<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13916
UNION PACIFIC RESOURCES GROUP INC.
(Exact name of registrant as specified in its charter)
UTAH 13-2647483
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 MAIN STREET, FORT WORTH, TEXAS
(Address of principal executive offices)
76102
(Zip Code)
(817) 321-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of April 30, 1999, there were 252,149,222 shares of the
registrant's common stock outstanding.
<PAGE> 2
UNION PACIFIC RESOURCES GROUP INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME -
For the Three Months Ended March 31, 1999 and 1998...................................... 2
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION -
At March 31, 1999 and December 31, 1998................................................. 3 - 4
. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - For the
Three Months Ended March 31, 1999 and 1998.............................................. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS..................................... 6 - 11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................. 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................................... 13 - 22
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... 22 - 24
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS......................................................................... 25
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 25 - 26
SIGNATURE.......................................................................................... 27
</TABLE>
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998
--------------------------------------------------
(Millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating revenues:
Exploration and production $ 319.0 $ 364.2
Other oil and gas revenues (Note 5) 63.9 3.7
---------- ----------
Total oil and gas operations 382.9 367.9
Minerals 32.2 40.1
---------- ----------
Total operating revenues 415.1 408.0
---------- ----------
Operating expenses:
Production 90.5 95.3
Exploration 51.6 56.1
Minerals 0.4 0.7
Depreciation, depletion and amortization 183.2 174.3
General and administrative 15.6 20.4
Restructuring charge (Note 6) 14.5 --
---------- ----------
Total operating expenses 355.8 346.8
---------- ----------
Operating income 59.3 61.2
Other income (expense) - net (Note 7) 11.4 1.3
Interest expense (64.3) (34.0)
---------- ----------
Income from continuing operations before income taxes 6.4 28.5
Income tax benefit (expense) (Notes 7 and 8) 35.9 (3.8)
---------- ----------
Income from continuing operations 42.3 24.7
Discontinued operations: (Note 4)
Income (loss) from discontinued operations - net of tax (23.8) 6.5
Gain on sale of discontinued operations - net of tax 157.0 --
---------- ----------
Total income from discontinued operations 133.2 6.5
Net income $ 175.5 $ 31.2
========== ==========
Other comprehensive income - net of tax:
Foreign currency translation adjustments (35.3) 3.6
---------- ----------
Comprehensive income $ 140.2 $ 34.8
========== ==========
Earnings per share - basic and diluted:
Continuing operations $ 0.17 $ 0.10
Discontinued operations 0.54 0.03
---------- ----------
Total $ 0.71 $ 0.13
Weighted average shares outstanding - diluted 248.7 248.2
Cash dividends per share $ 0.05 $ 0.05
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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<PAGE> 4
UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At March 31, 1999 and December 31, 1998
---------------------------------------
(Millions of dollars)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments............................................. $ 171.3 $ 8.8
Accounts receivable - net .................................................. 311.6 261.0
Inventories ................................................................ 53.1 64.6
Other current assets (Note 5) .............................................. 96.9 107.0
---------- ----------
Total current assets ................................................. 632.9 441.4
---------- ----------
Properties (successful efforts method)(Note 5):
Cost ....................................................................... 10,978.1 11,078.2
Accumulated depreciation, depletion and amortization ....................... (5,095.3) (4,984.9)
---------- ----------
Total properties - net ............................................... 5,882.8 6,093.3
Intangible and other assets .................................................... 169.5 180.8
Net assets of discontinued operations (Note 4) ................................. -- 926.9
---------- ----------
Total assets ................................................................... $ 6,685.2 $ 7,642.4
========== ==========
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At March 31, 1999 and December 31, 1998
---------------------------------------
(Millions of dollars)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable ....................................... $ 229.3 $ 270.5
Advance payment (Note 9) ............................... 150.0 --
Accrued taxes payable .................................. 263.0 64.9
Short-term debt ........................................ 382.0 853.8
Other current liabilities .............................. 228.4 157.5
---------- ----------
Total current liabilities ......................... 1,252.7 1,346.7
---------- ----------
Long-term debt .............................................. 2,755.4 3,744.9
Deferred income taxes ....................................... 1,215.9 1,291.6
Other long-term liabilities (Note 11) ....................... 600.4 531.0
Shareholders' equity:
Common stock, no par value;
Authorized -- 400,000,000
Issued and outstanding-- 252,153,830 and 250,685,204 . -- --
Paid-in surplus ........................................ 1,006.6 992.6
Treasury stock, at cost:
Shares--3,668,426 and 3,666,913 .................... (82.6) (82.5)
Retained earnings ...................................... 172.2 9.1
Unearned employee stock ownership plan ................. (94.2) (95.7)
Unearned compensation (Note 10) ........................ (16.6) (6.0)
Accumulated other comprehensive income:
Deferred foreign exchange adjustment ............... (119.7) (84.4)
Minimum pension contra equity ...................... (4.9) (4.9)
---------- ----------
Total accumulated other comprehensive income ...... (124.6) (89.3)
---------- ----------
Total shareholders' equity ................... 860.8 728.2
---------- ----------
Total liabilities and shareholders' equity .................. $ 6,685.2 $ 7,642.4
========== ==========
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
--------------------------------------------------
(Millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash flows provided by operations:
Net income ............................................. $ 175.5 $ 31.2
Less (income) from discontinued operations ............. (133.2) (6.5)
Non-cash charges to income:
Depreciation, depletion and amortization ............ 183.2 174.3
Deferred income taxes ............................... (21.3) (20.8)
Other non-cash charges - net ........................ 6.9 78.9
Changes in current assets and liabilities .............. 10.6 86.4
---------- ----------
Cash provided by operations ...................... 221.7 343.5
---------- ----------
Cash flows from investing activities:
Capital and exploratory expenditures ................... (110.8) (448.1)
Acquisition of Norcen (Note 3) ......................... -- (2,623.2)
Proceeds from other sales of assets (Note 5) .......... 200.2 6.0
Proceeds from sale of GPM segment (Note 4) ............ 1,359.1 --
Cash provided (used) by discontinued operations ........ (169.5) (88.7)
Other investing activities - net ....................... -- 6.4
---------- ----------
Cash provided (used) by investing activities ..... 1,279.0 (3,147.6)
---------- ----------
Cash flows from financing activities:
Dividends paid ......................................... (12.4) (12.4)
Other debt financing - net ............................. -- 2,816.1
Debt repaid ............................................ (1,472.9) --
Repurchase of common stock ............................. (0.1) (21.6)
Other financing activities - net (Note 9) .............. 147.2 (4.4)
---------- ----------
Cash provided (used) by financing activities ..... (1,338.2) 2,777.7
---------- ----------
Net change in cash and temporary investments ............... 162.5 (26.4)
Cash at beginning of period ................................ 8.8 67.1
---------- ----------
Cash at end of period ...................................... $ 171.3 $ 40.7
========== ==========
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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<PAGE> 7
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS
The Condensed Consolidated Financial Statements of Union Pacific
Resources Group Inc. and subsidiaries (the "Company") have been prepared
by management, are unaudited and reflect all adjustments (including normal
recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results of
the Company for the interim periods. However, these condensed statements
do not include all of the information and footnotes required by generally
accepted accounting principles to be included in a full set of financial
statements. The report of Arthur Andersen LLP commenting on their review
accompanies the Condensed Consolidated Financial Statements and is
included in Part I, Item 1 in this report. The Condensed Consolidated
Statement of Financial Position at December 31, 1998, is derived from
audited financial statements. The Condensed Consolidated Financial
Statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998. The results of operations
for the three months ended March 31, 1999, are not necessarily indicative
of the results for the full year ending December 31, 1999.
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, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses for each reporting period. Management believes its estimates and
assumptions are reasonable; however, such estimates and assumptions are
also subject to a number of risks and uncertainties which may cause actual
results to differ materially.
2. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
(Millions of dollars)
<S> <C> <C>
Revenues:
Exploration and production ............................................ $ 382.9 $ 367.9
Minerals .............................................................. 32.2 40.1
---------- ----------
Total ................................................................ $ 415.1 $ 408.0
========== ==========
Operating income:
Exploration and production............................................. $ 59.1 $ 43.4
Minerals .............................................................. 31.8 39.4
Corporate (a) ......................................................... (31.6) (21.6)
---------- ----------
Total ................................................................ $ 59.3 $ 61.2
========== ==========
</TABLE>
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<PAGE> 8
<TABLE>
<CAPTION>
At March 31, At December 31,
1999 1998
---------- ----------
(Millions of dollars)
<S> <C> <C>
Fixed assets (net of accumulated DD&A):
Exploration and production .............. $ 5,777.8 $ 5,988.8
Minerals ................................ 10.2 10.2
Corporate ............................... 94.8 94.3
---------- ----------
Total ................................... $ 5,882.8 $ 6,093.3
========== ==========
</TABLE>
(a) Operating income for the Corporate segment consists of general and
administrative expense and DD&A expense on Corporate fixed assets, and in
1999 includes $14.5 million related to a restructuring charge (See Note 6).
3. ACQUISITION OF NORCEN
In March 1998, the Company and Union Pacific Resources Inc. ("UPRI"), an
Alberta corporation and a wholly-owned subsidiary of the Company, acquired
Norcen Energy Resources Limited ("Norcen") for $2.6 billion ( the "Norcen
Acquisition"). The following table presents unaudited pro forma condensed
consolidated statements of income of the Company for the three months
ended March 31, 1998 as though the Norcen Acquisition had occurred on
January 1, 1998. Certain adjustments were made to the financial
information to conform to the accounting policies and financial statement
presentation of the Company.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 31, 1998
-----------------------
(Millions of dollars,
except per share amounts)
<S> <C>
Revenues ............................... $ 507.8
Costs and expenses ..................... 477.8
----------
Operating income ....................... 30.0
Interest expense ....................... (68.5)
Other income (expense) - net ........... 1.3
----------
Loss before income taxes ............... (37.2)
Income tax benefit (expense) ........... 20.4
----------
Loss from continuing operations ........ $ (16.8)
==========
Loss per share - basic ................. $ (0.07)
Loss per share - diluted ............... (0.07)
</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,
1998, nor is it necessarily indicative of future results of operations.
NORCEN SUMMARIZED FINANCIAL INFORMATION
In 1998, as a result of the Norcen Acquisition, UPRI assumed and
unconditionally guaranteed the public debt obligations of Norcen. The
following table presents summarized financial information for UPRI (as
successor to Norcen) as of and for the three months ended March 31, 1999,
the two months ended February 28, 1998, and the month ended March 31,
1998. This summarized financial information is being
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<PAGE> 9
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 for as long as the Debt
Securities remain outstanding and guaranteed by UPRI.
<TABLE>
<CAPTION>
(Millions of dollars) Three Months Ended Two Months Ended One Month Ended
March 31, 1999 February 28, 1998(a) March 31, 1998(b)
-------------- -------------------- --------------------
<S> <C> <C> <C>
Summarized Statement of Income Information:
Operating revenues ...................... $ 121.1 $ 104.0 $ 50.5
Operating income (loss) ................. 50.6 4.0 (16.0)
Net income (loss) ....................... 58.9 (30.0)(c) (12.8)
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1999 At December 31, 1998
----------------- --------------------
<S> <C> <C>
Summarized Statement of Financial Position Information:
Current assets ...................................... $ 103.7 $ 53.7
Non-current assets .................................. 1,847.8 1,882.3
Current liabilities ................................. 56.1 279.8
Non-current liabilities and equity .................. 1,895.4 1,656.2
</TABLE>
- ------------------
(a) Results for UPRI as of and for the two months ended February 28,
1998. Results have not been restated in accordance with U.S. generally
accepted accounting principles ("GAAP") and reflect the full cost method
for accounting for oil and gas operations.
(b) Results for UPRI as of and for the one month ended March 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.
(c) Net loss includes $40 million in costs incurred by UPRI in
connection with the Norcen Acquisition which were not reimbursed by the
Company.
4. SALE OF GPM SEGMENT
In November 1998, the Company entered into a Merger and Purchase
Agreement ("Agreement") with Duke Energy Field Services, Inc. ("Duke")
to sell its gathering, processing and marketing ("GPM") segment for
$1.36 billion in cash. On March 31, 1999, the Company closed on the sale
( the "GPM Disposition"). The GPM Disposition consisted primarily of the
Company's pipelines, gathering systems, natural gas processing plants
and natural gas and natural gas liquids marketing assets and operations,
including 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 natural gas liquids
fractionation plants. The Company has retained its crude oil marketing
business. The Company recorded a $157.0 million after-tax gain on the
GPM Disposition.
Under a process provided for in the Agreement, Duke has asserted claims
against the Company for costs to remediate alleged environmental
conditions. These environmental claims are in excess of a $40 million
deductible that Duke has assumed for environmental conditions. Under the
terms of the Agreement, the Company has the right to contest any
environmental claims through arbitration. If it is determined that there
are valid environmental claims in excess of the $40 million deductible,
then the Company will be required to make a payment to Duke for such
excess amount. The Company is analyzing Duke's environmental claims. At
this time, the Company believes that there are substantial defenses to
the Duke environmental claims, and that the likelihood that any payments
to Duke will be required is remote.
-8-
<PAGE> 10
The GPM segment results of operations and cash flows have been excluded
from continuing operations for all periods presented and have been
reported as discontinued operations in the accompanying condensed
consolidated statements of income and cash flows. The GPM net assets
that were sold were segregated from continuing operations in the
Company's condensed consolidated statement of financial position at
December 31, 1998.
Summarized information relating to results of discontinued operations
for the three months ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Millions of dollars)
<S> <C> <C>
Operating revenues ........................ $ 21.5 $ 91.0
Operating expenses ........................ (29.7) (58.1)
Depreciation, depletion and amortization .. (20.4) (16.8)
---------- ----------
Operating income (loss) ................... (28.6) 16.1
Other income (expense)-- net .............. -- 0.1
Interest expense (a) ...................... (8.0) (5.2)
---------- ----------
Income (loss) before taxes ................ (36.6) 11.0
Income taxes benefit (expense) ............ 12.8 (4.5)
---------- ----------
Net income (loss) from
discontinued operations ................... $ (23.8) $ 6.5
========== ==========
</TABLE>
- ----------
(a) The Company allocated interest expense to the GPM 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.
5. PROPERTY DIVESTITURES
In January 1999, the Company completed sales of its non-core South Texas
properties for a sales price of $137.8 million, including a $30 million
note receivable, and its Canadian Caroline-Swan Hill property (the
"Caroline property") for $108.6 million. The Company recorded a pretax
gain of $61.1 million in connection with these sales.
6. RESTRUCTURING CHARGES
During the first quarter, the Company reorganized into five 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
in the first quarter. The charge included $4.2 million for pension
benefits and other postretirement benefits ("OPEB") in connection with
the early retirement program and the workforce reductions. Also included
were $7.1 million for severance costs relating to a reduction in force,
$3.0 million for specialty drilling equipment and supplies no longer
required for cancelled drilling programs and $0.2 million for excess
office space commitments.
At January 1, 1999, the balance of the reserve for restructuring costs
was $14.6 million. During the first quarter, $7.3 million was added to
the reserve (the $14.5 million first quarter charge less the amount
relating to the pension, OPEB and specialty drilling equipment costs),
and $10.5 million, principally related to severance benefits, was paid
out of the reserve. At March 31, 1999, the $11.4
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<PAGE> 11
million remaining in the reserve represents a drilling rig commitment
($5.0 million), excess office space commitments ($4.1 million) and
remaining severance costs.
7. FOREIGN CURRENCY
The Company recorded a $9.0 million non-cash foreign currency gain
included in other income (expense) net on the Condensed Consolidated
Statement of Income. The gain resulted from remeasurement of UPRI's U.S.
dollar denominated monetary assets and liabilities (primarily debt
obligations).
The Company also recorded a $6.9 million non-cash foreign currency gain
included in deferred tax benefit (expense) on the Condensed Consolidated
Statement of Income. The gain resulted from remeasurement of deferred
tax liabilities denominated in the local currencies of Guatemala and
Venezuela.
8. TAX SETTLEMENT
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 will receive a refund of
approximately $54.6 million dollars. In the first quarter of 1999, the
Company recorded $7.1 million of interest income and a $27.9 million
deferred income tax benefit related to the settlement.
9. ADVANCE PAYMENT
In March 1999, the Company entered into a forward sale transaction,
whereby it received $150.0 million in cash and is required to deliver
approximately 401 MMcf of natural gas per day to the purchaser beginning
in April 1999 and continuing through October 1999. The Company has
recorded the obligation associated with this transaction as an advance
payment. This current liability will be amortized and the related cost
will be recorded in other oil and gas revenues on the Condensed
Consolidated Statement of Income as the gas is delivered over the term
of the contract. In addition, the Company has entered into a gas price
swap to hedge exposure to price risk associated with this transaction
(see Quantitative and Qualitative Disclosures About Market Risk in Part
I, Item 3 of this report).
10. SHAREHOLDERS' EQUITY
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 restricted stock were awarded to officers
and certain non-officer executives with a vesting schedule of one-third
per year over a three-year period, subject to accelerated vesting upon
the achievement of certain applicable Company common stock price
objectives. These stock price
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<PAGE> 12
objectives were achieved in April and May 1999, resulting in the
acceleration of vesting of all such shares of restricted stock.
11. COMMITMENTS AND CONTINGENCIES
The Company is subject to federal, state, provincial and local
environmental laws and regulations and currently is participating in the
investigation and remediation of a number of sites. Where the
remediation costs can reasonably be determined, and where such
remediation is probable, the Company has recorded a liability.
Management does not expect future environmental obligations to have a
material impact on the results of operations, financial condition or
cash flows of the Company.
In connection with the disposition of significant plant, pipeline,
refining and producing property assets, the Company has made certain
representations and warranties related to the assets sold 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 such representations and warranties and under certain
indemnities. Certain claims related to compliance with environmental
laws remain pending, including those discussed in Note 4. 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, financial
condition or cash flows.
The Company is a defendant in a number of other lawsuits and is involved
in governmental proceedings arising in the ordinary course of business
in addition to those described above. The Company also has entered into
commitments and provided guarantees for specific financial and
contractual obligations of its subsidiaries and affiliates. The Company
does not expect these lawsuits, commitments or guarantees to have a
material adverse effect on its results of operations, financial
condition or cash flows.
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<PAGE> 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Union Pacific Resources Group Inc.
We have reviewed the accompanying condensed consolidated statement of financial
position of Union Pacific Resources Group Inc. (a Utah corporation) and
subsidiaries as of March 31, 1999, and the related condensed consolidated
statements of income and the condensed consolidated statement of cash flows for
the three month periods ended March 31, 1999 and 1998. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
April 26, 1999
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1999 COMPARED TO MARCH 31, 1998
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1999 1998
------- -------
(Millions of dollars)
<S> <C> <C>
Total operating revenues............................................ $ 415.1 $ 408.0
Total operating expenses............................................ 355.8 346.8
Operating income.................................................... 59.3 61.2
Income from continuing operations................................... 42.3 24.7
Net income ......................................................... 175.5 31.2
Earnings from continuing operations per share - diluted............. 0.17 0.10
Earnings per share - diluted........................................ 0.71 0.13
</TABLE>
The Company recorded net income of $175.5 million in the first quarter of
1999, an increase of $144.3 million over first quarter results for 1998.
Earnings per share increased from $0.13 in the first quarter of 1998 to $0.71
per share in 1999. The increase was due to the $157.0 million after-tax gain on
the sale of the GPM business segment to Duke and improved results from
continuing operations, partly offset by lower income from discontinued
operations.
RESULTS OF CONTINUING OPERATIONS
The Company recorded income from continuing operations of $42.3 million
for the first quarter of 1999, an increase of $17.6 million compared to 1998.
Earnings per share for continuing operations of $0.17 increased $0.07 per
share. The increase was largely due to the $61.1 million pretax ($33.8 million
after-tax) gain on property sales and a $32.9 million after-tax gain related to
the Canadian tax settlement. Volumes improved over last year, primarily from
the benefit of three months of Norcen results in 1999 versus one month in 1998
(the Norcen Acquisition was effective March 3, 1998), which added $29.1 million
in revenues. The remeasurement of U.S. dollar denominated liabilities
contributed a $15.9 million after-tax foreign exchange gain. Lower product
prices, however, reduced revenues by $74.3 million for the quarter. In
addition, the Company also recorded a $14.5 million restructuring charge
related to the reduction in force and early retirement program that occurred in
the first quarter of 1999.
SUMMARY OF SEGMENT FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
(Millions of dollars)
<S> <C> <C>
Segment operating income:
Exploration and production ............ $ 59.1 $ 43.4
Minerals .............................. 31.8 39.4
Corporate/general and administrative .. (17.1) (21.6)
Restructuring charge .................. (14.5) --
---------- ----------
Total .............................. $ 59.3 $ 61.2
========== ==========
</TABLE>
-13-
<PAGE> 15
Operating income decreased by $1.9 million (3%) to $59.3 million for the
quarter. Exploration and production operating income increased by $15.7 million
(36%) to $59.1 million, reflecting the $61.1 million pretax gain on property
sales, as well as higher volumes, which contributed $29.1 million in revenues.
Those results were partially offset by lower prices for all products that
reduced revenues by $74.3 million.
Minerals operating income decreased $7.6 million to $31.8 million, largely
due to higher operating expenses at Black Butte Coal Company ("Black Butte"),
lower coal royalty volumes, lower soda ash volumes at the Company's soda ash
joint venture and reduced soda ash prices. These results were partially offset
by a gain on sale relating to an industrial minerals property and reduced
overhead expenses.
Corporate/general and administrative ("G&A") costs were $31.6 million
during the quarter, including the $14.5 million restructuring charge related to
the reduction in force and early retirement program. G&A expenses of $17.1
million were down $4.5 million from 1998, reflecting cost savings related to
the fourth quarter 1998 and first quarter 1999 reductions in force, partly
offset by the inclusion of three months of Canadian overhead compared to one
month last year.
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
(Millions of dollars)
<S> <C> <C>
Exploration and production revenues ......... $ 319.0 $ 364.2
Other oil and gas revenues .................. 63.9 3.7
---------- ----------
Total operating revenues ................. 382.9 367.9
---------- ----------
Operating expenses:
Production ............................... 90.5 95.3
Exploration .............................. 51.6 56.1
Depreciation, depletion and amortization . 181.7 173.1
---------- ----------
Total operating expenses ................. 323.8 324.5
---------- ----------
Operating income ............................ $ 59.1 $ 43.4
========== ==========
</TABLE>
OPERATING REVENUES
Exploration and production revenues for the first quarter of 1999
decreased by $45.2 million (12%) to $319.0 million, due to the $74.3 million
reduction associated with lower product prices. The reduction in revenues
occurred in spite of an 8 percent increase in volumes that added $29.1 million
to revenues. Other revenues were $60.2 million higher than last year due to the
$61.1 million pretax gain on property sales.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(without hedging) (with hedging)
<S> <C> <C> <C> <C>
Average price realizations - exploration and production:
Natural gas (per Mcf) ....................................... $ 1.53 $ 1.87 $ 1.63 $ 1.97
Natural gas liquids (per Bbl) ............................... 7.47 9.39 7.47 9.39
Crude oil (per Bbl) ......................................... 9.64 12.16 9.54 12.32
Average (per Mcfe) .......................................... 1.53 1.88 1.59 1.96
</TABLE>
-14-
<PAGE> 16
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Production volumes - exploration and production:
Natural gas (MMcfd) ........................... 1,327.1 1,277.5
Natural gas liquids (MBbld) ................... 24.5 32.9
Crude oil (MBbld) ............................. 126.3 98.7
Total (MMcfed) ................................ 2,231.7 2,066.7
</TABLE>
Exploration and production volumes of 2,231.7 MMcfed increased 165.0
MMcfed (8%) over 1998 results primarily due to the effect of including three
months of production from Norcen Acquisition properties in 1999 as compared to
only one month in 1998. As a result, Norcen property volumes, primarily in
Canada and Latin America, increased 489.9 MMcfed for the quarter. Production
from other properties decreased 324.9 MMcfed (19%) as a result of production
declines related to reduced capital spending and to property sales.
Canadian volumes increased 219.4 MMcfed to 478.4 MMcfed. Latin American
volumes also realized significant increases, primarily in Venezuela and
Guatemala where production increased 85.0 MMcfed and 67.8 MMcfed, respectively.
Volumes decreased in US Offshore by 15.5 MMcfed largely due to the sale in the
third quarter of 1998 of the Matagorda Island 623 field and surrounding blocks
(the "Matagorda property"), which more than offset the contribution from Norcen
Acquisition properties. US Onshore activities realized a 210.4 MMcfed decline
related to a reduction in capital spending and property sales.
Natural gas volumes increased 49.6 MMcfd (4%) to 1,327.1 MMcfd,
principally reflecting a 209.7 MMcfd increase in volumes from Norcen
Acquisition properties, partially offset by a 160.1 MMcfd decline for other
properties. Gas production from Canada improved 142.2 MMcfd. US Offshore
volumes decreased by 19.5 MMcfd primarily due to the sale of the Matagorda
property and production declines for existing properties, partly offset by
Norcen Acquisition properties which added 41.4 MMcfd. US Onshore volumes
dropped 77.5 MMcfd. The Plains/Kansas area realized a gain of 11.0 MMcfd with
significant increases in southeast Colorado related to the addition of helium
processing capabilities in the area. However, natural gas volumes in the East
Texas area dropped 26.7 MMcfd and in the Rockies area by 17.9 MMcfd, both
related to normal production declines. Gas volumes also reflect declines caused
by property sales.
Natural gas liquid ("NGL") volumes decreased 8.4 MBbld (26%) to 24.5
MBbld. The decline is related to ethane and propane rejection in most US
Onshore operating areas due to low product prices and the sale of the offshore
Matagorda property.
Crude oil volumes of 126.3 MBbld increased 27.6 MBbld (28%) over results
from the first quarter of last year. The increase reflects a 45.4 MBbld
improvement from properties added in the Norcen Acquisition. Canadian
production improved by 13.5 MBbld for the quarter, while production from Latin
America improved by 27.9 MBbld, where Venezuela and Guatemala increased 14.2
MBbld and 11.3 MBbld, respectively. US Onshore crude production fell 15.8 MBbld
due to production declines related to capital spending reductions. The Central
Texas and Louisiana area volumes dropped 9.5 MBbld and 4.0 MBbld, respectively.
OPERATING EXPENSES
Production expenses decreased $4.8 million (5%) to $90.5 million.
Production costs on a per unit basis were $0.45 per Mcfe, down from $0.51 per
Mcfe last year. Total lease operating expenses rose $2.8 million
-15-
<PAGE> 17
primarily due to the Norcen Acquisition properties, which caused a $19.9
million increase. However, cost reduction efforts initiated in 1998 resulted in
lower US Onshore lease operating expenses ($12.4 million) compared to 1998
results, with substantial cost savings in workovers, maintenance and repair
costs and salt water disposal costs. Also contributing to the improvement was
the effect of domestic property sales that had incurred $3.5 million of lease
operating expenses in 1998. Lease operating expenses on a per unit basis
dropped from $0.31 per Mcfe in 1998 to $0.30 per Mcfe in 1999.
Production and property taxes fell $5.0 million from 1998 due to reduced
domestic volumes and lower prices. Production overhead costs declined $3.4
million from 1998 largely due to reduced personnel costs related to the
reductions in force.
Exploration expenses decreased $4.5 million from the first quarter of last
year. The decrease was primarily the result of lower dry hole expenses ($9.0
million) and geologic and geophysical expenses ($4.6 million), both related to
the reduced capital spending program in 1999. Also contributing to the variance
was reduced exploration overhead, down $1.6 million, largely due to reduced
purchases of maps and logs and computer costs. Higher surrendered lease costs
($9.5 million) were primarily due to lower projected success rates in the US
Onshore Louisiana area.
Depreciation, depletion and amortization ("DD&A") increased by $8.6
million, but was lower on a per unit rate at $0.90 per Mcfe, compared to $0.93
per Mcfe last year. Higher volumes created a $13.8 million increase in DD&A
costs over the first quarter of last year, while a lower per unit rate resulted
in a $5.2 million reduction. DD&A rates in Latin America fell to $0.76 per
Mcfe, down from $1.22 per Mcfe in 1998 and also dropped in Canada, from $1.26
per Mcfe in 1998 to $0.94 per Mcfe in 1999. These per unit rate reductions are
largely the result of the asset impairment charge taken in December 1998.
MINERALS OPERATIONS
<TABLE>
<CAPTION>
OPERATING INCOME Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
(Millions of dollars)
<S> <C> <C>
Coal ........................................................... $ 24.9 $ 29.9
Soda ash ........................................................ 6.3 9.8
Other ........................................................... 0.6 (0.3)
---------- ----------
Total........................................................ $ 31.8 $ 39.4
========== ==========
</TABLE>
Minerals operating income decreased $7.6 million. Coal results declined
$5.0 million primarily from lower coal royalty volumes as a result of mining
operations that moved from Company-owned sections to federal sections, as well
as increased expenses at Black Butte. Soda ash results declined $3.5 million
from last year primarily reflecting lower volumes at the Company's soda ash
joint venture and lower product prices in spite of higher royalty volumes. The
gain on the sale of an industrial minerals property and reduced overhead
expenses provided an offsetting benefit.
GENERAL AND ADMINISTRATIVE AND OTHER
General and administrative expenses declined $4.8 million from last year
to $15.6 million. Reduced salaries and wages ($1.3 million) and computer costs
($1.2 million) reflect the cost savings realized by the
-16-
<PAGE> 18
reduction in force that occurred in the fourth quarter of 1998 and early in the
first quarter of this year. General and administrative expenses on a per unit
basis decreased by $0.03 per Mcfe to $0.08 per Mcfe. The Company also
recognized a $14.5 million restructuring charge taken in the first quarter of
1999 related to the Company's reorganization effort.
Other income/expense was $10.1 million higher than last year primarily due
to the $9.0 million gain on the remeasurement of U.S. dollar denominated
liabilities of UPRI and $7.1 million of interest income related to the Canadian
tax settlement. Included in 1998 results was $3.5 million of interest income
related to borrowings made in anticipation of the Norcen Acquisition.
Interest expense for the quarter increased $30.3 million from last year to
$64.3 million, principally reflecting the borrowings made in connection with
the Norcen Acquisition.
Income taxes declined $39.7 million from the first quarter of 1998 to a
benefit of $35.9 million. This change resulted primarily from the Company's
domestic pretax loss causing a reduction in taxes of $32.5 million. The
remaining variance is primarily the result of a foreign currency remeasurement
of deferred tax liabilities in Guatemala ($6.9 million). Canadian operations
recognized an increase in taxes totaling approximately $19.7 million due to
higher pretax income, which was offset by the $27.9 million associated with the
tax settlement. These net variances created a minimal change from Canada's
first quarter 1998 tax expense. Section 29 tax credits were $3.4 million in the
quarter, down from $4.1 million in the same quarter in 1998.
RESULTS OF DISCONTINUED OPERATIONS
Income from discontinued operations was $133.2 million for the quarter, an
increase of $126.7 from 1998 results. The variance is due to the $157.0 million
after-tax gain on the sale of the GPM segment to Duke. GPM Operations posted a
$23.8 million after-tax loss due to a $21.5 million pretax charge related to
firm transportation contracts that were marked to market, as well as lower
margins and product prices.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash during the first quarter of 1999
were the sales of the GPM segment and other properties, cash provided by
operations and a $150 million advance payment. Cash outflows for the first
quarter included capital and exploratory expenditures, repayment of commercial
paper and dividends.
Cash from operations of $221.7 million for the quarter was $121.8 million
lower than last year. The decline includes $74.3 million caused by lower prices
and $30.3 million of higher interest costs. In addition, $10.5 million of
payments were made related to the fourth quarter 1998 and first quarter 1999
restructuring charges, and minerals operating income decreased $7.6 million
compared to last year. These decreases were partly offset by the impact of
higher volumes in 1999.
Cash provided by investing activities was $1.28 billion for the quarter,
reflecting the proceeds from the GPM, South Texas and Caroline property sales.
Offsetting the sales proceeds were capital spending and cash used in
discontinued operations, which included $171 million of repayments of an
advance payment/forward sale transaction. Cash used in investing activities for
the first quarter of 1998 was $3.15 billion, with higher capital expenditures
and the acquisition of Norcen.
-17-
<PAGE> 19
Included in cash from financing activities is $1.47 billion in debt
repayments, primarily using proceeds from the GPM Disposition and other
property sales. In addition, $150 million of proceeds from the 1999 advance
payment are included in other financing activities.
Capital expenditures for continuing operations in the first quarter of
1999 of $110.8 million were down $337.3 million compared to last year,
excluding the $2.6 billion cost for the acquisition of Norcen. The 1998 amounts
below include capital expenditures for Norcen properties beginning in March.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
(Millions of dollars)
<S> <C> <C>
Capital and exploratory expenditures:
Exploration and production .......... $ 109.5 $ 441.7
Minerals and other .................. 1.3 6.4
---------- ----------
Total .......................... $ 110.8 $ 448.1
========== ==========
</TABLE>
Exploration and production capital spending was down $332.2 million to
$109.5 million, principally reflecting the effort to control capital spending
in light of depressed product prices. The major categories of capital spending
include development drilling ($59.3 million), other development capital ($27.2
million) and exploratory drilling ($7.2 million). Exploration and development
drilling by area included $30.8 million in the U.S. Onshore, $20.1 million in
the U.S. Offshore and $14.5 million in Canada. Expenditures for discontinued
operations of $32.0 million were down $7.0 million from last year.
With the GPM Disposition and the Caroline and South Texas property sales
in the first quarter of 1999, the Company has substantially completed its
previously announced deleveraging program. The Company continues to market
certain additional properties; however, remaining sales proceeds in 1999 are
expected to be less than $100 million.
As of March 31, 1999, and December 31, 1998, the total capitalization of
the Company was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
(Millions of dollars)
<S> <C> <C>
Long- and short-term debt:
Commercial paper and other, net ...................... $ 879.0 $ 2,351.9
Notes and debentures ................................. 2,225.0 2,225.0
Capital lease obligations ............................ 17.6 17.4
(Discount) premium on notes and debentures - net ..... 15.8 4.4
---------- ----------
Total debt ........................................ 3,137.4 4,598.7
Shareholders' equity ....................................... 860.8 728.2
---------- ----------
Total capitalization ................................. $ 3,998.2 $ 5,326.9
========== ==========
Debt to total capitalization ......................... 78.5% 86.3%
</TABLE>
In April 1999, the Company issued $200 million of 7.3% Notes due April 15,
2009, and $300 million of $7.95% Debentures due April 15, 2029. Proceeds from
the issuance were used to reduce commercial paper borrowings. Also in April
1999, the Company's senior unsecured credit ratings were downgraded by Standard
& Poor's to BBB-, and by Moody's to Baa3, and its commercial paper ratings were
downgraded by Standard & Poor's to A3 and by Moody's to P3.
-18-
<PAGE> 20
The Company continues to anticipate capital spending of approximately
$500 million for 1999, with spending focused on development projects that
generate more immediate cash flow. At these capital levels and because of sales
of producing properties during 1998 and early 1999, production volumes for the
year are expected to decline approximately five percent from 1998 levels.
However, with recent strengthening of prices and the resulting improvements in
cash flow, the Company may increase its capital spending later in the year.
Crude oil and gas prices have risen sharply in the first quarter and the
1999 outlook is favorable for both products. The Organization of Petroleum
Exporting Countries ("OPEC") and other countries have announced crude oil
production cuts to ease the oversupply, and Asian demand is expected to
increase through the year as these economies improve. Significant compliance
with production quotas by OPEC members and other countries is crucial to
sustaining higher crude oil prices. The supply/demand picture for natural gas
is favorable even considering the current high storage inventories. Domestic
and Canadian natural gas supply is expected to be down in 1999 due to
production declines driven by low sales prices. U.S. natural gas demand is
expected to be higher than last year due to the continued strength in the
economy and fuel switching from crude oil back to gas in the summer due to
higher crude oil prices. The Company expects to continue to experience
commodity price fluctuations and manages a portion of its price risk with
hedging activities; however, low prices could affect expected future net
income, cash flows and capital spending. See Item 3, Quantitative and
Qualitative Disclosures About Market Risk for information regarding the
Company's hedging positions at March 31, 1999.
YEAR 2000 ISSUE
The Company has established a formal Year 2000 Readiness Program to
address the Company's issues relating to the Year 2000. Program activities are
directed by a Program Management Office staffed with a Year 2000 Program
Manager, several senior Information Technology ("IT") and engineering project
managers and representatives from key internal functions including exploration
and production, operations, purchasing, finance and legal. The Program
Management Office operates under the oversight of a Year 2000 Executive
Steering Committee and the Audit Committee of the Board of Directors. The
Company has engaged CSC Consulting ("CSC") during the inventory and assessment
phases of the program and continues to make use of CSC services for program
management recommendations and reviews. The Company has also engaged the law
firm of Morgan, Lewis & Bockius LLP for legal advice on Year 2000 related
issues.
The general phases for the Company's Year 2000 Readiness Program are (i)
inventory of Year 2000 items; (ii) assessment of business criticality and
compliance status of inventory items; (iii) remediation and verification
planning for items determined to be material to the Company; (iv) remediation
(including repairing, retiring, replacing or preparing work-arounds) of
material items that are determined not to be Year 2000 compliant; (v)
verification that material items are Year 2000 compliant; and (vi) deployment
of corrected items into the ongoing business environment.
The Company's Year 2000 Readiness Program is organized around the following
major areas:
o IT infrastructure
o Information systems
o Process control and embedded technology
o Third party suppliers, partners, customers and governmental entities
-19-
<PAGE> 21
In the IT infrastructure area, seventeen readiness projects have been
designated as having a "high" criticality. All of these seventeen projects have
completed the remediation and verification phases. Fifteen of these seventeen
(88%) have completed the deployment phase as well.
In the information systems program area, forty-one systems have been
designated as having "high" criticality. The remediation, verification and
deployment phases have been completed for thirty-six (88%) of these systems.
The remaining five critical systems are awaiting version upgrades from a single
vendor. Year 2000 testing of the current releases of these systems has been
completed in order to prepare work-around procedures as a contingency.
In the process control and embedded technology area, project teams and
vendors are currently in the remediation and verification phases. Remaining
activity in this area primarily involves implementing software upgrades to
selected equipment and verifying the Year 2000 readiness of process control and
embedded technology equipment. The Company anticipates completion by mid-1999
of both the remediation and verification phases at each location.
In the third-party suppliers, partners, customers and governmental
entities program area, the Company is continuing the process of monitoring and
assessing the readiness of third parties. Approximately 400 third-party
entities have been contacted in writing concerning their Year 2000 plans and
readiness. The Company has also begun the process of monitoring SEC mandated
disclosures of third parties. Remaining work includes follow-up evaluations of
the readiness of "mission critical" third-party dependencies. Emphasis in this
area has also shifted to begin formal business contingency planning.
In the fourth quarter of 1998, the Company began a formal process for
business contingency planning that spans all of the above readiness program
areas. This process includes, for each business area, (i) identifying critical
dependencies, (ii) assessing exposures, (iii) identifying controllable vs.
non-controllable factors and (iv) developing proactive prevention plans and
reactive response plans. The Company anticipates completing such business
contingency plans by mid-year 1999. To incorporate the changes in status
information available from third parties, periodic updates of these contingency
plans are scheduled for September and November, 1999.
The total cost of the Company's Year 2000 Readiness Program is not
expected to be material to the Company's financial position. Not including the
cost of replacing its information systems between 1993 and 1997, the Company
anticipates spending a total of between $2.5 million and $3.0 million during
1998 and 1999 for Year 2000 related modifications and testing. This estimate
does not include the Company's potential share of Year 2000 costs that may be
incurred by partnerships and joint ventures in which the Company participates
but is not the operator.
Due to the general uncertainty inherent in the Year 2000 problem,
resulting in large part from the uncertainty of the Year 2000 readiness of
third-party suppliers, partners and customers, the Company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on the Company's results of operations, liquidity or
financial condition. The Company's Year 2000 Readiness Program is expected to
significantly reduce the Company's level of uncertainty about Year 2000 issues.
The Company believes that, with the completion of the Year 2000 Readiness
Program, the possibility of significant interruptions of normal operations
should be reduced.
-20-
<PAGE> 22
The Company believes that the "most reasonably likely worst case"
scenarios are as follows: (i) unanticipated Year 2000 induced failures in
information systems could cause a reliance on manual contingency procedures and
significantly reduce efficiencies in the performance of certain normal business
activities; (ii) unanticipated failures in embedded technology or process
control systems due to Year 2000 causes could result in temporarily suspending
operations at certain operating facilities with consequent loss of revenue; and
(iii) slow downs or disruptions in the third party supply chain due to Year
2000 causes could result in operational delays and reduced efficiencies in the
performance of certain normal business activities.
FORWARD LOOKING INFORMATION
Certain information included in this report, and other materials filed or
to be filed by the Company with the SEC (as well as information included in
oral statements or other written statements made or to be made by the Company)
contain projections and forward looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. Such forward looking statements may
be or may concern, among other things, capital expenditures, drilling activity,
acquisitions and dispositions, development activities, cost savings efforts,
production activities and volumes, hydrocarbon reserves, hydrocarbon prices,
hedging activities and the results thereof, liquidity, debt repayment,
regulatory matters and competition. Such forward looking statements generally
are accompanied by words such as "estimate," "expect," "predict," "anticipate,"
"goal," "should," "assume," "believe" or other words that convey the
uncertainty of future events or outcomes.
Such forward looking information is based upon management's current plans,
expectations, estimates and assumptions and is subject to a number of risks and
uncertainties that could significantly affect current plans, anticipated
actions, the timing of such actions and the Company's financial condition and
results of operations. As a consequence, actual results may differ materially
from expectations, estimates or assumptions expressed in or implied by any
forward looking statements made by or on behalf of the Company. The risks and
uncertainties include generally the volatility of oil, gas and
hydrocarbon-based financial derivative prices; basis risk and counterparty
credit risk in executing hydrocarbon price risk management activities;
economic, political, judicial and regulatory developments; competition in the
oil and gas industry as well as competition from other sources of energy; the
economics of producing certain reserves; demand for and supply of oil and gas;
the ability to find or acquire and develop reserves of natural gas and crude
oil; and the actions of customers and competitors. Additionally, unpredictable
or unknown factors not discussed herein could have material adverse effects on
actual results related to matters which are the subject of forward looking
information.
With respect to expected capital expenditures and drilling activity,
additional factors such as oil and gas prices, the extent of the Company's
success in acquiring oil and gas properties and in identifying prospects for
drilling, the availability of acquisition opportunities which meet the
Company's objectives as well as competition for such opportunities, exploration
and operating risks, the success of management's cost reduction efforts and the
availability of technology may affect the amount and timing of such capital
expenditures and drilling activity. With respect to changes in production and
sales volumes and estimated reserve quantities, factors such as the extent of
the Company's success in finding, developing and producing reserves, the timing
of capital spending, uncertainties inherent in estimating reserve quantities
and the availability of technology may affect such production volumes and
reserve estimates.
With respect to liquidity, factors such as the state of domestic capital
markets, credit availability from banks or other lenders and the Company's
results of operations may affect management's plans or ability to
-21-
<PAGE> 23
incur additional indebtedness. With respect to cash flow and the ability to
reduce debt, factors such as changes in oil and gas prices, the Company's
success in acquiring properties or divesting producing properties or other
assets, environmental matters and other contingencies, hedging activities, and
the Company's credit rating and debt levels may affect the Company's ability to
generate expected cash flows. With respect to contingencies, factors such as
changes in environmental and other governmental regulation, and uncertainties
with respect to legal matters may affect the Company's expectations regarding
the potential impact of contingencies on the operating results or financial
condition of the Company. Certain factors, such as changes in oil and gas
prices and underlying demand and the extent of the Company's success in
exploiting its current reserves and acquiring or finding additional reserves
may have pervasive effects on many aspects of the Company's business in
addition to those outlined above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the sale of the GPM segment, the Company has reduced its
risk exposure in several areas. The Company now has lower plant volumes subject
to price risk, lower risk relating to marketing activities for third party
volumes and lower variable rate debt resulting from debt repayments using sales
proceeds. However, credit risk exposure related to Duke has increased as a
result of certain agreements made in connection with the GPM sale.
COMMODITY PRICE RISK -- NON-TRADING ACTIVITIES
The following table summarizes the Company's open positions at March 31,
1999, which hedge the Company's future oil and gas production:
<TABLE>
<CAPTION>
WEIGHTED AVG. UNRECOGNIZED
CONTRACT PRICE PER MCF FAIR VALUE GAIN/(LOSS)
PRODUCT TYPE TIME PERIOD VOLUME OR BBL (MILLIONS) (MILLIONS)
------- -------------- -------------- -------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gas Puts Purchased May - Oct 1999 430MMcfd $ 1.90 $ 6.8 $ (5.0)
Gas Calls Sold May - Oct 1999 1.0Bcfd $ 2.54 $ 7.6 $ 11.3
Gas Swaps May - Oct 1999 744MMcfd Var. $ (14.8) $ (14.8)
Gas Futures May - Oct 1999 413MMcfd $ 1.91 $ (10.8) $ (10.8)
Gas Fixed Price May - Dec 1999 20MMcfd $ 2.12 $ 1.5 $ 1.5
Gas Fixed Price Jan - Dec 2000 18MMcfd $ 2.11 $ 1.2 $ 1.2
Gas Fixed Price Jan - Oct 2001 10MMcfd $ 1.54 $ (1.3) $ (1.3)
Oil Swaps May - Dec 1999 2MBbld $10.57 $ (1.0) $ (1.0)
Oil Swaps Jan - Dec 2000 2MBbld $10.57 $ (1.2) $ (1.2)
Oil Swaps May - Dec 1999 70MBbld $14.51 $ (29.4) $ (29.4)
Oil Fixed Price Feb - Aug 1999 2MBbld $ 9.60 $ (0.7) $ (0.7)
------- ---------
Totals: $ (42.1) $ (50.2)
</TABLE>
At March 31, 1999, the Company had margin deposits of $27.7 million.
The Company enters into financial contracts in conjunction with its
alliance with South Jersey Resources Group, in which it has a 50% ownership
interest. This alliance provides gas storage and customer service programs.
The following table summarizes the alliance's open positions at March 31, 1999:
-22-
<PAGE> 24
<TABLE>
<CAPTION>
WEIGHTED AVG. UNRECOGNIZED
CONTRACT PRICE PER MCF FAIR VALUE GAIN/(LOSS)
PRODUCT TYPE TIME PERIOD VOLUME (MILLIONS) (MILLIONS)
------- ---- -------------- ------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gas Futures/Swaps May - Dec 1999 5.9Bcf $ 2.35 $ (0.4) $ (0.4)
Purchased
Gas Futures/Swaps Jan - Dec 2000 2.7Bcf $ 3.07 $ 0.1 $ 0.1
Purchased
Gas Futures/Swaps May - Dec 1999 2.0Bcf $ 2.27 $ (0.1) $ (0.1)
Sold
Gas Futures/Swaps Jan - Dec 2000 1.9Bcf $ 2.34 $ (0.1) $ (0.1)
Sold
---------- ----------
Totals: $ (0.5) $ (0.5)
</TABLE>
As a result of the sales agreement with Duke, the Company has agreed to
reimburse Duke under a "keep whole" agreement for losses incurred under certain
transportation contracts for up to ten years. The fair value of these contracts
at March 31, 1999, was a loss of $109.6 million, which is included in other
current liabilities and other liabilities on the Condensed Consolidated
Statement of Financial Position.
FOREIGN CURRENCY RISK
The Company periodically enters into foreign currency contracts to hedge
specific currency exposures from commercial transactions. The following table
summarizes the Company's open foreign currency positions at March 31, 1999:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
(US$ MILLIONS) FAIR VALUE
YEAR FORWARD RATE (US$ MILLIONS)
---- ---------------- ------------ --------------
<S> <C> <C> <C>
1999 $ 126.0 C$1.3578 $ (12.1)
2000 8.0 C$1.3750 (0.6)
2004 70.0 C$1.3630 (5.1)
------- -------
$ 204.0 $ (17.8)
======= =======
</TABLE>
As a result of the Norcen Acquisition, the Company acquired foreign
currency forward exchange contracts with a $643 million notional amount and
maturities through October 2004, and recorded a $15.5 million deferred
liability representing the fair value of these contracts. This liability will
be amortized over the terms of the applicable contracts. The unrecognized loss
on foreign currency contracts at March 31, 1999, excluding the $5.2 million
remaining unamortized deferred liability, was $12.6 million.
CREDIT RISK
In conjunction with the GPM Disposition, on March 31, 1999, the Company
entered into a swap transaction with Duke which in effect transferred all
financial positions held by the GPM business to Duke. As a result, the Company
has eliminated all price/rate risk relating to these positions, and is only
subject to credit risk for amounts due from Duke or other counterparties under
the terms of the swap transactions with Duke or the underlying swap
transactions. At March 31, 1999, the Company's credit risk related to these
positions was $2.2 million. At March 31, 1999, the Company's largest credit
risk associated with any single counterparty, represented by the net fair value
of open contracts, was $17.2 million.
-23-
<PAGE> 25
In connection with the sale of the GPM segment, the Company entered into a
long-term sales agreement with Duke, which obligates the Company to sell most
of its domestic natural gas and NGLs to Duke for a five-year period beginning
on the date of the GPM Disposition. Prices received 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. Further, due to certain agreements with Duke, letter of credit and/or
other assurances can be demanded under certain circumstances.
-24-
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL
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, personal injury claims and
environmental claims. While management of the Company cannot predict the
outcome of such litigation and other proceedings, management does not expect
these matters to have a material adverse effect on the consolidated results of
operations, financial condition or cash flows of the Company. Refer to the
Company's Annual Report on Form 10-K for additional information regarding such
proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Amendment No. 3, dated March 30, 1999, to Merger and Purchase
Agreement, dated November 20, 1998, among Union Pacific Resources
Company, Union Pacific Fuels, Inc., Duke Energy Services, Inc. and DEFS
Merger Sub Corp.
10.2 Amendment No. 4, dated March 30, 1999, to Merger and Purchase
Agreement, dated November 20, 1998, among Union Pacific Resources
Company, Union Pacific Fuels, Inc., Duke Energy Services, Inc. and DEFS
Merger Sub Corp.
11 Computation of earnings per share
12 Computation of ratio of earnings to fixed charges
15 Awareness letter of Arthur Andersen LLP dated May 10, 1999
27.1 Financial data schedule for the three months ended March 31, 1999
27.2 Restated financial data schedules for the three months ended March 31,
1997, for the six months ended June 30, 1997, and for the nine months
ended September 30, 1997
(b) REPORTS ON FORM 8-K
On January 15, 1999, the Company filed a Current Report on Form 8-K
containing a copy of a press release making three announcements: (i)
the Company will take a $760 million non-cash charge to earnings in the
fourth quarter of 1998 resulting from asset impairments, (ii) the
Company's preliminary capital budget for 1999 of approximately $500
million and (iii) a continuing cost reduction program.
On January 28, 1999, the Company filed a Current Report on Form 8-K
announcing the Company's 1998 annual operating results, net income and
certain other financial and statistical information.
-25-
<PAGE> 27
On April 12, 1999, the Company filed a Current Report on Form 8-K
announcing the completion of the previously announced sale of the
Company's domestic natural gas gathering, processing, pipeline and
marketing ("GPM") business to Duke Energy Field Services Inc. Included
in the report is an unaudited pro forma condensed consolidated
statement of income for the year ended December 31, 1998, giving effect
to the sale of the GPM business and the acquisition of Norcen Energy
Resources Limited, as if these events had occurred on January 1, 1998.
On April 12, 1999, the Company filed a Current Report on Form 8-K
containing information and documents relating to the Company's issuance
of $500 million of Notes and Debentures, including the Underwriting
Agreement associated therewith.
On April 14, 1999, the Company filed a Current Report on Form 8-K
containing additional information and documents relating to the
Company's issuance of $500 million of Notes and Debentures, including
the Indenture associated therewith.
-26-
<PAGE> 28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 10, 1999
UNION PACIFIC RESOURCES GROUP INC.
(Registrant)
/s/ Morris B. Smith
------------------------------------------
Morris B. Smith,
Vice President and Chief Financial Officer
(Chief Financial Officer and
Duly Authorized Officer)
27
<PAGE> 29
UNION PACIFIC RESOURCES GROUP INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 Agreement No. 3, dated March 30, 1999, to Merger and Purchase
Agreement, dated November 20, 1998, among Union Pacific
Resources Company, Union Pacific Fuels, Inc., Duke Energy
Services, Inc. and DEFS Merger Sub Corp.
10.2 Agreement No. 4, dated March 30, 1999, to Merger and Purchase
Agreement, dated November 20, 1998, among Union Pacific
Resources Company, Union Pacific Fuels, Inc., Duke Energy
Services, Inc. and DEFS Merger Sub Corp.
11 Computation of earnings per share
12 Computation of ratio of earnings to fixed charges
15 Awareness letter of Arthur Andersen LLP dated May 10, 1999
27.1 Financial data schedule for the three months ended March 31,
1999
27.2 Restated financial data schedules for the three months ended
March 31, 1997, for the six months ended June 30, 1997, and
for the nine months ended September 30, 1997
</TABLE>
28
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 3
TO
MERGER AND PURCHASE AGREEMENT
THIS AMENDMENT NO. 3 TO MERGER AND PURCHASE AGREEMENT (the "Third
Amendment") is made as of the 30th day of March, 1999, among Union Pacific
Resources Company, a Delaware corporation, Union Pacific Fuels, Inc., a Delaware
corporation and a wholly-owned subsidiary of Seller, Duke Energy Field Services,
Inc., a Colorado corporation, and DEFS Merger Sub Corp., a Delaware corporation
and a wholly-owned subsidiary of Buyer.
WHEREAS, the parties hereto heretofore entered into a Merger and
Purchase Agreement, dated November 20, 1999, which was previously amended by the
First Amendment dated as of February 1, 1999 and the Second Amendment dated as
of March 5, 1999 (collectively, the "Amended Agreement") (capitalized terms not
otherwise defined herein have the same meanings ascribed to such terms in the
Amended Agreement);
WHEREAS, the parties hereto desire to further amend the Amended
Agreement, as described below, by entering into this Third Amendment;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties hereto hereby agree as follows:
1. Exhibit B (Restructuring Activities) and Schedule 3.04(c)
(Capitalization) to the Amended Agreement are hereby amended and restated in
their entirety as attached hereto and new Schedules 3.01 (Qualification
Exception) and 3.04A (Assets of Certain Entities Prior to Restructuring Mergers)
are added as attached hereto.
2. New Schedule 3.01 (Qualification Exceptions) is hereby added to the
Amended Agreement as attached hereto.
3. Section 1.01 (Definitions) of the Amended Agreement is hereby
amended in accordance with the following:
(a) The following new definition is hereby added:
"HOLDCO" means Fuels Holding Company, Inc., a newly formed
Delaware corporation and a wholly-owned subsidiary of Seller formed
pursuant to those Restructuring Activities contemplated by Section F of
Exhibit B.
<PAGE> 2
(b) The definition of the term "Subsidiary" is hereby amended and
restated in it its entirety as follows:
"SUBSIDIARY" means, with respect of HoldCo or the Company, as
the case may be, any entity of which the securities or other ownership
interests having ordinary voting power to elect a majority of the board
of directors or other persons performing similar functions are at the
time directly or indirectly owned by HoldCo or the Company, as the case
may be.
4. Section 2.01 (Merger) of the Amended Agreement is hereby amended and
restated as follows:
SECTION 2.01. MERGER. Subject to the terms and conditions
hereof and in accordance with Delaware General Corporation Law (the
"DGCL"), at the Effective Time (as hereinafter defined),
(a) Merger Sub, which was formed solely for purposes of
effecting the Merger, shall be merged with and into HoldCo (the
"MERGER") and the separate existence of Merger Sub shall cease;
(b) HoldCo, as the surviving corporation (also referred to
herein as the "SURVIVING CORPORATION"), shall: (i) be a wholly-owned
subsidiary of Buyer, (ii) continue its corporate existence under the
laws of the State of Delaware, and (iii) succeed to all rights, assets,
liabilities and obligations of Merger Sub and HoldCo in accordance with
the DGCL;
(c) the Certificate of Incorporation of the Company, as in
effect immediately prior to the Effective Time, as amended pursuant to
a certificate of merger filed with respect to the Merger (the
"CERTIFICATE OF MERGER"), shall continue as the Certificate of
Incorporation of the Surviving Corporation until thereafter amended in
accordance with the provisions therein and as provided by the
applicable provisions of the DGCL;
(d) the By-laws of the Surviving Corporation shall be the
By-laws of Merger Sub, as in effect immediately prior to the Effective
Time, until thereafter amended in accordance with their terms and the
Certificate of Incorporation of the Surviving Corporation and as
provided by the DGCL;
(e) Any Shares which are held in HoldCo's treasury immediately
prior to the Effective Time shall be canceled;
-2-
<PAGE> 3
(f) Each share of Merger Sub Stock which is outstanding
immediately prior to the Effective Time shall be converted at the
Effective Time into one share of Common Stock of the Surviving
Corporation; and
(g) Each Share which is outstanding immediately prior to the
Effective Time will be converted into, and become a right to receive,
at the Effective Time, the amount determined by dividing the Merger
Price by the number of Shares outstanding immediately before the
Effective Time.
5. Section 2.03(c) of the Amended Agreement is hereby amended and
restated as follows:
(c) The parties hereto shall cause the Merger to be
consummated by filing the Certificate of Merger with the Secretary of
State of the State of Delaware in such form as required by, and
executed in accordance with the relevant provisions of, Delaware Law,
and the Certificate of Merger shall provide for an effective time of
the Merger of 11:59 p.m., central time on March 31, 1999 (such time
being referred to herein as the "EFFECTIVE TIME").
6. Part A of ARTICLE 3 (Representations and Warranties of Seller) of
the Amended Agreement is hereby amended in accordance with the following:
(a) Section 3.01 (Corporate Existence and Power of the Company) of the
Amended Agreement is hereby amended and restated as follows:
SECTION 3.01 EXISTENCE AND POWER OF HOLDCO AND THE COMPANY.
(a) Each of the Company and its Subsidiaries is duly incorporated (or
otherwise organized or formed, in the case of non-corporate
Subsidiaries or the Company following the Company Restructuring
Merger), validly existing and in good standing under the laws of the
state of its incorporation (or organization or formation, in the case
of non-corporate Subsidiaries or the Company following the Company
Restructuring Merger), and has all corporate (or partnership or
company, in the case of non-corporate Subsidiaries or the Company
following the Company Restructuring Merger) powers required to carry on
its business as now conducted. Except as set forth on Schedule 3.01
hereto, the Company and each Subsidiary is duly qualified to do
business in each jurisdiction where such qualification is necessary to
the business of the Company or such Subsidiary. Seller has heretofore
delivered to Buyer true and complete copies of the charter and bylaws
(or comparable organizational documents with respect to non-corporate
entities) of the Company and each of its Subsidiaries as currently in
effect.
(b) By the Closing, HoldCo will have been duly incorporated
and will be validly existing and in good standing under the laws of the
state of its incorporation, and will have all corporate powers required
to carry on its business as then being conducted.
-3-
<PAGE> 4
(b) Section 3.04 (Capitalization) of the Amended Agreement is hereby
amended and restated as follows:
SECTION 3.04 CAPITALIZATION. (a) The authorized capital stock of HoldCo
consists of 1,000 shares of Common Stock (the "SHARES"). At the
Closing, no capital stock of HoldCo other than the Shares will be
outstanding. The Shares have been duly authorized and validly issued
and are fully paid and non-assessable.
(b) Except for the Shares, at the Closing there will be
outstanding no (i) shares of capital stock or other voting securities
of HoldCo, (ii) securities of HoldCo convertible into or exchangeable
for shares of capital stock or voting securities of HoldCo or (iii)
options or other rights to acquire from HoldCo, and there is no
obligation of HoldCo to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities (the items in clauses (i), (ii) and (iii) being referred to
collectively as the "HOLDCO SECURITIES")
(c) Schedule 3.04(c) sets forth a list of all of the
Subsidiaries of HoldCo (including the Company and its Subsidiaries)
upon completion of the Restructuring Activities. Except as set forth on
Schedule 3.04(c), all of the outstanding capital stock of, or other
voting securities or ownership interests in, each Subsidiary of HoldCo,
have been duly authorized and validly issued and are fully paid and
non-assessable, and are owned by HoldCo, directly or indirectly, free
and clear of any Lien and free of any other limitation or restriction
(other than those created by this Agreement and restrictions on sales
of stock under applicable securities laws), including any restriction
on the right to vote, sell or otherwise dispose of such capital stock
or other voting securities or ownership interests. There are no
outstanding (i) securities of HoldCo or any of its Subsidiaries
convertible into or exchangeable for shares of capital stock or other
voting securities or ownership interests in any such Subsidiary or (ii)
options or other rights to acquire from HoldCo or any of its
Subsidiaries, or other obligation of HoldCo or any of its Subsidiaries
to issue, any capital stock or other voting securities or ownership
interests in, or any securities convertible into or exchangeable for
any capital stock or other voting securities or ownership interests in,
any Subsidiary of HoldCo (the items in clauses (i) and (ii) being
referred to collectively as the "SUBSIDIARY SECURITIES"). There are no
outstanding obligations of HoldCo or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any outstanding HoldCo
Securities or Subsidiary Securities.
(c) The following new Section 3.04A (Assets of Certain New Entities) is
hereby added:
SECTION 3.04A ASSETS OF CERTAIN NEW ENTITIES. The entities identified
on Schedule 3.04A will have been created solely for purposes of
effecting the Restructuring Mergers, and in the case of HoldCo, the
Merger, and as such, as of immediately before the Restructuring
Mergers, will not (i) have engaged in any business operations, (ii)
have
-4-
<PAGE> 5
incurred any liabilities of any kind, or (iii) own any assets (other
than those identified on Schedule 3.04A hereto).
7. The following sentence shall be added to Section 12.02(a) of the
Amended Agreement:
The Material Adverse Effect qualification otherwise applicable in
respect of the representation and warranty of Seller contained in
clause (iii) of Section 3.03 and the limitations on indemnity claims
set forth in Section 12.03(b)(ii), shall not apply if (A) there is a
breach of such representation and warranty, which results from the
merger of the Company with and into Union Pacific Fuels, L.P., as
contemplated by Section F of Exhibit B hereto, and (B) no such breach
would have resulted if the Company, rather than Union Pacific Fuels,
L.P., was the surviving entity in such merger.
8. The Parties acknowledge that pursuant to those Restructuring
Activities contemplated by Section F of Exhibit B hereto, prior to the Closing:
(i) the Company will be merged (such merger being referred to as the "COMPANY
RESTRUCTURING MERGER") with and into a Union Pacific Fuels, L.P., a Delaware
limited partnership of which HoldCo will be the 99.5% limited partner and Fuels
Holding Company Operating LLC, a Delaware limited liability company (of which
HoldCo will be the sole member), will be the 0.5% general partner, and (ii) each
of Fuels Acquisition Company, Peach Ridge Pipeline, Inc. and Panola Pipe Line,
Inc. (collectively, the "CONVERTED SUBSIDIARIES"), respectively, will be merged
with and into Fuels Acquisition Company, L.P., Peach Ridge Pipeline, L.P., and
Panola Pipe Line, L.P., respectively, which are all Delaware limited
partnerships, the partnership interests of which will at Closing be held by
Subsidiaries of HoldCo (the mergers involving the Converted Subsidiaries are
referred to herein, together with the Company Restructuring Merger, as the
"RESTRUCTURING MERGERS"). In light of the foregoing, any representation,
covenant or other provision in the Amended Agreement (other than those
specifically amended and restated pursuant to Section 5 above) containing a
reference to "the Company" shall be deemed appropriately modified so that
following the completion of such Restructuring Activities such reference shall
relate to the Delaware limited partnership survivor of the Company Restructuring
Merger.
9. This Third Amendment is executed, and shall be considered, as an
amendment to the Amended Agreement and shall form a part thereof, and the
provisions of the Amended Agreement, as amended by this Third Amendment, are
hereby ratified and confirmed in all respects.
10. This Third Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, and all of which taken together shall
constitute but one and the same instrument. This Third Amendment shall become
binding only when each party hereto has executed and delivered to the other
parties one or more counterparts.
[intentionally left blank]
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amendment or have caused this Third Amendment to be duly executed by their
respective authorized officers as of the day and year first above written.
UNION PACIFIC RESOURCES COMPANY
By: /s/ JOSEPH A. LASALA
----------------------------------------------------
Name: Joseph A. LaSala
Title: Vice President, General Counsel
and Corporate Secretary
UNION PACIFIC FUELS, INC.
By: /s/ KERRY R. BRITTAIN
----------------------------------------------------
Name: Kerry R. Brittain
Title: Vice President
DUKE ENERGY FIELD SERVICES, INC.
By: /s/ DAVID D. FREDERICK
----------------------------------------------------
Name: David D. Frederick
Title: Senior Vice President
DEFS MERGER SUB CORP.
By: /s/ DAVID D. FREDERICK
----------------------------------------------------
Name: David D. Frederick
Title: Senior Vice President
-6-
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 4
TO
MERGER AND PURCHASE AGREEMENT
THIS AMENDMENT NO. 4 TO MERGER AND PURCHASE AGREEMENT (the "Fourth Amendment")
is made as of the 30th day of March, 1999, among Union Pacific Resources
Company, a Delaware corporation, Union Pacific Fuels, Inc., a Delaware
corporation and a wholly owned subsidiary of Seller, Duke Energy Field
Services, Inc., a Colorado corporation, and DEFS Merger Sub Corp., a Delaware
corporation and a wholly owned subsidiary of Buyer.
WHEREAS, the parties heretofore entered into a Merger and Purchase
Agreement dated November 20, 1998, which was amended by the Amendment No. 1
dated as of February 1, 1999, Amendment No. 2 dated as of March 5, 1999 and
Amendment No. 3 dated as of March 30, 1999 (collectively, the "Amended
Agreement") (capitalized terms not otherwise defined herein have the same
meanings ascribed to such terms in the Amended Agreement);
WHEREAS, the parties hereto desire to amend the Amended Agreement as
described below by entering into this Fourth Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties hereto hereby agree as follows:
1. Buyer acknowledges and agrees that the transaction evidenced by the
East Texas P&S Agreement has been consummated and that there will be no
reduction in the Merger Price pursuant to Section 2.07 of the Amended
Agreement.
2. Five new sections are added to Article 7 as follows:
SECTION 7.14. EAST TEXAS P&S AGREEMENT. Pursuant to Section 10.9 of
the East Texas P&S Agreement, there is to be a post closing adjustment
for the proration and calculation of income, costs and expenses
between the parties thereto. The parties agree that Seller (or its
Affiliates) shall be responsible for such post closing adjustment and
Seller (or one its Affiliates) shall pay or receive any sums resulting
therefrom.
SECTION 7.15. EMIGRANT TRAIL HEAT EXCHANGER. Seller agrees to bear the
cost of replacing the heat exchanger at the Emigrant Trail Gas Plant
under Purchase Order 982873 with J.W. Williams, Inc. and Purchase
Order 991234 with Elkhorn Construction, plus any reasonable and
necessary miscellaneous third party costs incurred by Buyer and
directly related to such replacement. Seller shall have the right to
verify any costs.
SECTION 7.16. WESTERN MARKET CENTER CLAIMS. The Company, through its
wholly owned subsidiary Fuels Pipeline, Inc., doing business as
Overland Trail Transmission Company, is a party to an arbitration
proceeding with The Western Market Center Joint Venture (the
"Venture") concerning the Venture's payment obligations under Article
II of the Payment Agreement dated December 22, 1994, between Overland
Trail Transmission Company and
<PAGE> 2
the Venture (the "Payment Agreement"). The parties agree that the
claims asserted in the arbitration proceeding, or in any concurrent or
subsequent litigation, including any settlement proceeds therefrom
(the "WMC Claims") will be retained by Seller and the Company and its
Subsidiaries assigns to Seller (i) the benefit of all rights, titles
and interests of the Company (or any Subsidiary) in and to the WMC
Claims and (ii) the benefit of and access to all petitions, pleadings,
exhibits, evidence, filings and orders, briefs, legal research,
attorney or legal assistant work product, books, files, records and
other data and other information in whatever form or medium of the
Company (or any Subsidiary) which relates to the WMC Claims. Seller
shall have the right to settle the WMC Claims on terms and conditions
satisfactory to it in the exercise of its sole discretion, including
without limitation, the termination or modification of the Payment
Agreement and any other agreements with the Venture pertaining to the
Muddy Creek Hub; provided, however, that no settlement by Seller shall
result in or create any obligations or liability to the Buyer, the
Company or its Subsidiaries other than the release of claims.
Following Closing, Buyer shall cause the Company and the Subsidiaries
to (i) take all actions reasonably requested by Seller or its nominees
in connection with the WMC Claims and the rights, titles and interests
beneficially assigned by the Company and its Subsidiaries, (ii)
expressly consent to and waive any conflict regarding the
representation of Seller in connection with the WMC Claims by any
lawyer or law firm which represents the Company (or any Subsidiary) in
connection with the WMC Claims and (iii) otherwise cooperate fully
with and assist Seller in connection with all matters and actions
undertaken by Seller in connection with the WMC Claims, including
without limitation by providing access to records and employees of
Buyer and the Company and the Subsidiaries. Following the Closing,
Seller shall indemnify Buyer and the Company and the Subsidiaries
against any (i) Damages arising out of or relating to the WMC Claims,
and (ii) obligations by the Company and its Subsidiaries to make
payments under the Payment Agreement to the Venture.
SECTION 7.17. KOCH REIMBURSEMENT. Panola Pipe Line, Inc., a Subsidiary
of the Company, has made certain expenditures for a valve station
delivery facility on the Panola Pipeline to allow Koch Hydrocarbon
Company ("Koch") to take NGLs from the line to Koch's Mont Belvieu
Fractionator. Koch has agreed to reimburse Panola Pipe Line, Inc. for
such expenditures, and Buyer agrees that Seller shall be entitled to
80% of the reimbursement payment made by Koch. If Koch makes the
reimbursement payment to Seller, Seller agrees to pay 20% of the
amount thereof to Buyer, and if Buyer, the Company or a Subsidiary is
paid by Koch, Buyer shall pay Seller 80% of the amount thereof to
Seller.
SECTION 7.18. CONROE GAS PLANT. With respect to the fire which
occurred at the Conroe Gas Plant office building on March 28, 1999,
Seller shall be obligated to pay for the reasonable, actual costs of
repairing the office building and replacing or repairing any damaged
contents to the building. Seller shall be entitled to all insurance
proceeds and amounts paid by third parties with respect to the fire,
and Seller shall be entitled to seek reimbursement from and make any
claims against third parties with respect to any damages caused by the
fire. Buyer, the Company and any Subsidiaries shall cooperate with
Seller in making any insurance filings or claims with respect to this
matter.
2
<PAGE> 3
3. Section 10.02(a)(ix) is deleted in its entirety and the following
substituted in its place:
"(ix) Seller, through its wholly-owned subsidiary, UPR Energy
Services, Inc. shall have entered into an International Swaps and
Derivatives Association Agreement and replacement "Price Risk
Management Contract" covering such transactions referenced in UPR
Energy Services' letter regarding Changes in Control of Union Pacific
Fuels, Inc.: Impact on Price Risk Management Contract and Associated
Transactions, with the Company, in substantially the form attached
hereto as Exhibit H."
3. Section 10.03 is amended by adding the following:
"(viii) Buyer shall have caused Duke Capital Corp. to enter into a
Guaranty in substantially the form of the Guaranty attached as Exhibit
"A" to Schedule to the ISDA Master Agreement which forms a part of
Exhibit H hereto.
4. The last sentence of Section 12.01 (Survival) is deleted in its
entirety and the following substituted in its place: "Notwithstanding the
foregoing, claims for breach of the agreements or representations and
warranties contained in Sections 2.01(b), 2.04(a)(1)-(3), 2.05, 3.13, 3.18,
5.02, 5.03, 5.04, Article 6, Sections 7.01, 7.02, 7.04, 7.05, 7.06, 7.07, 7.08,
7.11, 7.12, 7.13, 7.14, 7.15, 7.16, 7.17, 7.18, 8.01(b), 8.02(d), 8.03, Article
9, Article 11, this Article 12 and Article 14 shall survive for the full period
of any applicable statute of limitations."
5. Exhibit A (Property Schedule) is hereby amended and restated in its
entirety as attached hereto
6. Schedules 1.01(1) (Excluded Businesses and Assets) and 1.01(4)
(Purchased Assets) are hereby amended and restated in their entirety as
attached hereto.
7. This Fourth Amendment is executed, and shall be considered, as an
amendment to the Amended Agreement and shall form a part thereof, and the
provisions of the Amended Agreement, as amended by this Third Amendment, are
hereby ratified and confirmed in all respects.
8. This Fourth Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute but one and the same instrument. This Agreement shall
become binding only when each party hereto has executed and delivered to the
other parties one or more counterparts.
IN WITNESS WHEREOF, the parties hereto have duly executed this Fourth
Amendment or have caused this Fourth Amendment to be duly executed by their
respective authorized officers as of the day and year first written above.
3
<PAGE> 4
UNION PACIFIC RESOURCES COMPANY
By: /s/ JOSEPH A. LASALA
------------------------------------------
Name: Joseph A. LaSala
Title: Vice President, General Counsel
And Corporate Secretary
UNION PACIFIC FUELS, INC.
By: /s/ KERRY R. BRITTAIN
------------------------------------------
Name: Kerry R. Brittain
Title: Vice President
DUKE ENERGY FIELD SERVICES, INC.
By: /s/ J. W. MOGG
------------------------------------------
Name: J. W. Mogg
Title: President
DEFS MERGER SUB CORP.
By: /s/ J. W. MOGG
------------------------------------------
Name: J. W. Mogg
Title: President
4
<PAGE> 5
SCHEDULE 1.01(1)
EXCLUDED BUSINESSES AND ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AREA EXCLUDED BUSINESSES AND ASSETS
- --------------------------------------------------------------------------------
<S> <C>
EAST TEXAS CJV Gathering
Carthage Compressor Station
Tennessee 16" (owned by UPR, leased to East Texas Plant)
Southeast Carthage Gathering System
Oakhill Gathering System
- --------------------------------------------------------------------------------
GULF COAST Conroe Emissions Credits (available for sale prior to close)
Weesatche Gathering System
Roleta Gathering System
- --------------------------------------------------------------------------------
AUSTIN CHALK Oxy Gathering System (connected to El Paso Plant)
Needmore/Bluewater Gathering System (Brookeland)
Lyons Plant Site (abandoned)
Texaco Brookeland Plant (idle)
- --------------------------------------------------------------------------------
ROCKIES Brady Treater and Gathering System
Wamsutter Pipeline (except for option to own portion)
Table Rock Unit Gathering System (Non-op)
Delaney Rim Unit Gathering System
Painter Plant and Gathering System (Non-op)
Anschutz Plant and Gathering System (Non-op)
Whitney Canyon Plant, Inlet Facility and Gathering (Non-op)
Pineview Plant and Gathering System
Silo Plant and Gathering System
Mt Pearl Plant and Gathering System
Bledsoe Plant and Gathering System
Luckey Ditch Plant (idle) and Gathering System
Church Buttes Gathering System (Non-op)
Frontera Plant (idle) and Gathering System
Arapahoe Plant (idle) and Gathering System
- --------------------------------------------------------------------------------
WEST TEXAS Conger Gathering
Hunt Ranch Gathering and Compression (except for OGPP
facilities on same pad)
Henderson Gathering System
Davidson Ranch Gathering and Compression
Husdpeth Gathering Line
Rousselot Gathering System (Schleicher County)
West Packenham Gathering (Terrell County)
Rio-Tex JV (Packenham Gathering, Terrell County)
Crawar Gathering System (Winkler, Ward, Lovin Counties)
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AREA EXCLUDED BUSINESSES AND ASSETS
- -------------------------------------------------------------------------------
<S> <C>
MARKETING Crude Marketing Business and Assets
LaGrange Crude Oil Terminal
Lockport Crude Oil Storage Agreement (Texaco)
Powersmith Gas Sales Agreement
Lake Interest Holdings (Cogen)
NCP Syracuse, Inc. (Cogen)
Syracuse Investments, Inc. (Cogen)
All Gathering, Processing and Wellhead Sale Contracts with
Third Party Plants, which contracts are not related to
the Assets.
Wellhead Sale Agreements in the Roleta and Haynes Fields, and
with respect to the Crowell 7#1, Crowell 3#1,
Brousserd 2#1 and Basco #1, Curet and Harman wells
east of Masters Creek.
Subscription Agreement for Additional Transportation Capacity,
dated April 1, 1995 between Lone Star Gas Company and
Union Pacific Fuels, Inc.
Transportation Agreement, dated December 15, 1989, between
Kern River Transportation Company and Union Pacific
Fuels, Inc.
CiG System Supply contracts for sour and sweet gas in the
Table Rock/Higgins area.
South Jersey Resources Group LLC
All gas sales contracts and transactions between Union Pacific
Fuels, Inc. and Chesapeake Utilities
Corporation/Delaware (excluding any executed asset
management contracts between Union Pacific Fuels,
Inc. and Chesapeake Utilities Corporation/Maryland or
Chesapeake Utilities Corporation/Delaware)
Gas Purchase Contract between Union Pacific Resources
Company and Castle Texas Production Limited
Partnership, including the Gas Purchase Contract
between Castle Texas Production Company Limited
Partnership and MG Natural Gas Corp.
- -------------------------------------------------------------------------------
Other
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 7
SCHEDULE 1.01(4)
PURCHASED ASSETS
East Texas Plant Complex, Fractionator and Gathering System (including the MSV
Pipeline)
Ozona Gas Plant, Fractionator and Gathering System
Ozona NGL Pipeline
<PAGE> 1
EXHIBIT 11
UNION PACIFIC RESOURCES GROUP INC.
COMPUTATION OF EARNINGS PER SHARE
(Shares in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Basic weighted average number of shares outstanding ............. 248,650 247,625
Dilutive weighted average shares issuable on exercise of stock
options less shares repurchasable from proceeds ............ 15 556
------------ ------------
Diluted weighted average number of common and common
equivalent shares .......................................... 248,665 248,181
============ ============
Income from continuing operations (millions) .................... $ 42.3 $ 24.7
Income from discontinued operations (millions) .................. 133.2 6.5
------------ ------------
Net income (millions) ........................................... $ 175.5 $ 31.2
============ ============
Per share - basic and diluted
Income from continuing operations ............................... $ 0.17 $ 0.10
Income from discontinued operations ............................. 0.54 0.03
------------ ------------
Net income ...................................................... $ 0.71 $ 0.13
============ ============
</TABLE>
<PAGE> 1
EXHIBIT 12
UNION PACIFIC RESOURCES GROUP INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in Millions, Except Ratios)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
Earnings from continuing operations before income taxes ................... $ 6.4 $ 28.5
Add (deduct) distributions greater (less) than
income of unconsolidated affiliates .................................. (0.1) (2.2)
Fixed charges from below .................................................. 65.9 37.7
Capitalized interest included in fixed charges ............................ (0.1) (1.8)
------------ ------------
Earnings available for fixed charges ............................. $ 72.1 $ 62.2
============ ============
Fixed charges:
Interest expense, including amortization of debt expense/discount .... $ 64.3 $ 34.0
Portion of rentals representing an interest factor ................... 1.5 1.9
Interest capitalized ................................................. 0.1 1.8
------------ ------------
Total fixed charges .............................................. $ 65.9 $ 37.7
============ ============
Ratio of earnings to fixed charges ........................................ 1.1 1.7
============ ============
</TABLE>
<PAGE> 1
EXHIBIT 15
AWARENESS LETTER OF INDEPENDENT PUBLIC ACCOUNTANTS
May 10, 1999
Union Pacific Resources Group Inc.
777 Main Street
Fort Worth, Texas 76102
We are aware that Union Pacific Resources Group Inc. has incorporated by
reference in its Registration Statements No. 333-62181 on Form S-3 and No.
333-22613 and No. 333-35641 on Form S-8 its Form 10-Q for the quarter ended
March 31, 1999, which includes our report dated April 26, 1999 covering the
unaudited interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not considered a
part of the registration statement prepared or certified by our firm or a
report prepared or certified by our firm within the meaning of Sections 7 and
11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
Fort Worth, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNION
PACIFIC RESOURCES GROUP INC. CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION AT MARCH 31, 1999, AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 171
<SECURITIES> 0
<RECEIVABLES> 322
<ALLOWANCES> 10
<INVENTORY> 53
<CURRENT-ASSETS> 633
<PP&E> 10,978
<DEPRECIATION> 5,095
<TOTAL-ASSETS> 6,685
<CURRENT-LIABILITIES> 1,253
<BONDS> 2,755
0
0
<COMMON> 0
<OTHER-SE> 861
<TOTAL-LIABILITY-AND-EQUITY> 6,685
<SALES> 351
<TOTAL-REVENUES> 415
<CGS> 0
<TOTAL-COSTS> 356
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> 6
<INCOME-TAX> (36)
<INCOME-CONTINUING> 42
<DISCONTINUED> 133
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 175
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.71
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNION
PACIFIC RESOURCES GROUP INC. RESTATED CONDENSED CONSOLIDATED STATEMENT OF
FINANCIAL POSITION AT THE END OF EACH PERIOD PRESENTED AND THE RELATED CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR EACH PERIOD AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 185 38 39
<SECURITIES> 0 0 0
<RECEIVABLES> 160 200 206
<ALLOWANCES> 4 4 4
<INVENTORY> 17 16 17
<CURRENT-ASSETS> 384 280 308
<PP&E> 5,547 5,847 6,094
<DEPRECIATION> 3,039 3,171 3,284
<TOTAL-ASSETS> 3,593 3,696 4,048
<CURRENT-LIABILITIES> 520 454 430
<BONDS> 571 673 978
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 1,624 1,692 1,752
<TOTAL-LIABILITY-AND-EQUITY> 3,593 3,696 4,048
<SALES> 406 746 1,082
<TOTAL-REVENUES> 418 782 1,125
<CGS> 0 0 0
<TOTAL-COSTS> 256 519 792
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 7 15 25
<INCOME-PRETAX> 152 249 317
<INCOME-TAX> 48 77 92
<INCOME-CONTINUING> 104 172 226
<DISCONTINUED> 13 20 33
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 117 192 259
<EPS-PRIMARY> 0.47 0.77 1.03
<EPS-DILUTED> 0.47 0.76 1.03
</TABLE>
