Award Amount
1996-1999 9400 9400
1997-2000 7000 7000
1998-2001 7700 6256
1999-2002 9000 5063
The Companies agree that payout of the above referenced awards
shall be "at the convenience of the Company" for purposes of said
plans and the equivalent section of the Employee's LTIP
agreements. Accordingly, the Companies shall cause the LTIP
Committee to make Performance Share payments to Employee based on
the Awards described in Column B above following the
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<PAGE>
close of each Performance Cycle (in the form and at the time such
awards are generally paid) subject only to the following LTIP
variables:
(a) Pro-ration for service under Section 8(d)(I) of the
LTIP shall be as described in Column C above for
termination of employment on March 31, 2001; in the
event of an earlier termination of the term of
employment described in Section 2(a), the date of such
termination shall not be earlier than the Effective
Date and the pro-ration shall be based on the
principles used to derive Column C above.
(b) The original Performance Share award shall be subject
to variation in accordance with Section 8(b) of the
LTIP and the "Peer Group Companies" relative
performance fraction contemplated by the LTIP
agreement.
(c) The price of Stock under the LTIP at the end of the
Performance Cycle.
(d) LTIP Rights Vested; No Further Awards. The termination
of the term of Employee's employment under Section 2 by
reason of Section 8(b) shall not modify Employee's
rights under this Section 3(c). Employee shall not be
eligible for any additional grants under the Long Term
Incentive Plan of 1998 after the Effective Date.
(2) Stock Options.
The parties acknowledge and agree that Employee has been awarded,
under the LTIP, Option Grants dated as set forth in Column A
below, the number of non-qualified stock options appearing to the
right of each Option grant in Column B below, exercisable at the
applicable strike price set forth in Column C below and that
under the terms of the Option Grants, such Option Grants become
exercisable in accordance with the terms increments over the 3
years following the Option Grant date and will therefore be
exercisable in the numbers set forth in Column D below, assuming
Employee's employment continues through March 31, 2001:
A. B. C. D.
Options
Number xercisable
Option of Strike on
Grants Options Price 03/31/2001
01/28/91 16,521 $24.3125 16,521
03/30/92 27,164 $20.9375 27,164
03/29/93 25,466 $29.6875 25,466
03/28/94 30,512 $26.3750 30,512
03/27/95 30,000 $28.5000 30,000
03/25/96 28,600 $32.8125 28,600
03/24/97 29,800 $38.8125 29,800
Companies agree that the exercisable options described in Column
D are vested and non-forfeitable and shall be exercisable by
Employee without restriction until the earlier of (I) the tenth
anniversary of the grant or (ii) the third anniversary of the
termination of the term of Employee's employment under Section
2(a).
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<PAGE>
(3) Restricted Shares.
The parties acknowledge and agree that Employee has 14,932 shares
of Restricted Stock resulting from his deferral of a portion of
RICP awards, as of the effective date. Notwithstanding any other
provisions of this Agreement, such Restricted Stock shall be 100%
vested and non-forfeitable, and distributed to Employee without
restriction, on the earlier of the termination of the term of
employment described in Section 2(a) or March 31, 2001.
Notwithstanding any other provisions of this Agreement, such
Restricted Stock shall be 100% vested and non-forfeitable, and
distributed to Employee without restriction, on the earlier of
the termination of the restrictions thereunder or April 6, 2001.
(4) Performance Stock Options.
Employee will continue to "time vest" in his Performance Stock
Options. Employee was granted 400,000 Performance Stock Options
in 1998 and such options will be 100% vested and non-forfeitable
if he remains an employee until March 31, 2001 and will be
subject to pro rata vesting in the event of earlier termination
of employment. The options remain subject to the terms of the
plan, including satisfaction of the performance requirements
necessary for them to become exercisable.
In the event that Employee's Performance Stock Options fail to
become exercisable solely because the performance requirements
necessary for them to become exercisable have not been met, the
Companies shall pay to Employee not later than April 6, 2001 a
lump sum cash settlement amount determined in accordance with the
terms of the Unocal Retirement Plan equal to the benefit accruals
that would have occurred in the aggregate under the Unocal
Retirement Plan and the Non-Qualified Retirement Plans had
Employee continued employment for three (3) additional years
beyond the date of his termination. Said three (3) year period
shall be reduced by the amount of any service recognized by said
plans for the period of January 1, 2001 through March 31, 2001
and using "includable compensation" currently as used in the
Unocal Retirement Plan with respect to Employee as of March 31,
2001. "Includable Compensation" for purposes of the Non-Qualified
Retirement Plan shall not be subject to any Internal Revenue Code
limitations.
(d) Benefits.
(1) Participation After Effective Date.
On and after the Effective Date, and during the term of
Employee's employment under Section 2(a) above, Employee shall be
entitled to participate in all Benefit Plans and fringe benefit
and payroll practices of Unocal on the same terms and conditions
as would be applicable were Employee serving, during the term of
employment described in Section 2(a), in good standing and
receiving as compensation the amounts described in Sections 3(a),
3(b), 3(c) and 3(d) of this Agreement. For purposes of the
preceding sentence, "terms and conditions" includes Employee
making required elections, and Employee's paying generally
applicable employee contributions required by a Benefit Plan to
obtain one or more benefits under the Benefit Plan. If, for any
reason, Employee does not receive, pursuant to a Benefit Plan, at
the time required by such Benefit Plan, all or any portion of the
benefit under such Benefit Plan as contemplated by this Section
3(d), the Companies shall be jointly and severally obligated to
provide the Employee the After Tax Equivalent of the benefit not
then received by the Employee pursuant to the Benefit Plan. The
parties agree that the rights and obligations created under the
preceding sentence are contractual rights and obligations between
Employee and the Companies under the law of California, and not
rights and obligations under a Benefit Plan.
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<PAGE>
(a) Without limiting the foregoing Section 3(a)(1), Employee
shall continue to accrue Benefit Service under Unocal's defined
benefit and defined contribution plans under which he is
currently covered. Any amendment to the Unocal Retirement Plan or
any of the Non-Qualified Retirement Plans which would adversely
affect the Employee's benefit thereunder shall be of no force and
effect with respect to the Employee except where such amendment
also adversely affects the benefit with respect to the Company's
most senior executives in a substantially identical manner.
(b) Retiree Health Benefits.
Companies hereby acknowledge and agree that Employee shall
continue to be eligible, during all periods following the
termination of his employment under Section 2(a), to participate
in those Benefit Plans providing post-retirement health benefits
in accordance with the terms thereof as applicable to similarly
situated former employees.
(c) Financial Counseling.
Employee shall remain eligible for financial counseling services
through December 31, 2001.
4. Severance Payment
Employee shall receive payments in accordance with the terms set
forth in Appendix A hereto. The Company's obligations under this
Section 4, as set forth in Appendix A hereto shall survive the
termination of this Agreement, whether pursuant to Section 9
hereof or otherwise. This payment shall be made as early as
practical in the calendar year 2000 following the completion of
the RICP calculation in respect of the 1999 calendar year.
5. Retirement Plans
(a) Qualified Plan. Not later than 30 days following Company's
receipt of all required and properly completed forms, the
Companies shall pay (or cause to be paid) to Employee a lump sum
amount in cash equal to the present value of Employee's accrued
benefit under the Unocal Retirement Plan accrued through March
31, 2001 (assuming Employee's employment through March 31, 2001.)
(b) Non-Qualified Plans. Not later than 30 days following
Company's receipt of all required and properly completed forms,
the Companies shall pay to Employee a lump sum amount in cash
equal to the present value of Employee's accrued benefit under
the Non-Qualified Retirement Plans accrued through March 31, 2001
(assuming Employee's employment through March 31, 2001).
(c) Certain Assumptions. For purposes of calculating the benefits
payable under Sections 5(a) and (b) above, [in addition to the
assumptions set forth on Exhibit A hereto,] the Companies shall
(1) credit Employee with 60 years, 4 months of age and 37 years,
10 months service (provided that if Employee's employment
terminates prior to March 31, 2001 the Companies shall be
entitled to a reduction in such age and service assumptions on a
month-for-month basis), (ii) use Employee's "includible
compensation" in effect as of March 31, 2001, (iii) take into
account any increases in IRC section 415 limits taking effect as
of or prior to March 31, 2001, and (iv) take into account any
changes in the terms of the Unocal Retirement Plan taking effect
as of or prior to March 31, 2001 that would result in a greater
benefit becoming payable to employee, to the extent allowable by
law and applicable regulations.
5
<PAGE>
6. Confidential Information.
Employee acknowledges that in the course of carrying out his
responsibilities to Companies, he has had fiduciary
responsibilities to Companies and has had access to and has been
entrusted with the confidential and proprietary information and
trade secrets of Companies including, without limitation,
information not previously disclosed to the public regarding
current and projected revenues, expenses, costs, profit margins
and any other financial and budgeting information; marketing and
distribution plans and practices; manufacturing processes,
formulae, methods and facilities; research and development;
business plans, opportunities, projects and any other business
and corporate strategies; product information including reserves,
exploration and research; terms of contracts and other
arrangements with customers suppliers, agents and employees of
Companies; confidential and sensitive information of record
regarding other employees (other than Employee's personal
opinions), including information with respect to their job
descriptions, documented performance strengths and weaknesses,
and compensation; and other information not generally known
regarding the business, affairs and plans of Companies
(collectively, the "Confidential Information"). Employee
acknowledges that the unauthorized use or disclosure of
Confidential Information would be detrimental to Companies and
would reasonably be anticipated to materially impair Companies'
value. Employee acknowledges and agrees that such Confidential
Information is the exclusive property of Companies and that he
shall not at any time, without the prior written consent of an
authorized officer of Unocal either during his employment by
Companies or after the termination of that employment, directly
or indirectly use for himself or others, or disclose to others,
any Confidential Information. The foregoing shall not apply to
information which either (I) is known to Employee other than as a
result of work performed for Companies and from some authorized
source other than Companies, (ii) is or becomes part of the
public domain, other than by Employee's direct or indirect
disclosure, or (iii) consists of explanations of his work
experience that are reasonably necessary to interview for
employment. Employee's obligations under this paragraph shall
survive termination of his employment as described in Section
2(a) for a period of two years from such termination. Employee
represents he has made available to Companies all of his files
and materials taken from his Unocal office, and Companies have
had an opportunity to inspect same, and Companies acknowledge
that such files and materials contain no Confidential
Information.
7. Change of Control.
Employee agrees that during the period commencing on the
Effective Date and ended two years after the termination of
Employee's employment as described in Section 2(a). Employee will
not directly or indirectly participate in or assist any person or
entity in activities designed to effectuate, or reasonably likely
to result in, a change in control of Unocal or other
extraordinary transaction involving Unocal. The foregoing
sentence shall not be interpreted as preventing Employee from
holding a position with an employer where Employee is "walled
off" from any activity prohibited to Employee under this Section.
Without limiting the generality of the preceding sentence,
activities prohibited by this paragraph 7 include activities
designed to effectuate, or reasonably likely to result in (I) a
merger or consolidation involving Unocal, (ii) a sale or other
disposition of all, or a substantial portion of, Unocal's assets,
(iii) any transaction that would require a vote of Unocal's
stockholders under Unocal's Certificate of Incorporation or
bylaws or under applicable law, (iv) any person or entity
(individually or as a group within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as
amended) becoming the beneficial owner of 15% or more of the
combined voting owner of Unocal's then-outstanding equity
securities or (v) a change in the composition of Unocal's Board
of Directors such than, during any period of two consecutive
calendar years, Continuing Directors (as defined below) cease,
for any reason, to constitute at least a majority of the Board of
Directors at the beginning of the applicable two year period
together with new directors whose election by the stockholders
was approved by a vote of at least two-thirds
6
<PAGE>
of the directors than in office who either were directors at the
beginning of the applicable two-year period or whose election was
previously approved. Employee acknowledges and agrees that in
light of Employee's position and history with Companies and their
affiliates and the circumstances as they exist as of the
Effective Date of this Agreement, it would be impossible for
Employee to engage in any of the activities prohibited by this
paragraph 7 without making use of Confidential Information, and
the prohibitions contained in this paragraph 7 are reasonable.
8. Remedies:
(1) Damages.
The parties agree that the damages according to proof shall be
the remedy at law for breaches hereunder. However, the Companies
shall not be entitled to withhold any payment or portion thereof
provided under Section 3 as an alleged offset against any such
claim of damages by the Companies unless (i) Companies have
submitted the issue to arbitration under Section 8 by written
notice given in accordance with the procedures thereunder on or
before September 14, 1998 and (ii) after a full evidentiary
hearing, the arbitrator determines that the Companies have such a
right of offset as a matter of law and that there has been a
material breach by Employee of Section 7 hereof.
(2) Companies' Equitable Remedies.
Employee acknowledges and agrees that full compliance with his
obligations under Sections 6 or are essential to the Companies,
and in the event of any breach or threatened breach by Employee
of Sections 5 or 6 Companies will sustain losses which are
impossible to determine and not fully compensable by monetary
damages. Therefore, Company and/or Unocal shall be entitled to
institute and prosecute proceedings in any court of competent
jurisdiction to enjoin any such breach or threatened breach and
to enforce the specific performance of such provisions.
(3) Employee's Equitable Remedies.
Companies acknowledge and agree that full compliance with their
obligations under this Agreement are essential to the Employee,
and in the event of any breach or threatened breach by Companies
of this Agreement, Employee will sustain losses which are
impossible to determine and not fully compensable by monetary
damages. Therefore, Employee shall be entitled to institute and
prosecute proceedings in any court of competent jurisdiction to
enjoin any such breach or threatened breach and to enforce the
specific performance of such provisions.
(4) Defense of Validity.
The Companies agree to defend the validity of this Agreement in
any proceeding, which threatens to make this Agreement
unenforceable in any material respect.
9. Termination of Employee.
Employee's employment with the Companies described in Section
2(a) shall terminate only as a result of one of the following
conditions:
(1) The termination of such employment effective March 31, 2001,
pursuant to the first sentence of Section 2(a).
(2) The Employee's material breach of Employee's obligations
under Section 6 or 7 providing services to others contrary to the
requirements of Section 2 (c).
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10. General Release by Employee.
In consideration for this Agreement, Employee hereby releases and
forever discharges Companies and their respective predecessors,
successors, partners, assigns, employees, shareholders, owners,
officers, directors, agents, attorneys, subsidiaries, divisions,
and affiliates (jointly referred to as "Employee's Released
Parties") from any and all claims, demands, causes of action,
obligations, damages, attorneys' fees, costs and liabilities of
any nature whatsoever ("Claims"), whether or not now known,
suspected or asserted, which Employee may have or claim to have
against the Released Parties relating in any manner to Employee'
employment with Companies and/or the termination of such
employment, other than those claims arising by reason of
Employee's rights under this Agreement and Benefit Plans of the
Companies under this Agreement, and hereby covenants not to
assert any such released Claims through a lawsuit, an
administrative proceeding or otherwise. This General Release
includes, but is not limited to, claims arising under federal,
state or local laws prohibiting employment discrimination or
claims arising out of any legal restrictions on Company's rights
to terminate its employees, including without limitation the Age
Discrimination in Employment Act of 1967, Title VII of the Civil
Rights Act of 1964, and the Civil Rights Act of 1991. Except as
specifically provided herein, nothing in this Agreement shall
affect in any way, apply to, increase, or diminish, any rights
which Employee has with respect to benefits under Benefit Plans
that have accrued and vested as of the Effective Date. Nothing in
this Agreement shall affect in any way, apply to, increase or
diminish, any rights which Employee ma have with respect to
coverage by Companies' liability insurance policies, including
directors and officers liability coverages, or Company's or
Unocal's defense or indemnification of Employee during and after
his employment with the Companies, or service as an officer or
director thereof for acts or omissions occurring during the term
of his employment with Company or the term of his service as an
officer or director.
11. General Release by Companies.
In consideration for this Agreement, Companies hereby release and
forever discharge Employee and his successors, heirs, spouse,
executors, insurers, creditors, administrators, devisees,
partners, assigns, employees, shareholders, owners, officers,
directors, agents, financial consultants, attorneys and
affiliates (jointly referred to as "Companies' Released Parties")
from any and all claims, demands, causes of action, obligations,
damages, attorneys' fees, costs and liabilities of any nature
whatsoever ("Company Claims"), whether or not now known,
suspected or asserted, which Companies may have or claim to have
against the Companies' Released Parties relating in any manner to
Employee's employment with Companies and/or the termination of
such employment (other than Company Claims arising under this
Agreement), and hereby covenants not to assert any such released
Company Claims through a lawsuit, an administrative proceeding or
otherwise.
12. Section 1542 Waiver.
Companies and Employee waive all rights under Section 1542 of the
Civil Code of California. That section reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH
THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
Notwithstanding the provisions of Section 1542 or any similar law
of any other state, and to provide a full and complete release of
Employee's and Companies' Released Parties as provided in
Sections 9 and 10 hereof, Companies and Employee expressly
acknowledge that Sections 9 and 10 of this Agreement are intended
to release, without limitation, Claims and Company Claims which
Companies or Employee do not know or suspect to exist in their or
his favor at the time of execution of this document, and that the
settlement agreed upon completely extinguishes all such Claims
and Company Claims.
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13. Arbitration.
Except for claims for equitable or injunctive relief, the parties
hereby agree to submit any claim or dispute arising out of the
terms of this Agreement (including exhibits) to private and
confidential arbitration by a single neutral arbitrator. Subject
to the terms of this paragraph, the arbitration proceedings shall
be governed by the Commercial Arbitration Rules of the American
Arbitration Association, and shall take place in Los Angeles
County. The arbitrator shall be appointed by agreement of the
parties hereto or, if no agreement can be reached, by the
American Arbitration Association pursuant to its Rules. The
decision of the arbitrator shall be final and binding on all
parties to this Agreement , and judgment thereon may be entered
in any court having jurisdiction. All costs of the arbitration
proceeding or litigation to enforce this Agreement, including
reasonable attorneys' fees shall be paid to the prevailing party
by the party against whom the arbitrator or court rules. The
parties shall instruct the arbitrator to specify which party is
the prevailing party. Except for claims for equitable or
injunctive relief, this arbitration procedure is intended to be
the exclusive method of resolving any claim relating to the
obligations set forth in this Agreement or otherwise relating in
any way to Employee's employment relationship with Companies.
14. Entire Agreement. This Agreement is a full and complete
expression of the intent of the parties with respect to the
subject matter of this Agreement. No other agreement or
representation, express or implied, has been made by either party
with respect to the subject matter of this Agreement.
15. Amendment. This Agreement may not be modified except by a written
agreement signed by both Employee and by a Vice President of
Unocal.
16. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California without
reference to the conflicts of law provisions thereof.
17. Severability. In the event any provision of this Agreement shall
finally be determined to be unlawful, such provision shall be
deemed to be severed from this Agreement and every other
provision of this Agreement shall remain in full force and
effect. If any one or more of the provisions of this Agreement
shall for any reason be held to be excessively broad, it shall be
construed, by limiting and reducing it, so as to be enforceable
to the full extent possible under applicable law.
18. Assignment. Employee warrants and represents that he has not
assigned or in any way transferred any right or claim related to
the subject matter of this Agreement and that he will not allow
or assist in such transfer or assignment in the future. Any
purported assignment or transfer shall be deemed void ab initio.
19. No Admission. This Agreement shall not constitute an admission by
any Released Party of any wrongful action or inaction whatsoever.
20. Voluntariness. Employee agrees that this Agreement is understood
by Employee and is voluntarily entered into by the Employee.
21. Beneficiary Designation. Employee may file a written beneficiary
designation for any payments in the event of his death prior to
receipt of the amounts due under this Agreement in the form of
Exhibit A. The last such designation received by Company prior to
his death shall control any such payments.
22. Employee's Right to Review Agreement. Employee has twenty-two
(22) days from the date of Employee's receipt of this Agreement
to consider whether or not to sign this Agreement.
23. Effective Date. This Agreement shall not be effective until eight
(8) days from the date of execution of this Agreement by Employee
(the "Effective Date"). During the seven days following his
execution of this Agreement, Employee may notify Company in
writing of his revocation of this Agreement.
9
<PAGE>
24. Employee's Right to Consult Counsel. Employee is advised to
consult with Employee's attorney before deciding whether or not
to sign this Agreement.
25. Parties in Interest. Except as expressly provided to the contrary
herein, this Agreement shall be binding upon each successor to,
and assign of, the parties, and inure to the benefit of each
permitted successor to, and assign of, the parties.
26. Waiver. Employee shall not be entitled to any other separation
benefits except as specifically provided in this Agreement.
27. Definitions. Capitalized terms herein shall have the meanings set
forth below.
(a) "After Tax Equivalent" means, with respect to the value of a
benefit under a Benefit Plan that is tax-free or tax
deferred, the amount necessary to replace the value of such
benefit after the tax effect on Employee, assuming a 50%
effective tax rate. For example, if Employee were not able
to receive a tax deferred allocation of $1,000 in a Benefit
Plan that was a defined contribution plan, the After Tax
Equivalent would be $2,000 payable in taxable form to
Employee (on the assumption that at least $1,000 net of
taxes would be generated which Employee could choose to
deposit in a deferred annuity). Similarly, the After Tax
Equivalent of a tax deferred defined benefit future accrual
would be twice the lump sum present value of the accrual at
the time the accrual would otherwise have occurred using
plan actuarial assumptions.
(b) "Applicable Withholding" means the sum of (i) required
Federal, state and local payroll and income tax withholding
and (ii) withholdings for employee-side contributions
pursuant to the terms of Benefit Plans.
(c) "Benefit Plan" means all of the Unocal employee benefit
plans (as defined in Section 3(3) of ERISA), programs or
fringe benefit arrangements or payroll practices in effect
at the Companies on October 14, 1999, any amendment,
modification, restatement or successor to same, and any
other "employee benefit plans" as defined in Section 3(3) of
ERISA or fringe benefit programs established by the
Companies during the term of Employee's employment described
in Section 2(a) in which the Chief Financial Officer of
Unocal is eligible to participate.
(d) "Confidential Information" has the meaning assigned by
Section 5.
(e) "Effective Date" has the meaning assigned by Section 23.
(f) "LTIP" means the Long Term Incentive Compensation Plan
forming a part of the Unocal Management Incentive Program of
1998.
(g) "Non-Qualified Retirement Plans" means the Unocal Retirement
Supplementary Compensation Plan and the Unocal Supplemental
Retirement Plan for Key Management Personnel.
(h) "RICP" means the Revised Incentive Compensation Plan forming
a part of the Unocal Corporation Management Incentive
Program.
10
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed in duplicate
originals.
UNION OIL COMPANY OF EMPLOYEE
CALIFORNIA
By: Dennis Codon ss By: J. F. Imle ss
----------------------
V.P.& Chief Legal Officer
Dennis Codon J. F. Imle
------------------ ----------------
Print Name Print Name
9/3/99 9/3/99
----------------- ----------------
Date Date
September 3, 1999
UNOCAL CORPORATION
By: Dennis Codon ss
--------------------------
V.P. & Chief Legal Officer
Dennis Codon
------------------
Print Name
9/3/99
------------------
Date
11
<PAGE>
APPENDIX A
A. Employee's benefits under Section 4 of the Agreement shall be a lump sum
equal to the sum of the following:
(1) $1,575,000 (One Million Five Hundred and Seventy-Five Thousand
Dollars), plus
(2) $75,000 (Seventy-Five Thousand Dollars), plus
(3) The sum of Employee's Revised Incentive Plan Awards for calendar years
1998 and 1999 multiplied by 1.5 (one and one-half).plus
(4) An amount equal to $94,500
B. The above payment shall be considered full satisfaction of all rights,
benefits and payments under Employee's Unocal Employment Agreement dated
July 28, 1998.
C. Employee shall not be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to Employee under any
provisions of this Agreement.
D. Certain Additional Payments by the Company may be due as follows:
(1) In the event it shall be determined that any payment or distribution
by the Company or its affiliates to or for the benefit of Employee
(whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise but determined without regard
to any additional payments required under this Agreement), (a
"Payment") would be subject to the excise tax imposed by Section 4999
of the Internal Revenue Code of 1986, as amended (the "Code") or any
interest or penalties are incurred by Employee with respect to such
excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise
Tax"), then Employee shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by
Employee of all taxes (including any interest or penalties imposed
with respect such taxes), including, without limitation, any income
taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, Employee retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Payments. Notwithstanding the foregoing provisions of this
Paragraph D(1), if it shall be determined that Employee is entitled to
a Gross-Up Payment, but that the Payments do not exceed 110% of the
greatest amount (the "Reduced Amount") that could be paid to Employee
such that the receipt of payments would not give rise to any Excise
Tax, then no Gross-Up Payment shall be made to Employee and the
Payments, in the aggregate, shall be reduced to the Reduced Amount.
(2) Subject to the provisions of Paragraph D(3), all determinations
required to the made under this Paragraph D, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up
Payment and the assumptions to be utilized in arriving at such
determination, shall be made by Ernst and Young or such other
certified public accounting firm as may be designated by Employee (the
"Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Employee within 15 business days
of the receipt of notice from Employee that there has been a Payment,
or such earlier time as is requested by the Company. In the event that
the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change of Control, Employee
shall appoint another nationally recognized accounting firm to make
the determinations required (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses
of the Accounting Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this Paragraph D, shall be
paid by the Company to Employee within five days of the receipt of the
Accounting Firm's determination. Any determination by the Accounting
firm shall be binding upon the Company and Employee. As a result of
the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder, it
is possible that Gross-Up Payments which will
12
<PAGE>
not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts itsremedies pursuant
to Paragraph D(3) and Employee thereafter is required to make a
payment of any Excise Tax, the Accounting Firm shall determine the
amount of the Underpayment that has occurred and any such Underpayment
shall be promptly paid by the Company to or for the benefit of
Employee.
(3) Employee shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than 10 business
days after Employee is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which
such claims is requested to be paid. The Employee shall not pay such
claim prior to the expiration of the 30-day period following the date
on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such
claim is due). If the Company notifies Employee in writing prior to
the expiration of such period that it desires to contest such claim,
Employee shall:
(i) give the Company any information reasonably requested by the
Company relating t such claim;
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by
the Company;
(iii)cooperate with the Company in good faith in order effectively to
contest such claim; and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
Employee harmless, on an after-tax basis, for any Excise Tax or income
tax (including interest and penalties with respect thereto) imposed as
a result of such representations and payment of costs and expenses.
Without limitation on the foregoing provisions of this Paragraph D(3),
the Company shall control all proceedings taken in connection with
such contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct Employee to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and Employee agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however,
that if the Company directs Employee to pay such claim and sue for a
refund, the Company shall advance the amount of such payment to
Employee, on an interest-free basis and shall indemnify and hold
Employee harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect thereto)
imposed with respect to the such advance or with respect to any
imputed income with respect to taxes for the taxable year of Employee
with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's
control of the contest shall be limited to issues with respect to
which a Gross-Up payment would be payable hereunder and Employee shall
be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
(4) If, after the receipt by Employee of an amount advanced by the Company
pursuant to Paragraph D(3), Employee becomes entitled to receive any
refund with respect to such claim, Employee shall (subject to the
Company's employing with the requirements of Paragraph D) promptly pay
to the Company the amount of such refund (together with any interest
paid or credited thereon after taxes applicable thereto). If, after
the receipt by Employee of an amount advanced by the Company with
13
<PAGE>
respect to such claim and the Company does not notify Employee in
writing of its intent to contest such denial of refund prior to the
expiration of 30 days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount
of Gross-Up Payment required to be paid.
14
<TABLE>
<CAPTION>
EXHIBIT 12.1
UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Nine Months
Ended September 30
--------------------
Millions of dollars 1999 1998
- --------------------------------------------------------------------------------
<S> ........................................................ <C> <C>
Earnings (loss) from operations ............................ $ 40 $159
Provision for income taxes ................................. 51 177
- --------------------------------------------------------------------------------
Earnings (loss) subtotal .......................... 91 336
Fixed charges included in earnings:
Interest expense ........................................ $145 $131
Distribution on convertible preferred securities ........ 24 24
Interest portion of rentals ............................. 15 17
- --------------------------------------------------------------------------------
Fixed charges subtotal ............................ 184 172
Earnings from operations
available before fixed charges .......................... $275 $508
- --------------------------------------------------------------------------------
Fixed charges:
Fixed charges included in earnings ...................... $184 $172
Capitalized interest .................................... 13 22
- --------------------------------------------------------------------------------
Total fixed charges ............................... $197 $194
- --------------------------------------------------------------------------------
Ratio of earnings from operations
to fixed charges ........................................ 1.4 2.6
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 12.2
UNION OIL COMPANY OF CALIFORNIA AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Nine Months
Ended September 30
--------------------
Millions of dollars 1999 1998
- --------------------------------------------------------------------------------
<S> .................................................. <C> <C>
Earnings (loss) from operations ...................... $ 61 $179
Provision for income taxes ........................... 57 184
- --------------------------------------------------------------------------------
Earnings subtotal .............................. 118 363
Fixed charges included in earnings:
Interest expense .................................. 145 131
Interest portion of rentals ....................... 15 17
- --------------------------------------------------------------------------------
Fixed charges subtotal ......................... 160 148
Earnings (loss) from operations
available before fixed charges .................... 278 511
- --------------------------------------------------------------------------------
Fixed charges:
Fixed charges included in earnings ................ 160 148
Capitalized interest .............................. 13 22
- --------------------------------------------------------------------------------
Total fixed charges ............................ $173 $170
- --------------------------------------------------------------------------------
Ratio of earnings from operations
to fixed charges ................................. 1.6 3.0
- --------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Unocal Corporation FDS
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 209
<SECURITIES> 0
<RECEIVABLES> 863
<ALLOWANCES> (65)
<INVENTORY> 197
<CURRENT-ASSETS> 1,360
<PP&E> 16,263
<DEPRECIATION> (10,395)
<TOTAL-ASSETS> 8,688
<CURRENT-LIABILITIES> 1,346
<BONDS> 2,834
0
0
<COMMON> 253
<OTHER-SE> 2,346
<TOTAL-LIABILITY-AND-EQUITY> 8,688
<SALES> 4,230
<TOTAL-REVENUES> 4,374
<CGS> 3,136
<TOTAL-COSTS> 4,283
<OTHER-EXPENSES> 224
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145
<INCOME-PRETAX> 91
<INCOME-TAX> 51
<INCOME-CONTINUING> 40
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.17
</TABLE>
