EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Union Pacific Resources Group Inc.
Fort Worth, Texas
We have audited the accompanying consolidated statements of financial
position of Union Pacific Resources Group Inc. (a Utah Corporation) and
subsidiaries ("the Company") as of December 31, 1999 and 1998, and the related
consolidated statements of income and comprehensive income, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
We have also audited the adjustments related to discontinued operations
described in Note 3 that were applied to restate the 1997 financial statements.
In our opinion, such adjustments are appropriate and have been properly applied.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 3, 2000
40
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Union Pacific Resources Group Inc.
Fort Worth, Texas
We have audited the accompanying consolidated statements of income, changes
in shareholders' equity and cash flows of Union Pacific Resources Group Inc.
("the Company") for the year ended December 31, 1997, (which have been restated
and are no longer presented herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of its operations and its cash flows for the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
January 26, 1998
41
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Operating revenues:
Producing properties...................................... $1,473.3 $ 1,537.4 $1,293.5
Other oil and gas revenues................................ 133.7 162.5 84.7
Minerals (Note 14)........................................ 120.5 141.1 139.8
-------- --------- --------
Total operating revenues.......................... 1,727.5 1,841.0 1,518.0
-------- --------- --------
Operating expenses:
Production................................................ 400.6 444.3 300.8
Exploration............................................... 267.9 339.0 204.7
Minerals (Note 14)........................................ (2.8) 3.5 3.4
Depreciation, depletion and amortization (Note 6)......... 827.7 2,125.6 504.0
General and administrative................................ 86.9 104.8 71.2
Restructuring charge (Note 4)............................. 11.4 17.0 --
-------- --------- --------
Total operating expenses.......................... 1,591.7 3,034.2 1,084.1
-------- --------- --------
Operating income (loss)..................................... 135.8 (1,193.2) 433.9
Other income (expense) -- net (Note 16)..................... 31.7 (45.3) 24.5
Interest expense (Notes 3 and 9)............................ (218.7) (249.8) (39.5)
-------- --------- --------
Income (loss) from continuing operations before income
taxes..................................................... (51.2) (1,488.3) 418.9
Income tax expense (benefit) (Note 8)....................... (140.4) (605.2) 115.8
-------- --------- --------
Income (loss) from continuing operations, before
extraordinary items....................................... 89.2 (883.1) 303.1
Gain on sale of discontinued operations -- net of tax....... 157.0 -- --
Income (loss) from discontinued operations -- net of tax.... (23.8) (15.6) 29.9
-------- --------- --------
Income (loss) from discontinued operations (Note 3)......... 133.2 (15.6) 29.9
Extraordinary gain from early extinguishment of debt -- net
of tax (Note 9)........................................... 3.4 -- --
-------- --------- --------
Net income (loss)........................................... $ 225.8 $ (898.7) $ 333.0
-------- --------- --------
Comprehensive income -- net of tax: (Note 15)
Foreign currency translation adjustments.................. $ 22.5 $ (67.1) $ (5.3)
Minimum pension liability................................. (6.0) (3.9) (1.0)
-------- --------- --------
Comprehensive income (loss)................................. $ 242.3 $ (969.7) $ 326.7
======== ========= ========
Earnings (loss) per share -- basic and diluted: (Note 15)
Continuing operations..................................... $ 0.36 $ (3.57) $ 1.21
Discontinued operations................................... 0.54 (0.06) 0.12
Extraordinary item........................................ 0.01 -- --
-------- --------- --------
Total............................................. $ 0.91 $ (3.63) $ 1.33
-------- --------- --------
Weighted average shares outstanding -- diluted.............. 249.2 247.7 250.9
Cash dividends per share.................................... $ 0.20 $ 0.20 $ 0.20
</TABLE>
The accompanying accounting policies and notes to the Consolidated Financial
Statements
are an integral part of these statements.
42
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Current assets:
Cash and temporary investments............................ $ 123.7 $ 8.8
Accounts receivable (net of allowance for doubtful
accounts of $8.5 million in 1999 and $9.8 million in
1998).................................................. 304.4 261.0
Inventories............................................... 54.7 64.6
Other current assets...................................... 13.1 107.0
--------- ---------
Total current assets.............................. 495.9 441.4
--------- ---------
Properties: (Note 6)
Cost...................................................... 11,006.6 11,078.2
Accumulated depreciation, depletion and amortization...... (5,535.6) (4,984.9)
--------- ---------
Total properties.................................. 5,471.0 6,093.3
Intangible and other assets................................. 180.0 180.8
Net assets of discontinued operations (Note 3).............. -- 926.9
--------- ---------
Total assets...................................... $ 6,146.9 $ 7,642.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 285.0 $ 270.5
Accrued taxes payable..................................... 68.6 64.9
Short-term debt (Note 9).................................. 2.3 853.8
Other current liabilities (Note 14)....................... 185.8 157.5
--------- ---------
Total current liabilities......................... 541.7 1,346.7
--------- ---------
Long-term debt (Note 9)..................................... 2,797.3 3,744.9
Deferred income taxes (Note 8).............................. 1,326.8 1,291.6
Retiree benefits obligations (Note 11)...................... 142.5 142.9
Other long-term liabilities (Notes 12, 13 and 14)........... 401.1 388.1
Shareholders' equity (see page 45).......................... 937.5 728.2
--------- ---------
Total liabilities and shareholders' equity........ $ 6,146.9 $ 7,642.4
========= =========
</TABLE>
The accompanying accounting policies and notes to the
Consolidated Financial Statements are an integral part of these
statements.
43
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Cash provided by operations:
Net income................................................ $ 225.8 $ (898.7) $ 333.0
(Income) loss from discontinued operations (Note 3)..... (133.2) 15.6 (29.9)
Gain on extinguishment of debt -- net of tax............ (3.4) -- --
--------- --------- ---------
Income (loss) from continuing operations.................. 89.2 (883.1) 303.1
Non-cash charges to income:
Depreciation, depletion and amortization................ 827.7 2,125.6 504.0
Deferred income tax (benefit) (Note 8).................. 1.4 (659.3) 110.9
Surrendered lease amortization.......................... 172.5 185.9 85.6
(Gains) losses on sales of assets -- net................ (148.0) (139.9) (18.8)
Other non-cash charges (credits) -- net................. (86.2) 194.7 (96.2)
Exploratory expenditures.................................. 44.1 115.2 76.9
Changes in current assets and liabilities................. 94.8 92.0 (109.3)
--------- --------- ---------
Cash provided by operations........................ 995.5 1,031.1 856.2
--------- --------- ---------
Investing activities:
Capital and exploratory expenditures (Note 7)............. (428.2) (1,194.5) (1,188.4)
Acquisition of Norcen (Note 2)............................ -- (2,634.3) --
Proceeds from sale of discontinued operations (Note 3).... 1,359.1 -- --
Proceeds from sales of assets (Note 3).................... 281.3 436.6 37.3
Proceeds from sale of investments......................... -- 48.4 --
Cash provided (used) by discontinued operations........... (203.6) 50.4 (221.8)
Other investing activities -- net......................... -- -- (17.7)
--------- --------- ---------
Cash provided (used) by investing activities....... 1,008.6 (3,293.4) (1,390.6)
--------- --------- ---------
Financing activities:
Dividends paid............................................ (49.6) (49.6) (50.0)
Repayment of debt......................................... (2,295.5) -- --
Proceeds from long-term debt issuance (Note 9)............ 500.0 1,025.0 --
Other debt financing -- net............................... -- 1,294.5 559.6
Repurchase of common stock................................ (12.6) (26.7) (52.3)
Reissuance of treasury stock.............................. 3.3 -- --
Other financings -- net (Note 9).......................... (34.8) (39.2) 30.4
--------- --------- ---------
Cash provided (used) by financing activities....... (1,889.2) 2,204.0 487.7
--------- --------- ---------
Net change in cash and temporary investments................ 114.9 (58.3) (46.7)
Balance at beginning of year................................ 8.8 67.1 113.8
--------- --------- ---------
Balance at end of year...................................... $ 123.7 $ 8.8 $ 67.1
========= ========= =========
Changes in current assets and liabilities:
Accounts receivable....................................... $ (37.2) $ 215.8 $ (33.2)
Inventories............................................... 9.9 (17.8) (1.5)
Other current assets...................................... 98.3 3.2 21.6
Accounts payable.......................................... 40.8 (153.4) (21.4)
Accrued taxes payable..................................... (55.2) 3.5 (73.4)
Other current liabilities................................. 38.2 40.7 (1.4)
--------- --------- ---------
Total.............................................. $ 94.8 $ 92.0 $ (109.3)
========= ========= =========
Supplemental cash flow disclosure:
Interest paid:
Continuing operations................................... $ 227.5 $ 216.0 $ 42.7
Discontinued operations................................. 7.4 21.1 13.6
Income taxes paid (recovered):
Continuing operations................................... (95.5) 81.0 121.0
Discontinued operations................................. -- (35.0) 8.7
</TABLE>
The accompanying accounting policies and notes to the Consolidated Financial
Statements
are an integral part of these statements.
44
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Common stock, no par value; authorized 400,000,000 shares:
251,951,140 shares issued and outstanding at December 31,
1999
250,685,204 shares issued and outstanding at December 31,
1998
251,888,575 shares issued and outstanding at December 31,
1997
Balance at beginning and end of year...................... $ -- $ -- $ --
------ ------- --------
Paid-in surplus (Note 15):
Balance at beginning of year.............................. 992.6 991.2 872.9
Conversion, award, forfeiture and appreciation of
retention shares........................................ 13.6 0.5 5.1
Issuance of ESOP shares................................... -- -- 107.3
Release of ESOP shares.................................... (11.8) -- --
Exercise of stock options................................. 3.3 0.6 5.5
Other..................................................... 1.1 0.3 0.4
------ ------- --------
Balance at end of year.................................... 998.8 992.6 991.2
------ ------- --------
Retained earnings:
Balance at beginning of year.............................. 9.1 957.4 674.4
Net income (loss)......................................... 225.8 (898.7) 333.0
------ ------- --------
Total.............................................. 234.9 58.7 1,007.4
Dividends declared on common stock........................ (49.6) (49.6) (50.0)
------ ------- --------
Balance at end of year.................................... 185.3 9.1 957.4
------ ------- --------
Unearned compensation (Note 15):
Balance at beginning of year.............................. (6.0) (11.8) (17.5)
Conversion, award, forfeiture and amortization of
retention shares -- net................................. 3.5 5.8 5.7
------ ------- --------
Balance at end of year.................................... (2.5) (6.0) (11.8)
------ ------- --------
ESOP (Note 15):
Balance at beginning of year.............................. (95.7) (102.0) --
Issuance of ESOP shares................................... -- -- (107.3)
Release of ESOP shares.................................... 16.2 6.3 5.3
------ ------- --------
Balance at end of year............................. (79.5) (95.7) (102.0)
------ ------- --------
Treasury stock (Note 15):
Balance at beginning of year.............................. (82.5) (55.8) (3.5)
Treasury stock repurchased or reissued, at cost -- net.... (9.3) (26.7) (52.3)
------ ------- --------
Balance at end of year: 4,276,989 shares at December 31,
1999
3,666,913 shares at December 31,
1998
2,379,625 shares at December 31,
1997............................ (91.8) (82.5) (55.8)
------ ------- --------
Comprehensive income:
Deferred foreign exchange adjustment (Note 15):
Balance at beginning of year............................ (84.4) (17.3) (12.0)
Foreign currency translation adjustment................. 22.5 (67.1) (5.3)
------ ------- --------
Balance at end of year.................................. (61.9) (84.4) (17.3)
------ ------- --------
Minimum pension liability (Note 11)
Balance at beginning of year............................ (4.9) (1.0) --
Minimum pension liability adjustment.................... (6.0) (3.9) (1.0)
------ ------- --------
Balance at end of year.................................. (10.9) (4.9) (1.0)
------ ------- --------
Total Comprehensive income......................... (72.8) (89.3) (18.3)
------ ------- --------
Total shareholders' equity......................... $937.5 $ 728.2 $1,760.7
====== ======= ========
</TABLE>
The accompanying accounting policies and notes to the Consolidated Financial
Statements
are an integral part of these statements.
45
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
BUSINESS SEGMENT INFORMATION
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Revenues(a):
Exploration and production................................ $1,607.0 $ 1,699.9 $1,378.2
Minerals.................................................. 120.5 141.1 139.8
-------- --------- --------
Total revenues.................................... $1,727.5 $ 1,841.0 $1,518.0
======== ========= ========
Depreciation, depletion and amortization:
Exploration and production................................ $ 816.0 $ 2,115.8 $ 499.3
Minerals.................................................. 5.5 4.1 0.9
Corporate................................................. 6.2 5.7 3.8
-------- --------- --------
Total depreciation, depletion and amortization.... $ 827.7 $ 2,125.6 $ 504.0
======== ========= ========
Operating income (loss):
Exploration and production................................ $ 122.5 $(1,199.2) $ 373.4
Minerals.................................................. 117.8 133.5 135.5
Corporate(b).............................................. (104.5) (127.5) (75.0)
-------- --------- --------
Total operating income (loss)..................... $ 135.8 $(1,193.2) $ 433.9
======== ========= ========
Fixed assets -- net:
Exploration and production................................ $5,367.4 $ 5,988.8 $2,827.1
Minerals.................................................. 7.4 10.2 14.1
Corporate................................................. 96.2 94.3 59.9
-------- --------- --------
Total fixed assets -- net......................... $5,471.0 $ 6,093.3 $2,901.1
======== ========= ========
Capital and exploratory expenditures:
Exploration and Production................................ $ 423.1 $ 3,796.2 $1,172.6
Minerals.................................................. -- 0.1 1.4
Corporate................................................. 5.1 32.5 14.4
-------- --------- --------
Total capital and exploratory expenditures........ $ 428.2 $ 3,828.8 $1,188.4
======== ========= ========
</TABLE>
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Revenues(a):
United States............................................. $1,182.9 $ 1,455.9 $1,477.2
Canada.................................................... 332.1 259.0 28.9
Other international....................................... 212.5 126.1 11.9
-------- --------- --------
Total revenues.................................... $1,727.5 $ 1,841.0 $1,518.0
======== ========= ========
Fixed assets -- net:
United States............................................. $2,389.6 $ 2,965.2 $2,800.9
Canada.................................................... 1,918.8 1,854.0 89.8
Other international....................................... 1,162.6 1,274.1 10.4
-------- --------- --------
Total fixed assets -- net......................... $5,471.0 $ 6,093.3 $2,901.1
======== ========= ========
</TABLE>
---------------
(a) 1999, 1998 and 1997 revenues include income from equity affiliates of $78.5
million, $89.7 million and $74.4 million, respectively for the Minerals
segment.
(b) Segment operating loss for the Corporate segment consists primarily of
general and administrative expense and restructuring charge.
The Company's reportable segments are strategic business units or an
aggregation of business units with similar operations and management objectives.
The reportable segments are managed separately because each segment requires
different operational assets, technology and management strategies.
This information should be read in conjunction with the accompanying accounting
policies and notes
to the Consolidated Financial Statements.
46
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The Consolidated Financial Statements include
the accounts of Union Pacific Resources Group Inc. (a Utah Corporation) and
subsidiaries (collectively, the "Company"), including its principal operating
subsidiary Union Pacific Resources Company ("UPRC"). The Company accounts for
investments in affiliated companies (20% to 50% owned) on the equity method of
accounting. The Company also consolidates its pro-rata share of oil and gas
joint ventures. All significant intercompany transactions are eliminated. The
Consolidated Financial Statements for previous periods include certain
reclassifications that were made to conform to the current presentation. Such
reclassifications have no effect on previously reported net income. Refer to the
accompanying notes to the financial statements for additional disclosure of the
Company's significant accounting policies.
As a result of the disposition of the Company's gathering, processing and
marketing ("GPM") business segment, the GPM business segment has been accounted
for as a discontinued operation. GPM results of operations have been excluded
from continuing operations in the Consolidated Statements of Income and Cash
Flows. GPM net assets have been segregated from continuing operations in the
accompanying statements of financial position and reported as net assets of
discontinued operations (See Note 3).
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during each reporting period. Management believes its estimates and assumptions
are reasonable; however, such estimates and assumptions are subject to a number
of risks and uncertainties which may cause actual results to differ materially
from the Company's estimates. Significant estimates underlying these financial
statements include the estimated quantities of proved oil and gas reserves and
the related present value of estimated future net cash flows therefrom (see
Supplementary Information beginning on page 74).
Cash and Temporary Investments. Temporary investments are stated at cost
which approximates fair market value, and consist of investments with original
maturities of three months or less.
Inventories. Inventories consist primarily of hydrocarbon volumes and
materials and supplies, carried on a first-in first-out basis at the lower of
cost or market. At December 31, 1999 and 1998 hydrocarbon inventory was $13.5
million and $11.0 million, respectively, while materials and supplies inventory
was $41.1 million and $53.6 million, respectively.
Oil and Gas Properties. Oil and gas properties are accounted for using the
successful efforts method. Under this method, exploration costs (drilling costs
of unsuccessful exploration wells, geological and geophysical costs,
non-producing leasehold amortization and delay rentals) are charged to expense
when incurred. Costs to develop producing properties, including drilling costs
and applicable leasehold acquisition costs, are capitalized. Costs to drill
exploratory wells that result in additions to reserves are also capitalized.
Depreciation, depletion and amortization of producing properties, including
depreciation of well and support equipment and amortization of related lease
costs, are determined by using a unit of production method based upon estimated
proved reserves. Provisions for depreciation of property and equipment other
than producing properties are computed principally on the straight-line method
based on estimated service lives, which range from two to 15 years. Potential
impairment of producing properties is assessed annually on a field-by-field
basis. Significant unproved properties are not amortized, but are monitored for
impairment and assessed annually in detail. Aggregated acquisition costs of
individual insignificant unproved properties are amortized from the date of
acquisition on a composite basis, which considers past success experience and
average lease life (see Note 6).
47
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs of future site restoration, dismantlement and abandonment for
producing properties are accrued as part of depreciation, depletion and
amortization expense for tangible equipment by assuming no salvage value in the
calculation of the unit of production rate. Additional costs are accrued for
offshore and Canadian wells based on internal engineering estimates using the
unit of production method with a charge to depreciation, depletion and
amortization expense. The balance of the abandonment accrual at December 31,
1999 and 1998 was $75.0 million and $62.1 million, respectively.
Gains or losses on retired, sold or abandoned properties that constitute
part of an amortization base are deferred by charging or crediting the
investment, net of proceeds, to accumulated depreciation, depletion and
amortization unless such non-recognition would significantly affect the unit of
production rate. Gains or losses from the disposition of other properties are
recognized currently. Gains and losses from the sale of operating assets are
recognized in other oil and gas revenues. Gains included in other oil and gas
revenues were $148.0 million, $139.9 million and $18.8 million in 1999, 1998 and
1997, respectively. Gains and losses from all other dispositions are recorded in
other income.
Goodwill. Intangible and other assets include goodwill of $68.6 million for
intangible value acquired from business combinations prior to 1971. Such
goodwill is not being amortized because it is considered to have continuing
value over an indefinite period. The value of goodwill is evaluated annually to
determine whether any potential impairment exists.
Revenue Recognition. Sales from producing wells are recognized on the
entitlement method of accounting which defers recognition of sales when, and to
the extent that, deliveries to customers exceed the Company's net revenue
interest in production. Similarly, when deliveries are below the Company's net
revenue interest in production, sales are recorded to reflect the full net
revenue interest. The Company's gas imbalance liability at December 31, 1999 and
1998 was $5.5 million and $5.2 million, respectively. Natural gas and crude oil
marketing revenue is included in other oil and gas revenue and recorded net of
the cost of product purchased.
Recently issued accounting standards. The Financial Accounting Standards
Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities," and
SFAS No. 137, which defers the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivatives be
recognized on the balance sheet and measured at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge and
be eligible for special accounting treatment. However, the special accounting
treatment afforded hedge transactions may delay the recognition of a portion of
the gain or loss on the derivative, which would later be recorded concurrent
with the gain or loss on the item being hedged. For derivatives not designated
as hedges, gains or losses are recognized in earnings in the period of change.
The impact of the statement on the Company will depend upon price volatility and
the level of open derivative positions at the end of a reporting period. The
Company plans to adopt SFAS No. 133 for the first quarter 2001 and is currently
evaluating the effects of this pronouncement. Adoption will require the Company
to begin recording unrealized gains and losses in the Consolidated Statement of
Financial Position and in the Consolidated Statement of Comprehensive Income.
1. NATURE OF OPERATIONS
The Company is an independent oil and gas company engaged primarily in the
exploration for and the development and production of natural gas and crude oil
in several major basins in the United States, Canada, Guatemala, Venezuela and
other international areas. The Company markets all of its crude oil production
together with significant volumes of crude oil produced by others. In 1998, the
Company marketed a substantial portion of its natural gas and natural gas
liquids ("NGLs"); however, in 1999 the Company entered into a long-term natural
gas sales agreement to sell a substantial portion of its domestic natural gas
and NGLs to Duke (hereinafter defined) (see Notes 3 and 5). The Company also
engages in the hard
48
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minerals business through non-operated joint ventures and royalty arrangements
in several coal, trona (natural soda ash) and industrial mineral mines.
The Company's results of operations are largely dependent on the difference
between the prices received for its hydrocarbon products and the cost to find,
develop, produce and market such resources. Hydrocarbon prices are subject to
fluctuations in response to changes in supply, market uncertainty and a variety
of factors beyond the control of the Company. These factors include worldwide
political instability, the foreign supply of crude oil and natural gas, the
price of foreign imports, the level of consumer demand and the price and
availability of alternative fuels. The Company manages a portion of the
operating risk relating to hydrocarbon price volatility through hedging
activities (see Note 5).
2. ACQUISITIONS
Norcen Energy Resources Limited. On January 25, 1998, the Company and Union
Pacific Resources Inc. ("UPRI"), an Alberta corporation and a wholly-owned
subsidiary of the Company, entered into a pre-acquisition agreement
("Pre-acquisition Agreement") with Norcen Energy Resources Limited ("Norcen").
Under the Pre-acquisition Agreement, the Company and UPRI agreed to make an
offer (the "Tender Offer") for up to 100% of the common shares of Norcen,
subject to certain conditions. On March 3, 1998, the Company announced the
closing of the Tender Offer. In total, 95.5% of the outstanding common shares of
Norcen were tendered at a purchase price of U.S. $13.65 per share.
On March 5, 1998, the Company and UPRI completed the compulsory acquisition
of the remaining common shares outstanding which were not tendered. (The closing
of the Tender Offer and completion of the compulsory acquisition is referred to
as the "Norcen Acquisition.") The aggregate cash purchase price for the Norcen
Acquisition, including non-recurring transaction costs of $28.1 million, was
$2.634 billion. In addition, UPRI assumed the long-term debt obligations of
Norcen.
Norcen operations primarily consisted of crude oil and natural gas
exploration and development operations in western Canada, the Gulf of Mexico,
Guatemala and Venezuela.
The Company funded the purchase price of the Norcen Acquisition through the
issuance of commercial paper, supported by a U.S. $2.7 billion 364-Day
Competitive Advance/Revolving Credit Agreement dated March 2, 1998. In
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations," the Norcen Acquisition was accounted for as a purchase effective
March 3, 1998.
The following table represents the allocation of the total purchase price
of the assets acquired and liabilities assumed, based upon their fair values on
the date of the Norcen Acquisition and pushed down to the acquired Company. In
accordance with SFAS No. 109 "Accounting for Income Taxes", a deferred tax
liability was recognized for the differences between the allocated values and
the tax bases of the acquired assets and liabilities.
<TABLE>
<CAPTION>
MARCH 1998
---------------------
(MILLIONS OF DOLLARS)
<S> <C>
Working capital............................................. $ 114.4
Property, plant and equipment............................... 4,931.2
Other assets................................................ 228.2
Long-term debt.............................................. (1,012.0)
Deferred taxes.............................................. (1,495.7)
Other non-current liabilities............................... (131.8)
---------
Total purchase price.............................. $ 2,634.3
=========
</TABLE>
49
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents unaudited pro forma Condensed Consolidated
Statements of Income of the Company for the twelve months ended December 31,
1998 and 1997, as though the Norcen Acquisition had occurred on January 1, 1997.
Certain adjustments were made to the financial information to conform to the
accounting policies and financial statement presentation of the Company.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997
------------ -----------
(MILLIONS OF DOLLARS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $ 1,940.8 $2,169.3
Costs and expenses.......................................... 3,165.2 1,810.4
--------- --------
Operating income (loss)..................................... (1,224.4) 358.9
Interest expense............................................ (284.3) (240.1)
Other income (expense) -- net............................... (45.3) 24.5
--------- --------
Income (loss) before income taxes........................... (1,554.0) 143.3
Income tax (benefit) expense................................ (629.4) (24.5)
--------- --------
Income (loss) from continuing operations.................... $ (924.6) $ 118.8
========= ========
Earnings (loss) per share -- basic and diluted Continuing
operations................................................ $ (3.73) $ 0.47
</TABLE>
The unaudited pro forma condensed consolidated information presented above
is not necessarily indicative of the results of operations which would have
occurred had the Norcen Acquisition been consummated on January 1, 1997, nor is
it necessarily indicative of future results of operations.
Norcen Summarized Financial Information. As a result of the Norcen
Acquisition, and the amalgamation of Norcen with UPRI, UPRI assumed the
obligations of Norcen, including the public debt obligations of Norcen (the
"Debt Securities"). The Debt Securities include 6.8% Debentures due July 2,
2002, in the aggregate principal amount of $250 million, 7 3/8% Debentures due
May 15, 2006, in the aggregate principal amount of $250 million, and 7.8%
Debentures due July 2, 2008, in the aggregate principal amount of $150 million,
each of which have been fully and unconditionally guaranteed by the Company.
The following table presents summarized financial information for UPRI (as
successor to Norcen) as of and for the year ended December 31, 1999 and the two
months ended February 28, 1998, and ten months ended December 31, 1998. This
summarized financial information is being provided pursuant to Section G of
Topic 1 of Staff Accounting Bulletin No. 53 -- "Financial Statement Requirements
in Filings Involving the Guarantee of Securities by a Parent." The Company will
continue to provide such summarized financial information for UPRI as long as
the Debt Securities remain outstanding.
<TABLE>
<CAPTION>
YEAR ENDED UNAUDITED
DECEMBER 31, TEN MONTHS TWO MONTHS
1999 ENDED ENDED
--------------------- DECEMBER 31, FEBRUARY 28,
1998(a) 1998(b)
-------------------- --------------------
(MILLIONS OF (MILLIONS OF (MILLIONS OF
DOLLARS) DOLLARS) DOLLARS)
<S> <C> <C> <C>
Summarized Statement of Income
Information:
Operating revenues................... $343.0 $ 357.2 $104.0
Operating income (loss).............. (13.0) (784.5) 4.0
Net income (loss).................... $ 12.0 $(508.3)(c) $(30.0)(d)
50
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
-------------------- --------------------
(MILLIONS OF DOLLARS)
Summarized Statement of Financial Position Information:
Current assets........................................ $ 40.5 $ 53.7
Non-current assets.................................... 1,844.8 1,882.3
Current liabilities................................... 83.9 279.8
Non-current liabilities and equity.................... $1,801.4 $1,656.2
</TABLE>
---------------
(a) Results for UPRI as of and for the ten months ended December 31, 1998,
include adjustments to reflect U.S. GAAP and the successful efforts method
of accounting. Adjustments to reflect the application of the purchase method
of accounting for the Norcen Acquisition are included effective March 3,
1998.
(b) Results for Norcen as of and for the two months ended February 28, 1998 have
not been restated in accordance with U.S. generally accepted accounting
principles ("GAAP") and reflect the full cost method of accounting for oil
and gas operations.
(c) Results reflect the impairment and write-down of certain oil and gas
properties.
(d) Net loss includes $40 million in costs incurred by Norcen in connection with
the Norcen Acquisition which were not reimbursed by the Company.
3. DIVESTITURES
Deleveraging Program. In 1998, the Company commenced a deleveraging program
which was designed to reduce the Company's debt. The deleveraging program, which
was initiated following the completion of the Norcen Acquisition, included the
sale of non-strategic properties and assets. The completed sales undertaken as
part of the Company's deleveraging program include the following:
<TABLE>
<CAPTION>
NON-STRATEGIC PROPERTIES OPERATING AREA SALES PRICE
------------------------ -------------- ---------------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
1998
Denver-Julesburg Basin...................................... U.S. Onshore $ 41
Matagorda Island Blocks..................................... U.S. Offshore 158
Rockies Package............................................. U.S. Onshore 46
Eugene Island Blocks........................................ U.S. Offshore 8
Canadian Package............................................ Canada 145
Superior Propane............................................ Canada 48
----
1998 Total................................................ $446
----
1999
Caroline -- Swan Hill....................................... Canada $108
South Texas Package(a)...................................... U.S. Onshore 138
East Texas Package.......................................... U.S. Onshore 18
Rockies Package............................................. U.S. Onshore 10
Project Orange.............................................. Other 25
----
1999 Total................................................ 299
----
Total............................................. $745
====
</TABLE>
---------------
(a) As a result of the sale of the South Texas Package, the Company recorded a
fully reserved $20.6 million note receivable included in other current
assets. If the note is collected, the Company will record $20.6 million in
additional proceeds and gain on the South Texas sale.
Discontinued Operations. In November 1998, the Company entered into a
Merger and Purchase Agreement ("Agreement") with Duke Energy Field Services,
Inc. ("Duke") to sell its GPM business segment for $1.36 billion in cash. On
March 31, 1999, the Company closed on the sale (the "GPM
51
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Disposition"). The GPM Disposition consisted primarily of the Company's
pipelines, gathering systems, natural gas processing plants and natural gas and
NGL marketing assets and operations. These operations included interests in
nineteen natural gas processing plants (together with approximately 7,200 miles
of pipelines that support these processing plants), as well as two non-operated
NGL fractionation plants. The Company retained its crude oil marketing business.
The Company recorded a $157.0 million after-tax gain on the GPM Disposition,
including $108.3 million for accrued taxes payable.
Summarized information relating to discontinued results of operations,
excluding the after-tax gain on the GPM Disposition are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Operating revenues....................................... $ 21.5 $ 340.0 $ 406.7
Operating expenses....................................... (29.7) (263.4) (281.3)
Depreciation depletion and amortization.................. (20.4) (77.6) (64.1)
------ ------- -------
Operating income (loss).................................. (28.6) (1.0) 61.3
Other income (expense) -- net............................ -- -- (0.2)
Interest expense (a)..................................... (8.0) (21.1) (13.6)
------ ------- -------
Income (loss) before taxes............................... (36.6) (22.1) 47.5
Income tax (benefit) expense............................. (12.8) (6.5) 17.6
------ ------- -------
Net income (loss) from discontinued operations........... $(23.8) $ (15.6) $ 29.9
====== ======= =======
</TABLE>
---------------
(a) The Company allocated interest expense to the GPM business segment based on
the ratio of net assets of discontinued operations to total Company net
assets, excluding $3.6 billion of debt associated with the Norcen
Acquisition.
Summarized information relating to net assets of discontinued operations
are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
---------------------
(MILLIONS OF DOLLARS)
<S> <C>
Current Assets:
Cash and temporary investments............................ $ 5.7
Accounts receivable -- net................................ 152.8
Inventories............................................... 46.8
Other current assets...................................... 5.2
--------
Total current assets.............................. 210.5
Properties -- net of accumulated depreciation............. 851.3
Intangible and other assets............................... 154.8
--------
Total assets...................................... $1,216.6
========
Current Liabilities:
Accounts payable.......................................... $ 158.0
Advance payment(a)........................................ 126.7
Other current liabilities................................. 2.0
--------
Total current liabilities......................... 286.7
Other long-term liabilities............................... 3.0
--------
Total liabilities................................. $ 289.7
========
Net assets of discontinued operations............. $ 926.9
========
</TABLE>
52
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
---------------
(a) In June 1998, the Company entered into a third-party forward sales
arrangement covering a total of 567 MMcf of gas per day. At the time of the
arrangement, the Company received $250 million and became obligated to
deliver gas from October 1998 through March 1999. The Company recorded the
obligation associated with this transaction as an advance payment included
in net assets of discontinued operations. This current liability was
amortized and recorded on the Consolidated Statement of Income as part of
discontinued operations, as the gas was delivered over the remaining term of
the contract.
4. RESTRUCTURING CHARGES
During the first quarter of 1999, the Company reorganized its operating
groups, announced workforce reductions for its Canadian and U.S. operations and
established an early retirement program. As a result of these actions, the
Company recorded a $14.5 million restructuring charge. The charge included $7.3
million for severance costs and excess office space commitments, an additional
$4.2 million liability for pension and other postretirement benefits in
connection with the early retirement program and a $3.0 million valuation
allowance for specialty drilling equipment and supplies no longer required for
cancelled drilling programs. Payments of $7.2 million were made for severance
and office lease costs. The pension and other postretirement liabilities are
included in the balance of the Company's liabilities for those items (see Note
11). The valuation allowance for specialty drilling equipment and supplies was
recorded to the inventory accounts.
During 1998, the Company announced a workforce reduction for its domestic
operations and implemented programs to reduce overhead and other costs. The
$17.0 million restructuring charge included $7.6 million for workforce
reductions of approximately 140 U.S. employees, $5.0 million for a drilling rig
commitment and $4.4 million for excess office space commitments. At December 31,
1998, $14.6 million of the reserve remained. During 1999, net payments of $8.1
million were made and $3.1 million of the rig commitment charge was reversed as
a result of favorable settlement negotiations. At December 31, 1999, the $3.4
million remaining reserve represents excess office space commitments net of
sublease rentals.
5. FINANCIAL INSTRUMENTS
Hedging. The Company has established policies and procedures for managing
risk within its organization, including internal controls and governance by a
risk management committee. The level of risk assumed by the Company is based on
its objectives and earnings, and its capacity to manage risk. Limits are
established for each major category of risk, with exposures monitored and
managed by Company management and reviewed semi-annually by the risk management
committee. Major categories of the Company's risk are defined as follows:
Commodity Price Risk -- Non-Trading Activities. The Company uses derivative
financial instruments for non-trading purposes in the normal course of business
to manage and reduce risks associated with contractual commitments, price
volatility and other market variables. These instruments are generally put in
place to limit risk of adverse price movements; however, these same instruments
usually limit future gains from favorable price movements. Risk management
activities are generally accomplished pursuant to exchange-traded contracts or
over-the-counter swaps and options.
Recognition of realized gains/losses and option premium payments/receipts
relating to non-trading activities are deferred in the Consolidated Statement of
Income until the underlying physical product is sold. Unrealized gains/losses
are not recorded. Margin deposits, deferred gains/losses and net premiums are
included in other current assets or liabilities in the Consolidated Statement of
Financial Position. The cash flow impact is reflected in cash flows provided by
operations in the Consolidated Statement of Cash Flows.
Utilization of the Company's hedging program may result in crude oil and
natural gas prices varying from market prices. As a result of the hedging
program, revenues in 1999, 1998 and 1997 were $178.1 million, $9 million and $86
million lower, respectively than if the hedging program had not been in effect.
Since these transactions were hedges on production, these impacts were also
reflected in the average sales price of the associated products.
53
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commodity Price Risk -- Trading Activities. The Company periodically enters
into financial contracts in conjunction with market-making or trading activities
with the objective of achieving profits through successful anticipation of
movements in commodity prices and changes in other market variables. Market-
making positions are marked-to-market and gains and losses are immediately
included as revenue in the Consolidated Statement of Income. In addition, the
fair value of unsettled positions is immediately included in the Consolidated
Statement of Financial Position as a current asset or current liability. As of
December 31, 1999 and 1998, there were no transactions in place which would
materially affect the results of operations or financial condition of the
Company.
Interest Rate Swaps. The Company periodically enters into rate swaps and
contracts to hedge certain interest rate transactions. As of December 31, 1999
and 1998, there were no interest rate contracts outstanding which would
materially affect the results of operations or financial condition of the
Company. During 1998, the Company entered into rate lock contracts to hedge
interest rates related to a contemplated bond issuance. The bonds were not
issued and the Company recognized a $14.3 million pre-tax loss in 1998
associated with these contracts.
Foreign Currency. The financial statements of foreign subsidiaries, except
those subsidiaries located in countries which have highly inflationary
economies, utilize the local currency as their functional currency. The
financial statements of foreign subsidiaries located in countries which have
highly inflationary economies utilize the U.S. dollar as their functional
currency. Monetary assets and liabilities denominated in a currency other than
the functional currency are remeasured into the functional currency with the
corresponding gains/ losses included in the Consolidated Statement of Income.
The financial statements of those foreign subsidiaries which do not utilize the
U.S. dollar as their functional currency are translated into the U.S. dollar.
Assets and liabilities are translated at the current exchange rate, while
revenues and expenses are translated at the average exchange rate for the
reporting period. Translation gains/losses are not included in the Consolidated
Statement of Income but are recorded in a separate section of shareholders'
equity. The Company's Canadian subsidiary's functional currency is the Canadian
dollar. Generally, the functional currency of the Company's other foreign
subsidiaries is the U.S. dollar.
At December 31, 1999, the Company's Canadian subsidiary had outstanding
$650 million of fixed-rate notes and debentures denominated in U.S. dollars.
During 1999, the Company recognized a $38.0 million pretax non-cash gain
associated with remeasurement of this debt and a $46.5 million pretax non-cash
loss during 1998. The potential foreign currency remeasurement impact on
earnings from a five percent change in the year-end Canadian exchange rate would
be approximately $32 million.
Two of the Company's Latin American subsidiaries had foreign deferred tax
liabilities denominated in the local currency. At December 31, 1999 and 1998,
Venezuela had a $131.6 million and $159.6 million liability, respectively and
Guatemala had a $34.1 million and $58.0 million liability, respectively. During
1999 and 1998, the Company recognized after-tax deferred tax benefits associated
with the remeasurement of the deferred tax liabilities of $20.4 million and
$15.2 million in Venezuela, and $8.9 million and $7.3 million in Guatemala,
respectively. The potential foreign currency remeasurement impact on net
earnings from a five percent change in the year-end Latin American exchange
rates would be approximately $9 million.
The Company may periodically enter into foreign currency contracts to hedge
specific currency exposures from commercial transactions. As a result of the
Norcen Acquisition, the Company acquired foreign currency forward exchange
contracts with maturities through October 2000, and recorded a $15.5 million
deferred liability representing the fair value of these contracts. These
contracts were deemed to be hedges of UPRI's future U.S. dollar denominated
hydrocarbon sales. This deferred liability will be amortized over the contract
terms. The unrecognized loss on foreign currency contracts at December 31, 1999,
excluding the $1.4 million remaining unamortized deferred liability, was $2.9
million.
54
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of Credit Risk. Credit risk is the risk of loss as a result
of non-performance by counterparties pursuant to the terms of their contractual
obligations. Because the loss can occur at some point in the future, a potential
exposure is added to the current replacement value to arrive at a total expected
credit exposure. The Company has established methodologies to establish limits,
monitor and report creditworthiness and concentrations of credit to reduce such
credit risk. At December 31, 1999, the Company's largest credit risk associated
with any single counterparty, represented by the net fair value of open
contracts with such counterparty, was $7.1 million.
Financial instruments which subject the Company to concentrations of credit
risk consist principally of trade receivables and short-term cash investments.
The Company places its temporary excess cash investments in high quality
short-term instruments through several high-credit-quality financial
institutions. A significant portion of the Company's trade receivables relate to
customers in the oil and gas industry, and, as such, the Company is directly
affected by the economy of that industry. The Company derives a substantial
portion of its revenues from international operations in Canada and Latin
America. With the exception of one large customer, described below, the credit
risk associated with trade receivables is minimized by the Company's large
customer base and ongoing procedures to monitor the creditworthiness of
customers. The Company generally requires no collateral from its customers.
Historically, the Company has not experienced significant losses on trade
receivables.
In connection with the GPM Disposition, the Company entered into a
long-term sales agreement with Duke. The long-term sales agreement obligates the
Company to sell the majority of its domestic natural gas and existing NGL
production to Duke through March 2004. Prices received for the natural gas and
NGLs will be tied to the current market price for each product. As a result, a
significant portion of the Company's credit risk will be with a single customer.
Duke is currently considered a good credit risk; however, periodic credit
evaluations will continue and will be performed more often if circumstances
dictate. The agreement with Duke provides for a parental guaranty to cover its
obligations under the agreements and the Company has the right to demand a
letter of credit and/or other assurances under certain circumstances. During
1999, sales to Duke accounted for 31% of the Company's consolidated revenues and
38% of United States revenues. Approximately 25% of the Company's trade
receivables outstanding at December 31, 1999 were due from Duke which exposes
the Company to a concentration of credit risk.
Performance Risk. Performance risk results when a counterparty fails to
fulfill its contractual obligations with respect to commodity pricing or volume
commitments. Typically, such risk obligations are defined within the trading
agreements. The Company utilizes its credit risk methodology to manage
performance risk.
6. PROPERTIES
Major property classifications were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1999 1998
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Producing properties........................................ $ 9,738.3 $ 9,429.9
Non-producing properties.................................... 983.3 1,241.5
Construction in progress.................................... 84.3 143.4
Other....................................................... 200.7 263.4
--------- ---------
Total............................................. $11,006.6 $11,078.2
========= =========
</TABLE>
55
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accumulated depreciation, depletion and amortization by major property
classifications were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1999 1998
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Producing properties........................................ $5,160.0 $4,642.1
Non-producing properties.................................... 273.2 233.1
Other....................................................... 102.4 109.7
-------- --------
Total............................................. $5,535.6 $4,984.9
======== ========
</TABLE>
Based upon the Company's analysis of expected future net cash flows from
its crude oil and natural gas properties, certain properties were deemed to be
impaired due to lower hydrocarbon prices and/or downward revisions in reserve
estimates. As a result of its analysis, the Company adjusted the net book value
of such properties to their fair value with a charge to depreciation, depletion
and amortization of $70.6 million in 1999 for exploration and production
properties primarily located in the U.S. Onshore area and uranium properties.
During 1998, the Company adjusted the net book value of properties with a $1.2
billion charge, primarily on properties acquired in the Norcen Acquisition.
Fixed asset additions included capitalized interest of $0.4 million and $0.9
million in 1999 and 1998, respectively.
7. CAPITAL AND EXPLORATORY EXPENDITURES
Capital and exploratory expenditures include the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- ---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Capital expenditures:
Producing properties.................................. $345.1 $3,056.9 $ 773.3
Non-producing properties.............................. 21.0 506.6 200.7
Exploratory drilling.................................. 12.9 117.5 121.7
Other................................................. 5.1 32.6 15.8
------ -------- --------
Total capital expenditures.................... 384.1 3,713.6 1,111.5
Exploratory expenditures:
Expensed geological and geophysical costs............. 19.5 63.1 35.2
Expensed dry hole costs............................... 24.6 52.1 41.7
------ -------- --------
Total exploratory expenditures................ 44.1 115.2 76.9
------ -------- --------
Total capital and exploratory expenditures.... $428.2 $3,828.8 $1,188.4
====== ======== ========
</TABLE>
8. INCOME TAXES
Deferred taxes are established for all temporary differences between the
book and tax bases of assets and liabilities. In addition, deferred tax balances
must be adjusted to reflect tax rates that will be in effect in the years in
which the temporary differences are expected to reverse. Non-U.S. subsidiaries
compute taxes at rates in effect in the various countries. Earnings of these
subsidiaries may also be subject to additional income and withholding taxes when
they are distributed as dividends. Deferred tax liabilities are not recognized
on profits that are expected to be permanently reinvested by the local
subsidiaries and thus not considered available for distribution to the parent
Company. The Company has undistributed earnings of its 100% owned foreign
subsidiaries that arose in 1999 and prior years.
56
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income (loss) from continuing operations before taxes is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
-------- ----------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Domestic................................................. $(45.2) $ (239.7) $405.9
Foreign.................................................. (6.0) (1,248.6) 13.0
------ --------- ------
Total.......................................... $(51.2) $(1,488.3) $418.9
====== ========= ======
</TABLE>
Components of income tax expense (benefit), from continuing operations,
were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
--------- --------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Current:
U.S. Federal........................................... $(151.4) $ 43.2 $ (0.4)
U.S. state............................................. 2.2 6.8 5.1
Foreign................................................ 7.4 4.1 0.2
------- ------- ------
Total current.................................. (141.8) 54.1 4.9
------- ------- ------
Deferred:
U.S. Federal........................................... 82.4 (155.7) 113.4
U.S. state............................................. (2.7) 3.4 (2.5)
Foreign................................................ (78.3) (507.0) --
------- ------- ------
Total deferred................................. 1.4 (659.3) 110.9
------- ------- ------
Total income tax expense (benefit)............. $(140.4) $(605.2) $115.8
======= ======= ======
</TABLE>
Deferred tax liabilities (assets), were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1999 1998
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Excess tax over book items, including depreciation and
exploration costs......................................... $1,369.0 $1,528.2
State taxes -- net.......................................... 12.1 (15.0)
Long-term liabilities....................................... 116.3 (19.6)
Alternative minimum tax..................................... (79.8) (72.6)
Pension and other retirement benefits....................... (47.2) (52.6)
Net operating losses........................................ (91.3) (93.1)
Other....................................................... 47.7 16.3
-------- --------
Net deferred tax liability........................ $1,326.8 $1,291.6
======== ========
</TABLE>
57
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between U.S. statutory and consolidated effective tax
rates is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
U.S. statutory Federal tax rate............................. 35.0% 35.0% 35.0%
Section 29 credits.......................................... 35.1 1.1 (4.3)
State taxes-- net........................................... (8.2) (0.4) 1.3
Foreign rate differentials.................................. -- 1.8 --
Foreign currency remeasurement.............................. 98.7 1.5 --
Non-tax effected foreign expense............................ (48.4) -- --
Non-taxable entity.......................................... 15.3 1.0 --
Tax settlements............................................. 78.3 -- (1.5)
Reserve adjustments......................................... 28.7 -- --
Tax return reconciliation adjustments....................... 34.1 -- --
Other....................................................... 7.0 0.6 (1.9)
----- ---- ----
Effective tax rate........................................ 275.6% 40.6% 28.6%
===== ==== ====
</TABLE>
The Company generates Section 29 tax credits from the sale of certain fuels
produced from non-conventional sources. Fuels qualifying for the credit must be
produced from a well drilled or a facility placed in service after December 31,
1979, and before January 1, 1993, and must be sold before January 1, 2003. The
Company generated $17.9 million, $16.4 million and $18.8 million of Section 29
tax credits in 1999, 1998 and 1997, respectively. The Federal tax law provides
for the use of these credits against regular Federal income tax liability.
Accordingly, the Company utilized $6.9 million of Section 29 tax credits on its
1998 tax return. It is anticipated that all of the 1999 Section 29 tax credits
along with some of the prior year credits will be recognized in the Company's
1999 tax return. The Company recognized favorable tax adjustments relating to
prior year Federal tax returns in the amount of $17.4 million for 1999 and $4
million for 1998.
While the operations of the Company in Guatemala are subject to local
income taxes, no liability has arisen in recent years since sufficient
unrecovered costs, carried forward from previous years, have been available to
offset current taxable income. Guatemalan tax benefits, which can be carried
forward indefinitely, were $57.6 million at December 31, 1999. Other domestic
subsidiary net operating losses in existence at the time of the Norcen
Acquisition were merged with the Company when those subsidiaries were dissolved.
The Company plans to utilize the losses in 2000 or a future year.
On September 1, 1999, the Company and its former parent, Union Pacific
Corporation ("UPC"), settled certain outstanding issues pertaining to the
allocation of all Federal and state tax liabilities, including interest, for the
tax years 1968 through 1982. This settlement was made pursuant to the Tax
Allocation Agreement entered into as of October 6, 1995, between the Company and
UPC. This settlement resulted in the receipt by the Company from UPC on
September 3, 1999, of $29 million (including $20.5 million of interest income
recorded in other income) in full and final settlement of all amounts owed to or
by UPR with respect to tax years 1968 through 1982. The tax settlement with UPC
enabled the Company to reevaluate its deferred tax reserves, and as a result,
the Company recorded $11.9 million of deferred tax benefits related to the tax
years covered by the settlement. The Company and UPC also agreed to suspend
settlement rights under the Tax Allocation Agreement with respect to post-1982
tax years until July 1, 2001. UPC has informed the Company that all material
deficiencies prior to 1986 have been settled with the Internal Revenue Service
("IRS"). UPC is negotiating with the IRS Appeals Office concerning 1986 through
1989. The IRS has completed its examination of the Company's returns for 1990
through 1994; however, their audit remains open until resolution of the UPC
issues. The IRS has initiated steps to begin the process of examining the
Company's
58
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
records for 1995 through 1998. The Company believes it has adequately provided
for Federal and state income taxes.
In 1997, Norcen received a reassessment from Canadian tax authorities in
the amount of $81.1 million concerning the deductibility of certain expenses and
foreign exchange losses claimed for income tax purposes during the period 1989
through 1993. In spite of Norcen's disagreement and appeal, the reassessment was
fully funded in 1997. As a result of the Norcen Acquisition, the Company valued
this issue at $17.0 million, net of any valuation allowance, as part of the
purchase price allocation. On March 8, 1999, UPRI entered into an agreement with
Canadian tax authorities to settle these claims out of court. Under the terms of
the settlement, the Company received a refund of approximately $54.6 million
dollars. The Company recorded $7.1 million of interest to other income and a
$27.9 million deferred income tax benefit related to the refund.
9. DEBT
The total debt of the Company is summarized below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
INTEREST ---------------------
RATE 1999 1998
-------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Commercial Paper and Bankers' Acceptances (Average of
5.55% and 5.98% at December 31, 1999 and 1998,
respectively)......................................... $ 135.1 $2,351.9
Debentures due July 2, 2002............................. 6.800% 250.0 250.0
Notes due May 15, 2005.................................. 6.500% 200.0 200.0
Debentures due May 15, 2006............................. 7.375% 250.0 250.0
Notes due October 15, 2006.............................. 7.000% 200.0 200.0
Notes due May 15, 2008.................................. 6.750% 169.5 200.0
Debentures due July 2, 2008............................. 7.800% 150.0 150.0
Notes due April 15, 2009................................ 7.300% 176.0 --
Debentures due May 15, 2018............................. 7.050% 200.0 200.0
Debentures due October 15, 2026......................... 7.500% 200.0 200.0
Debentures due May 15, 2028............................. 7.150% 395.0 425.0
Debentures due April 15, 2029........................... 7.950% 290.0 --
Debentures due November 1, 2096......................... 7.500% 150.0 150.0
Capital lease obligations (Note 10)..................... 16.0 17.4
(Discount) Premium on notes and debentures -- net....... 18.0 4.4
-------- --------
Total debt.................................... 2,799.6 4,598.7
Less: current portion......................... 2.3 853.8
-------- --------
Total long-term debt.......................... $2,797.3 $3,744.9
======== ========
</TABLE>
At year-end 1998, the Company had three debt facilities totaling an
aggregate of U.S. $2.5 billion. These facilities were comprised of a $1.0
billion 364-Day Competitive Advance/Revolving Credit Agreement (the "Bridge
Facility"), a $750 million 364-Day Competitive Advance/Revolving Credit
Agreement and a $750 million Competitive Advance/Revolving Credit Agreement
("Long-Term Facility") expiring in October 2003.
In April 1999, the Company issued $500 million of notes and debentures
comprised of $200 million 7.3% Notes due April 2009 and the $300 million 7.95%
Debentures due April 2029. The notes and debentures were issued under the
Company's existing $1.0 billion shelf registration statement, of which $500
million remains available.
59
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the first half of 1999, commercial paper, supported in part by the
Company's Bridge Facility, was repaid using proceeds from property sales,
proceeds from the sale of the GPM business segment and the issuance of the
long-term notes and debentures. The Bridge Facility was terminated in April
1999. The $750 million 364-Day Competitive Advance/Revolving Credit Agreement
expired in October 1999, leaving the Company with the Long-Term Facility at
year-end 1999. The Long-Term Facility contains a covenant stipulating that the
ratio of consolidated debt to consolidated EBITDAX -- the sum of operating
income (before adjustments for income taxes, interest expense or extraordinary
gains or losses), depreciation, depletion and amortization and exploration
expenses -- cannot exceed 3.25:1.00. The Long-Term Facility also places other
restrictions on the Company regarding the creation of liens, incurrence of
additional indebtedness by subsidiaries, transactions with affiliates, sales of
stock of Union Pacific Resources Company (a wholly-owned subsidiary of the
Company) and certain mergers, consolidations and asset sales. The Company was in
compliance with the covenant provisions at year-end 1999 and 1998.
The 2005, 2008 and 2009 notes and the 2018, 2028 and 2029 debentures are
redeemable as a whole or in part, at the option of the Company at any time. The
redemption price is equal to the greater of (i) 100% of the principal amount of
the Debt Securities to be redeemed or (ii) the sum of the present values of the
remaining scheduled payments thereon, discounted to the redemption date on a
semi-annual basis at the Treasury Rate, plus a stated basis point spread and
accrued interest on the principal amount being redeemed to the redemption date.
There are no other notes or debentures redeemable prior to maturity. None of the
Company's notes and debentures are subject to a sinking fund requirement. At
December 31, 1999, the Company had an effective shelf registration statement on
file with the Securities and Exchange Commission that would permit the Company
or certain identified subsidiaries to offer up to $500 million in debt, equity
and/or other securities.
During 1999, the Company purchased on the open market and retired long-term
debt with a face value of $94.5 million at a discount prior to maturity. The
retirement of long-term debt due to the repurchases resulted in an extraordinary
gain of $3.4 million, net of $1.8 million of tax. The gain on the retirement was
classified as a gain from an extraordinary item on the Consolidated Statement of
Income.
At December 31, 1999, $135.1 million of commercial paper and bankers
acceptances was classified as long-term. This classification reflects the
Company's intent and ability to maintain these borrowings on a long-term basis,
supported by the Long-Term Facility through the issuance of additional
commercial paper and/or new term financings. Debt maturities through 2004,
excluding capital leases, are $135.1 million of bankers acceptances due in 2000
and $250 million of Debentures due July 2, 2002.
The fair value of the Company's long-term debt, excluding commercial paper
and bankers acceptances, debt discount/premium and capital lease obligations was
$2,467 million at December 31, 1999 and $2,088 million at December 31, 1998. The
fair value was estimated using quoted market prices. These fair values were
trading at a discount to the face value of 93.8% at both December 31, 1999 and
1998.
As a result of the Norcen Acquisition, the Company recorded a $31.5 million
debt premium, representing the excess of the fair value over the carrying value
of the debt acquired. The $25.2 million remaining debt premium, net of $7.2
million in debt discount related to prior debt issuances, are being amortized
over the life of the debt term.
The Company has guaranteed a portion of the OCI Wyoming, L.P debt facility.
At December 31, 1999, OCI Wyoming, L.P. had an outstanding debt facility balance
of $30 million, of which the Company has guaranteed $14.7 million. The Company's
portion of the debt is reflected in the balance for investment in affiliate on
the Consolidated Statement of Financial Position.
The Company utilizes letters of credit to support certain financing
instruments, performance contracts and insurance policies. The fair value of the
letters of credit at December 31, 1999 and 1998 was $41.3 million and $58.6
million, respectively.
60
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LEASE COMMITMENTS
The Company leases several office buildings, certain production platforms
and other property under operating leases. The Company also maintains a capital
lease for furniture and walls in its Fort Worth offices. Future minimum lease
payments for operating and capital leases with initial non-cancelable lease
terms in excess of one year as of December 31, 1999, were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
2000...................................................... $ 2.8 $ 46.9 $ 49.7
2001...................................................... 2.9 44.4 47.3
2002...................................................... 2.9 42.6 45.5
2003...................................................... 2.9 32.2 35.1
2004...................................................... 6.6 3.9 10.5
Later years............................................... 0.8 6.9 7.7
----- ------ ------
Total future minimum lease payments....................... 18.9 $176.9 $195.8
====== ======
Less: amounts representing interest....................... (2.9)
-----
Present value of minimum capital lease obligations........ 16.0
-----
Less: Short-term portion of capital lease obligations..... (2.3)
-----
Long-term portion of capital lease obligations............ $13.7
=====
</TABLE>
Rent expense, net of sublease income, for operating leases with terms
exceeding one month was $60.2 million in 1999, $59.8 million in 1998, and $19.2
million in 1997. Sublease income for the next five years will be $30.5 million
in 2000, $29.8 million in 2001, $29.8 million in 2002, $28.5 million in 2003 and
$0.4 million in 2004. Capital leases included in corporate fixed assets were
$17.4 million and $18.1 million at December 31, 1998 and 1999, respectively.
11. RETIREMENT PLANS
The Company provides pension, health care and life insurance benefits to
all eligible retirees in the U.S. and pension benefits to all eligible retirees
in Canada. No such pension or other benefits are provided to employees of other
foreign subsidiaries.
U.S. Pension Benefits. Pension benefits for U.S. employees are based on
years of service and compensation during the last years of employment.
Contributions to the plans are calculated on the Projected Unit Credit actuarial
funding method and are not less than the minimum funding standards set forth in
the Employees Retirement Income Security Act of 1974, as amended. The portion of
the funded plan's assets held in fixed-income and short-term securities was
approximately 33% and 32% as of December 31, 1999 and 1998, respectively, with
the remainder primarily in equity securities.
Curtailments and Termination of Benefits. During 1999, the Company
announced reductions in force, a voluntary retirement incentive program ("VRIP")
and the sale of the GPM business segment. The separations due to these programs
triggered curtailment accounting and termination benefit accounting as a result
of the VRIP. The Company recognized curtailment gains of $11.4 million, offset
by costs of the termination of benefits of $10.5 million. These separations
caused a slight reduction in the Company's retiree benefits obligations due to
reduced expected future benefits for the employees affected by these programs.
Other U.S. Postretirement Benefits. Postretirement health and life
insurance benefits are provided to all eligible U.S. retirees. The Company does
not currently pre-fund health care and life insurance benefit costs.
61
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Canadian Pension Benefits. Benefits provided under the Canadian defined
benefit plan are based on years of service and highest compensation over a
specified number of consecutive years. The provisions under the defined benefit
plan were modified to provide employees with a defined contribution plan option,
which has been retroactively elected by substantially all active employees.
Under the defined contribution plan, the Company matches a stated percentage of
employee contributions to the plan. Both the defined benefit payments and the
defined contribution Company match obligation are paid from assets held in
trust. The Company will make contributions to the plans, if necessary, to
maintain adequate assets in trust. Contributions are not expected to be
necessary for several years.
The following pension credits and funded status are based on historical
actuarial valuations.
<TABLE>
<CAPTION>
U.S. PENSION OTHER CANADIAN
BENEFITS U.S. BENEFITS PENSION BENEFITS
--------------- ------------- -----------------
1999 1998 1999 1998 1999 1998
------ ------ ----- ----- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year..... $221.0 $202.6 $40.4 $42.9 $ 25.6 $ --
Acquisition................................. -- -- -- -- -- 26.1
Service cost................................ 5.1 6.1 0.7 1.0 -- 0.1
Interest cost............................... 15.3 14.3 2.8 3.0 1.8 1.4
Curtailments................................ (10.1) -- (1.3) -- -- --
Termination benefits........................ 9.5 -- 1.0 -- -- --
Plan amendments............................. 12.3 2.4 -- (5.4) -- --
Actuarial (gain) loss....................... (4.7) 12.6 (2.9) 0.1 0.2 (0.2)
Benefits paid............................... (19.4) (17.0) (2.7) (1.2) (2.7) (1.8)
------ ------ ----- ----- ------ ------
Benefit obligation at end of year........... $229.0 $221.0 $38.0 $40.4 $ 24.9 $ 25.6
====== ====== ===== ===== ====== ======
Change in plan assets:
Fair value of plan assets at beginning of
year...................................... $269.7 $240.9 $ -- $ -- $ 47.7 $ --
Acquisition................................. -- -- -- -- -- 50.3
Actual return on plan assets................ 32.4 40.0 -- -- 3.5 --
Employer contribution(a).................... 2.3 5.8 2.7 1.2 0.2 --
Benefits paid(b)............................ (19.4) (17.0) (2.7) (1.2) (3.6) (2.6)
Foreign currency exchange rate gain......... -- -- -- -- 2.9 --
------ ------ ----- ----- ------ ------
Fair value of plan assets at end of year.... $285.0 $269.7 $ -- $ -- $ 50.7 $ 47.7
====== ====== ===== ===== ====== ======
Plan assets (over) under benefit
obligation................................ $(56.0) $(48.7) $38.0 $40.4 $(25.8) $(22.1)
Unamortized net transition asset............ 13.2 15.8 -- -- -- --
Unrecognized prior service gain (cost)...... (18.9) (9.0) 6.0 8.0 -- --
Unrecognized net gain....................... 121.2 105.1 24.9 25.1 (3.2) (1.9)
------ ------ ----- ----- ------ ------
Net amount recognized....................... $ 59.5 $ 63.2 $68.9 $73.5 $(29.0) $(24.0)
====== ====== ===== ===== ====== ======
</TABLE>
---------------
(a) Represents payments relating to unfunded plans. In addition, the Company
periodically settles a portion of the unfunded supplemental pension plan
benefit obligations through the purchase of annuities.
(b) $0.9 million and $0.8 million of Canadian pension benefits paid in 1999 and
1998 respectively, represent payments to fund the defined contribution
Company match.
62
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
U.S. PENSION U.S. OTHER CANADIAN
BENEFITS BENEFITS PENSION BENEFITS
-------------- ------------- -----------------
1999 1998 1999 1998 1999 1998
------ ----- ----- ----- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Amounts recognized in the Statement of
Financial Position consist of:
Prepaid benefit cost....................... $ -- $ -- $ -- $ -- $(29.0) $(24.0)
Accrued benefit liability.................. 76.0 72.0 68.9 73.5
Intangible asset........................... (5.6) (3.9) -- -- -- --
Accumulated other comprehensive income..... (10.9) (4.9) -- -- -- --
------ ----- ----- ----- ------ ------
Net amount recognized........................ $ 59.5 $63.2 $68.9 $73.5 $(29.0) $(24.0)
====== ===== ===== ===== ====== ======
Weighted-average assumptions as of December
31
Discount rate................................ 7.75% 7.0% 7.75% 7.0% 7.25% 6.5%
Expected return on plan assets............... 9.0% 9.0% -- -- 7.25% 6.5%
Rate of compensation increase................ 5.75% 5.0% -- -- 5.75% 5.0%
</TABLE>
For measurement purposes, a 7.2% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to gradually decrease to 5% in 2005 and remain at that level thereafter.
<TABLE>
<CAPTION>
CANADIAN
U.S. PENSION BENEFITS U.S. OTHER BENEFITS PENSION
------------------------ ------------------- -------------
1999 1998 1997 1999 1988 1997 1999 1998
------ ------ ------ ----- ---- ---- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost-benefits earned during the
period........................................ $ 5.1 $ 6.1 $ 5.5 $ 0.7 $1.0 $0.8 $ -- $ 0.1
Interest cost on the projected benefit
obligation.................................... 15.3 14.3 13.4 2.8 3.0 3.3 1.8 1.4
Expected return on plan assets.................. (19.0) (18.6) (17.1) -- -- -- (3.6) (2.7)
Amortization of net transition asset............ (2.6) (2.1) (2.0) -- -- -- -- --
Amortization of unrecognized prior service gain
(cost)........................................ 1.2 1.2 1.2 (0.6) (0.8) (0.8) -- --
Amortization of unrecognized net gain........... (2.3) (4.1) (4.9) (1.0) (1.7) (1.6) -- --
Settlement/curtailment/termination benefits..... 0.9 -- -- (3.7) -- -- -- --
------ ------ ------ ----- ---- ---- ----- -----
(Benefit) charge to operations................ $ (1.4) $ (3.2) $ (3.9) $(1.8) $1.5 $1.7 $(1.8) $(1.2)
====== ====== ====== ===== ==== ==== ===== =====
Other comprehensive income...................... $ 6.0 $ 3.9 $ 1.0 $ -- $-- $-- $ -- $ --
====== ====== ====== ===== ==== ==== ===== =====
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement benefit plan. A one-percentage-point
change in assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1 PERCENTAGE 1 PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Effect on total of service and interest cost components.... $0.4 $(0.3)
Effect on postretirement benefit obligation................ 3.5 (3.1)
</TABLE>
12. ENVIRONMENTAL EXPOSURE
Environmental expenditures related to treatment or cleanup are expensed
when incurred, while environmental expenditures which extend the life of the
property or prevent future contamination are capitalized in accordance with
generally accepted accounting principles. Liabilities for these expenditures are
recorded when it is probable that obligations have been incurred and the amounts
can be reasonably estimated, based on
63
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
current law and existing technologies. Environmental accruals are recorded at
undiscounted amounts and exclude claims for recoveries from insurance or other
third parties.
The Company generates and disposes of hazardous and non-hazardous waste in
its current operations as well as formerly owned operations and is subject to
increasingly stringent Federal, state, local, provincial and international
environmental regulations. The Company has identified seven sites currently
subject to environmental response actions or on the Superfund National
Priorities List or state superfund lists, at which it is or may be liable for
remediation costs associated with alleged contamination or for violation of
environmental requirements. Certain Federal legislation imposes joint and
several liability for the remediation of various sites; consequently, the
Company's ultimate environmental liability may include costs relating to other
parties in addition to costs relating to its own activities at each site. In
addition, the Company is or may be liable for certain environmental remediation
matters involving existing or former facilities.
In March 1994, the Company sold its interest in the Wilmington, California
field and the Harbor Cogeneration Plant to the Port of Long Beach, California.
As part of the Wilmington sales agreement, the Company agreed to participate
with the Port of Long Beach in funding environmental remediation and site
preparation, as specified by the Port of Long Beach, up to a maximum of $105.5
million. As a result, a provision of $50.5 million for future environmental
costs and $55.0 million for future site preparation costs was established ($87.8
million in total remaining at December 31, 1999) and is categorized as other
current liabilities and long-term liabilities (see Note 14).
As of December 31, 1999 and 1998, liabilities totaling $65.2 million and
$74.7 million, respectively, had been accrued for future costs of all sites
where the Company's obligation is probable and where such costs reasonably can
be estimated; however, the ultimate cost could be lower or higher. This accrual
includes future costs for remediation and restoration of sites, as well as for
ongoing monitoring costs, but excludes any anticipated recoveries from third
parties. The accrual also includes $34.1 million for the obligation to
participate in the remediation of the Wilmington field properties. Cost
estimates were based on information available for each site, financial viability
of other Potentially Responsible Parties ("PRPs") and existing technology, laws
and regulations. The Company believes that it has accrued adequately for its
share of costs at sites subject to joint and several liabilities. The ultimate
liability for remediation is difficult to determine with certainty because of
the number of PRPs involved, site-specific cost sharing arrangements with other
PRPs, the degree of contamination by various wastes, the scarcity and quality of
volumetric data related to many of the sites and the speculative nature of
remediation costs.
Anticipated payments of environmental liabilities at December 31, 1999,
which will be funded by cash generated by operations, are as follows:
AT DECEMBER 31, 1999
---------------------
(MILLIONS OF DOLLARS)
2000...................................................... $17.0
2001...................................................... 13.2
2002...................................................... 12.5
2003...................................................... 10.0
2004...................................................... 8.0
Thereafter................................................ 4.5
-----
Total........................................... $65.2
=====
The Company also is involved in reducing emissions, spills and migration of
hazardous materials. Remediation of identified sites and control of
environmental exposures required spending of $11.6 million in 1999 and $17.0
million in 1998. In 2000, the Company anticipates spending a total of $19
million for remediation, control and prevention. Based on current rules and
regulations, management does not expect
64
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future environmental obligations to have a material impact on the results of
operations, cash flows or financial condition of the Company.
13. COMMITMENTS AND CONTINGENCIES
The Company was a party to several long-term firm gas transportation
agreements that supported the gas marketing program within the GPM business
segment which was sold to Duke. Most of the GPM business segment's firm
long-term transportation contracts were transferred to Duke in the GPM
Disposition. As part of the GPM Disposition, the Company and Duke agreed that
the Company will keep Duke whole on certain transportation contracts
("keep-whole agreement"). The Company will pay Duke if transportation market
values fall below the contract transportation rates, while Duke agreed to pay
the Company if the market value exceeds the contract transportation rates. This
keep-whole agreement will be in effect until the earlier of (i) each contract's
expiration date, or (ii) March 2009. Transportation contracts transferred to
Duke in the GPM Disposition and included in the keep-whole agreement with Duke
relate to various pipelines. The significant contracts covered by the keep-whole
agreement include: (i) an agreement with Texas Gas Transmission Corporation for
a transportation rate of $0.331 per MMBtu for 90 MMBtud of gas from Carthage,
Texas to Lebanon, Ohio expiring October 31, 2008; (ii) an agreement with Pacific
Gas Transmission ("PGT") for a transportation rate of $0.328 per MMBtu for 25
MMBtud of gas from Kingsgate, British Columbia to the California/Oregon border
expiring October 31, 2023; and (iii) a second agreement with PGT expiring
October 31, 2023 for 106 MMBtud of which 47 MMBtud will expire on October 31,
2007. The keep-whole agreement excludes 45 MMBtud of the PGT amount through
October 31, 2002 then 20 MMBtud through the end of the contract.
The Company retained a contract with Kern River Gas Transportation Company
("Kern River") which expires on May 31, 2007. Under the transportation
agreement, the Company has the right to transport 75 MMcfd of gas on the Kern
River system. The current transportation rate is $0.69 per Mcf. This rate can
change based on Kern River's cost of service and upon rate regulation policies
of the FERC. The Company is a party to an additional agreement under which it
may acquire in 2001, at its option, an additional 25 MMcfd of transportation
rights on the Kern River system beginning in 2002. As a result of the GPM
Disposition, the Company entered into an agreement whereby Duke would operate
and handle volume nominations related to the Company's contract with Kern River.
Currently, Duke is utilizing the Company's volume transportation rights under
the Kern River contract and paying the Company market rates.
Included in the Consolidated Statements of Financial Position of the
Company is a reserve for the estimated fair value of the difference between the
total rate under the firm transportation agreements and estimated market rates
through March 2009. The reserve, which is included in other current liabilities
and other long-term liabilities, was $43.8 million and $81.8 million at December
31, 1999 and $17.5 million and $71.2 million at December 31, 1998, respectively.
The Company may adjust its reserve based on changes in current quoted future
market rates or estimated long-term rates. Such adjustments could be
significant. Management believes its reserves are adequate; however, at December
31, 1999, if the Company had used quoted future market rates at December 31,
1999 to estimate the long-term portion of the reserve discounted at 10%, the
Company would have recorded an additional reserve of $41.3 million for the firm
transportation commitment period.
65
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Anticipated discounted and undiscounted payments for firm transportation
commitment at December 31, 1999, which will be funded by cash generated by
operations, are as follows:
<TABLE>
<CAPTION>
UNDISCOUNTED DISCOUNTED
------------ ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
2000.................................................. $ 43.8 $ 43.8
2001.................................................. 17.0 14.8
2002.................................................. 15.6 12.3
2003.................................................. 17.8 12.8
2004.................................................. 24.4 15.9
Thereafter............................................ 50.0 26.0
------ ------
Total....................................... $168.6 $125.6
====== ======
</TABLE>
In February 2000, the Company entered into a $70 million contract with
Noble Drilling (U.S.) Inc. for the services of a semisubmersible drilling rig
designed for operations in water depths up to 5,000 feet. Under this agreement,
the Company has a commitment to use the rig for 15 months over a five-year
period commencing January 1, 2000.
In connection with the disposition of significant pipeline, refining and
producing property assets, the Company has made certain representations and
warranties relating to the assets sold (covering, among other matters, the
condition and capabilities of certain assets and compliance with environmental
and other laws) and provided certain indemnities with respect to liabilities
associated with such assets. The Company has been advised of possible claims
which may be asserted by the purchasers of certain disposed assets for alleged
breaches of representations and warranties and under certain indemnities.
Certain claims related to compliance with environmental laws remain pending. In
addition, as some of the representations, warranties, and indemnities related to
some of the disposed assets have not expired, further claims may be made against
the Company. While no assurance can be given as to the ultimate outcome of these
claims, the Company does not expect these matters to have a material adverse
effect on its results of operations, cash flows or consolidated financial
condition.
The Company, through one of its affiliates, is a party to a lease agreement
("base lease") for the leveraged lease financing of the Corpus Christi West
Plant Refinery ("West Plant") with an initial term expiring December 31, 2003,
and successive renewal periods lasting through January 31, 2011. At the
conclusion of the initial term of the base lease, any renewal period or January
31, 2011, the Company has the right to purchase the West Plant at the fair
market sales value. In connection with the sale by the Company of its refining
business in 1987 and 1989, the West Plant was subleased to CITGO Petroleum
Corporation ("CITGO") with sublease payments during the initial term equal to
the Company's base lease payments and during any renewal period equal to the
lesser of the base lease rental, which will be tied to the fair market rental
value, or $5 million annually. Additionally, CITGO has the option under the
sublease to purchase the West Plant from the Company at the conclusion of the
initial term or any renewal term at the fair market sales value, or on January
31, 2011 at a nominal price. If the fair market rental value of the base lease
during any renewal term exceeds CITGO's maximum obligation under the sublease,
or if CITGO purchases the West Plant on January 31, 2011 and the fair market
sales value of the West Plant is greater than the purchase amount specified in
the sublease, the Company will be obligated to pay the excess amounts. The
Company is unable at this time to determine the fair market rental value or the
fair market sales value of the West Plant, but will periodically evaluate the
potential effect of the obligation.
There are lawsuits pending against the Company and certain of its
subsidiaries which are described in Part I, Item 3 -- "Legal Proceedings" in
this Annual Report on Form 10-K. The Company intends to defend vigorously
against these lawsuits as well as any similar lawsuits. In the opinion of
management of the
66
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, the outcome of these matters should not have a materially adverse
effect on results of operations, cash flows or consolidated financial condition.
The Company is a defendant in a number of lawsuits and is involved in
governmental proceedings arising in the ordinary course of business, including,
but not limited to, royalty claims, contract claims and environmental claims.
The Company has also been named as a defendant in various personal injury
claims, including numerous claims by employees of third party contractors
alleging exposure to asbestos and asbestos-containing materials while working at
the Corpus Christi refinery, which the Company sold in segments in 1987 and
1989. While the Company's management cannot predict the outcome of such
litigation and other proceedings, management does not expect these matters to
have a materially adverse effect on the consolidated results of operations,
financial condition or cash flows of the Company.
14. OTHER CURRENT AND LONG-TERM LIABILITIES
Other current liabilities include the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
----------------------
1999 1998
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Interest payable............................................ $ 40.6 $ 35.7
Short-term firm transportation commitments (Note 13)........ 43.8 17.5
Environmental (Note 12)..................................... 16.9 17.7
Dividends................................................... 12.4 12.4
Other....................................................... 72.1 74.2
------ ------
Total other current liabilities................... $185.8 $157.5
====== ======
</TABLE>
Other long-term liabilities include the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
----------------------
1999 1998
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Long-term firm transportation commitments (Note 13)......... $ 81.8 $ 71.2
Abandonment provision....................................... 70.7 58.1
Wilmington field site preparation........................... 53.7 53.7
Environmental (Note 12)..................................... 48.3 57.2
Equity investment -- Black Butte(a)......................... 38.6 37.8
Deferred compensation....................................... 19.6 25.9
Litigation and contingencies (Note 13)...................... 25.5 23.4
Deferred revenue............................................ 15.8 9.4
Other....................................................... 47.1 51.4
------ ------
Total other long-term liabilities................. $401.1 $388.1
====== ======
</TABLE>
---------------
(a) Black Butte
The Company has a 50% ownership interest in Black Butte Coal Company and
R-K Leasing Company ("Black Butte"), partnerships which operate a surface coal
mine complex in southwestern Wyoming. The
67
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company accounts for these partnerships under the equity method of accounting.
Summarized financial information for Black Butte is as follows:
<TABLE>
<CAPTION>
AS OF AND FOR YEARS ENDED
DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Current assets............................................. $ 26.9 $ 30.4
Non-current assets......................................... 16.5 26.2
Current liabilities........................................ 18.4 21.0
Non-current liabilities and equity......................... 25.0 35.7
Sales...................................................... $216.1 $254.5 $159.7
Operating income........................................... 148.4 183.4 112.4
Partners' income........................................... 149.0 183.2 113.6
Cash distributions to partners -- net...................... 80.5 98.5 65.8
</TABLE>
During 1999 and 1998, Black Butte's sales to its largest customer under a
coal supply contract accounted for $73.4 million and $79.3 million of the
Company's consolidated operating income, respectively. This coal supply contract
will terminate by the end of 2000. Although Black Butte continues to seek new
buyers for its low-sulfur coal, its mining costs are considerably higher than
the mining costs for competing supplies. The Company does not expect to be able
to replace the operating income currently received under the contract with
incremental coal sales after 2000.
In addition, Black Butte provides an accrual for reclamation of mined
properties, based on the estimated cost of restoration of such properties in
compliance with laws governing strip mining. Accrued reclamation costs for Black
Butte as of December 31, 1999 and 1998 were $54.6 million and $52.0 million,
respectively, of which the Company's share is $27.3 million and $26 million,
respectively. Anticipated cash expenditures for this reclamation liability are
expected to be incurred in years beginning after 2004.
A supplier of coal to Black Butte has been assessed by the Minerals
Management Service of the United States Department of the Interior for
underpayment of royalties and the State of Montana Department of Revenue for
underpayment of production taxes related to coal previously sold to Black Butte.
The supplier is contesting these claims; however, should the claims be
successful, the supplier will claim reimbursement from Black Butte. In 1998, the
Courts ruled in favor of the State of Montana. The supplier is appealing to the
Montana State Supreme Court, however, the Company recorded $15.2 million as its
proportionate share of the Montana Department of Revenue assessment related to
coal production taxes. The Company's proportionate share of the liability for
underpaid royalties and interest to the Minerals Management Service of the
United States Department of the Interior, if any, could range from zero to $6.7
million.
15. SHAREHOLDERS' EQUITY
Stock Option and Retention Stock Plans. Pursuant to the Company's stock
option and retention stock plans, 11,062,582 and 5,999,439 shares of Common
Stock were available for grant to employees and directors at the end of December
31, 1999 and 1998, respectively. In May 1999, the Company's shareholders
approved a 7.5 million increase in the number of shares available for grants and
awards to employees and directors. Shares may either be granted as options to
purchase Common Stock or as awards of retention stock. Options to purchase
Common Stock under the plans are generally granted with an exercise price equal
to the fair market value at the date of grant and are exercisable for a period
of up to 10 years from grant date. Option grants have been made to directors,
officers and employees and vest over periods up to 10 years from the grant date.
Retention stock is awarded under the plans to eligible employees, subject to
forfeiture if employment
68
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
terminates during the prescribed retention period, generally one to five years
from grant, subject to accelerated vesting in some situations.
In the first quarter of 1999, options covering 1,171,439 shares of Company
common stock were granted to directors, officers and certain non-officer
executives of the Company, each with an exercise price of $9.44 per share, a
one-year vesting period and a ten-year term. In addition, 1,474,439 shares of
retention stock were awarded to officers and certain non-officer executives with
a vesting schedule of one-third per year over a three-year period commencing on
the first anniversary of the award date, subject to accelerated vesting upon the
achievement of certain Company common stock price objectives. These stock price
objectives were achieved in April and May 1999, resulting in the acceleration of
vesting of all such shares of retention stock. Of the Company's $17.0 million
compensation expense in 1999 that was recorded for retention stock, $14.8
million was recorded in connection with the vesting of the January 1999
retention stock awards.
The status of the Company's stock-based compensation programs is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
COMPANY AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Stock options:
Balance at December 31, 1996................................ 5,216,074 $19.97
Granted................................................... 1,111,750 25.63
Exercised................................................. (351,723) 16.05
Expired/surrendered....................................... (91,615) 24.75
----------
Balance at December 31, 1997................................ 5,884,486 21.20
Granted................................................... 2,951,375 17.01
Exercised................................................. (57,487) 9.49
Expired/surrendered....................................... (207,635) 15.18
----------
Balance at December 31, 1998................................ 8,570,739 19.84
Granted................................................... 2,459,900 12.28
Exercised................................................. (271,999) 12.24
Expired/surrendered....................................... (1,818,375) 18.27
----------
Balance at December 31, 1999................................ 8,940,265 18.32
==========
Exercisable December 31:
1997...................................................... 3,853,035 $18.72
1998...................................................... 4,496,736 19.93
1999...................................................... 4,925,741 20.47
</TABLE>
REGULAR
----------
Retention stock:
Unvested at December 31, 1996............................... 1,204,562
Awarded................................................... 209,114
Vested.................................................... (376,295)
Forfeited, surrendered and other.......................... (34,693)
----------
Unvested at December 31, 1997............................... 1,002,688
Awarded................................................... 45,580
Vested.................................................... (531,951)
Forfeited, surrendered and other.......................... (19,200)
----------
Unvested at December 31, 1998............................... 497,117
Awarded................................................... 1,792,257
Vested.................................................... (1,764,776)
Forfeited, surrendered and other.......................... (188,194)
----------
Unvested at December 31, 1999............................... 336,404
==========
69
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Weighted-average fair value on the dates of option grants and retention
share awards:
<TABLE>
<CAPTION>
RETENTION
OPTIONS(A) SHARES(B)
---------- ---------
<S> <C> <C>
1997........................................................ $8.74 $25.63
1998........................................................ 7.00 17.01
1999........................................................ 7.05 10.09
</TABLE>
---------------
(a) Calculated in accordance with the Black-Scholes option pricing model, using
the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Expected volatility......................................... 61% 51% 28%
Expected dividend yield..................................... 1.59% 2.25% 0.8%
Expected weighted average option term....................... 8 years 5 years 4 years
Risk-free rate of return.................................... 6.4% 4.6% 5.7%
</TABLE>
(b) Represents market value on grant date.
Options to purchase Common Stock were as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF YEARS TO EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SHARES EXPIRATION PRICE SHARES PRICE
------------------------ --------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 8.79 -- $15.78................. 3,687,117 5.9 $13.58 1,518,420 $14.97
$17.04 -- $20.94................. 2,936,389 3.4 17.74 1,612,450 18.32
$22.50 -- $29.44................. 2,316,759 6.1 26.62 1,794,871 27.06
--------- ---------
$ 8.79 -- $29.44................. 8,940,265 5.1 18.32 4,925,741 20.47
========= =========
</TABLE>
Since the Company applies the intrinsic value method in accounting for its
stock option and retention stock plans, it generally records no compensation
cost for its stock option plans. This method calculates compensation expense on
the measurement date (usually the date of grant or award) as the excess of the
current market price of the underlying common stock of the Company over the
amount the employee is required to pay for the shares, if any. The expense is
recognized over the vesting period of the grant or award. Compensation cost
recognized relating to retention stock was $17.0 million, $6.5 million and $11.6
million in 1999, 1998 and 1997, respectively. Approximately $14.8 million of the
$17.0 million 1999 compensation costs was related to the vesting of the January
1999 retention stock awards. If compensation cost for the Company's stock option
plan had been determined based on the fair value at the grant dates for awards
under the plan, the Company's net income would have been reduced by $26.7
million in 1999, $13.8 million in 1998 and $8.0 million in 1997. Basic and
diluted earnings per share would have been reduced by $0.11 per share in 1999,
$0.06 per share in 1998 and $0.03 per share in 1997.
70
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share. Basic earnings per share ("EPS") excludes dilution and
is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The reconciliation between basic earnings per share and diluted earnings per
share is as follows:
<TABLE>
<CAPTION>
AVERAGE PER
INCOME SHARES SHARE
--------------------- ---------- ------
(MILLIONS OF DOLLARS) (MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 1999
<S> <C> <C> <C>
Basic EPS
Net income.................................... $ 225.8 249.0 $ 0.91
Less: Income from discontinued operations..... 133.2 -- 0.54
Income from extraordinary gain.......... 3.4 -- 0.01
------- ------
Income from continuing operations available to
common shareholders........................ 89.2 -- 0.36
Effect of dilutive options...................... -- 0.2 --
------- ----- ------
Diluted EPS
Income from continuing operations available to
Common shareholders plus assumed
conversion................................. $ 89.2 249.2 $ 0.36
======= ===== ======
FOR THE YEAR ENDED DECEMBER 31, 1998
Basic EPS
Net loss...................................... $(898.7) 247.7 $(3.63)
Less: Loss from discontinued operations....... (15.6) -- (0.06)
------- ------
Loss from continuing operations available to
common shareholders........................ (883.1) -- (3.57)
Effect of dilutive options (a).................. -- -- --
------- ----- ------
Diluted EPS
Loss from continuing operations available to
Common shareholders plus assumed
conversion................................. $(883.1) 247.7 $(3.57)
======= ===== ======
FOR THE YEAR ENDED DECEMBER 31, 1997
Basic EPS
Net Income.................................... $ 333.0 250.1 $ 1.33
Less: income from discontinued operations..... 29.9 -- 0.12
------- ------
Income from continuing operations available to
common shareholders........................ 303.1 -- 1.21
Effect of dilutive options...................... -- 0.8 --
------- ----- ------
Diluted EPS
Income from continuing operations available to
Common shareholders plus assumed
conversion................................. $ 303.1 250.9 $ 1.21
======= ===== ======
</TABLE>
---------------
(a) Options outstanding, as discussed above, have been excluded from the 1998
calculation of diluted earnings per share due to anti-dilution.
71
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Stock Ownership Plan. Effective January 2, 1997, the Company
instituted an employee stock ownership plan ("ESOP") for eligible U.S.
employees. The ESOP purchased 3.7 million shares or $107.3 million of newly
issued common stock (the "ESOP Shares") from the Company, to be used to fund the
Company's matching obligation under its 401(k) Thrift Plan. All domestic regular
employees of the Company are eligible to participate in the ESOP.
The ESOP Shares, which are held in trust, were purchased with the proceeds
from a 30-year loan from the Company. Such shares were pledged as collateral for
the loan. As loan payments are made, shares are released from collateral, based
on the proportion of debt service paid. Scheduled principal and interest
requirements are $5.9 million annually and will be funded with dividends paid on
the unallocated ESOP Shares and with cash contributions from the Company.
Principal or interest prepayments may be made to ensure that the Company's
minimum matching obligation is met.
Shares held by the ESOP are included in the computation of earnings per
share as such ESOP Shares are released from collateral. Releases of ESOP Shares
will be allocated to participants' accounts and will be charged to compensation
expense at the fair market value of the shares on the date of the employer
match. Dividends on allocated ESOP Shares will be recorded as a reduction of
retained earnings; dividends on unallocated ESOP Shares will be recorded as a
reduction of the principal or accrued interest on the loan.
As of December 31, 1999, allocated and unallocated shares in the ESOP were
958,472 and 2,741,528, respectively. As of December 31, 1998, allocated and
unallocated shares were 483,216 and 3,216,784, respectively. The fair value of
unallocated ESOP shares at December 31, 1999 and 1998 was $35.0 million and
$29.2 million, respectively. During 1999, 1998 and 1997, compensation cost
related to the allocation of ESOP shares to participants' accounts was $4.4
million, $6.3 million and $5.3 million, respectively.
Preferred Stock and Shareholder Rights. The Company has 100 million shares
of no-par-value preferred stock authorized, none of which are outstanding. On
October 28, 1996, the Company's Board of Directors designated 3,000,000 of the
authorized preferred shares as non-redeemable Series A Junior Participating
Preferred Shares (the "Series A Preferred Stock"). Upon issuance, each
one-hundredth of a share of the Series A Preferred Stock will have dividend and
voting rights approximately equal to those of one share of the Company's common
stock. In addition, on October 28, 1996, the Board of Directors adopted a
shareholder rights plan with a "flip-in" threshold of 15% to ensure that all
shareholders of the Company receive fair value for their Common Stock in the
event of any proposed takeover of the Company and to guard against the use of
coercive tactics to gain control of the Company without offering fair value to
the Company's shareholders ("Rights Agreement"). Under the Rights Agreement, the
Company declared a dividend of one right ("Right") for each outstanding share of
common stock to shareholders of record on November 7, 1996. Under certain
limited conditions as defined in the Rights Agreement, each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Preferred Stock at $135 subject to adjustment. The Rights are not
exercisable until the Distribution Date (as defined in the Rights Agreement)
which will occur upon the earlier of (i) ten days following a public
announcement that an Acquiring Person (as defined in the Rights Agreement) has
acquired beneficial ownership of 15% or more of the Company's outstanding Common
Stock (the "Stock Acquisition Date") or (ii) ten business days following the
commencement of a tender offer or exchange offer that would result in a person
or group owning 15% or more of the Company's outstanding Common Stock.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on a substantial number of Rights being redeemed.
In the event that at any time following the Stock Acquisition Date certain
events occur as defined in the Rights Agreement, each holder of a Right, except
the Acquiring Person, will thereafter have the right to receive, upon exercise,
Company Common Stock or common stock of the acquiring company, as the case may
be, having a value equal to two times the exercise price of the Right.
72
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Rights should not interfere with any merger or other business
combination approved by the Company since the Board of Directors may, at its
option, at any time prior to the close of business on the earlier of the tenth
day following the Stock Acquisition Date or October 28, 2006, redeem all but not
less than all of the then outstanding Rights at $0.01 per Right. The Rights
expire on October 28, 2006, and do not have voting power or dividend privileges.
During 1999, the Company repurchased 869,681 shares at a cost of $12.6
million primarily in connection with the Company's retention stock program. Also
during 1999, the Company reissued 259,605 shares of repurchased stock for $3.3
million to settle deferred compensation liabilities for several former
executives. During 1998, the Company repurchased 837,500 shares at a cost of
$18.6 million and 449,788 shares at a cost of $8.1 million, in connection with
the Company's retention stock and options, respectively.
Other Comprehensive Income. The Company's other comprehensive income is as
follows:
<TABLE>
<CAPTION>
TAX
BEFORE-TAX BENEFIT NET-OF-TAX
AMOUNT (EXPENSE) AMOUNT
---------- ----------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
1999
Foreign currency translation adjustment................ $ 49.6 $(27.1) $ 22.5
Minimum pension liability adjustment................... (6.0) -- (6.0)
------- ------ ------
Other comprehensive income............................. $ 43.6 $(27.1) $ 16.5
======= ====== ======
1998
Foreign currency translation adjustment................ $(149.6) $ 82.5 $(67.1)
Minimum pension liability adjustment................... (3.9) -- (3.9)
------- ------ ------
Other comprehensive income (loss)...................... $(153.5) $ 82.5 $(71.0)
======= ====== ======
</TABLE>
16. OTHER INCOME -- NET
Other income (expense) -- net consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Foreign currency gain (loss) -- net (Note 5)............... $ 44.2 $(35.5) $ --
Firm transportation contract valuation..................... (43.4) -- --
Interest income............................................ 30.5 11.1 4.4
Insurance settlement proceeds.............................. -- 3.3 10.0
Excess reserve releases.................................... -- -- 23.0
Gain (loss) on sales of investment......................... -- (1.4) 7.2
Pennzoil acquisition costs(a).............................. -- (2.0) (17.8)
Interest rate lock cost (Note 5)........................... -- (14.3) --
Other -- net............................................... 0.4 (6.5) (2.3)
------ ------ ------
Total other income -- net........................ $ 31.7 $(45.3) $ 24.5
====== ====== ======
</TABLE>
---------------
(a) Related to cost incurred with the unsuccessful takeover attempt of Pennzoil
Company.
73
