<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 September 30, 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 October 31, 1999, there were 252,050,121 shares of the
registrant's common stock outstanding.
<PAGE> 2
UNION PACIFIC RESOURCES GROUP INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page Number
-----------
<S> <C> <C>
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Statements of Income and Comprehensive Income -
For the Three Months and Nine Months Ended September 30, 1999 and 1998.................... 2
Condensed Consolidated Statements of Financial Position -
At September 30, 1999 and December 31, 1998............................................... 3 - 4
Condensed Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1999 and 1998..................................... 5
Notes to Condensed Consolidated Financial Statements...................................... 6 - 13
Report of Independent Public Accountants.................................................. 14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................................ 15 - 28
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 29 - 32
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS......................................................................... 32
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 32 - 33
SIGNATURE.......................................................................................... 34
</TABLE>
-2-
<PAGE> 3
UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months and Nine Months Ended September 30, 1999 and 1998
(Millions of dollars, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Oil and gas operations:
Exploration and production .............................................. $ 403.0 $ 388.7 $ 1,065.2 $ 1,190.3
Other oil and gas revenues (Note 5) ..................................... 27.3 130.9 104.0 162.3
--------- --------- --------- ---------
Total oil and gas operations ......................................... 430.3 519.6 1,169.2 1,352.6
Minerals ................................................................... 32.8 38.8 95.7 115.5
--------- --------- --------- ---------
Total operating revenues ............................................. 463.1 558.4 1,264.9 1,468.1
--------- --------- --------- ---------
Operating expenses:
Production ................................................................. 105.1 113.2 288.8 337.2
Exploration, including exploratory dry holes ............................... 47.3 79.0 152.4 229.6
Minerals ................................................................... 0.5 0.5 1.0 1.8
Depreciation, depletion and amortization ................................... 253.0 261.5 621.4 702.3
General and administrative ................................................. 18.6 23.0 65.1 68.0
Restructuring charge (Note 6) .............................................. -- -- 14.5 --
--------- --------- --------- ---------
Total operating expenses ............................................. 424.5 477.2 1,143.2 1,338.9
--------- --------- --------- ---------
Operating income ............................................................... 38.6 81.2 121.7 129.2
Other income (expense) - net (Notes 7 and 8) ................................... 8.7 (48.2) 41.4 (32.9)
Interest expense ............................................................... (52.6) (72.5) (167.6) (179.5)
--------- --------- --------- ---------
Income (loss) before income taxes .............................................. (5.3) (39.5) (4.5) (83.2)
Income tax expense (benefit) (Notes 7 and 8) ................................... (26.0) (26.4) (82.8) (61.0)
--------- --------- --------- ---------
Income (loss) from continuing operations ....................................... 20.7 (13.1) 78.3 (22.2)
Discontinued operations (Note 4)
Income (loss) from discontinued operations - net of tax .................... -- (4.2) (23.8) 18.8
Gain on sale of discontinued operations - net of tax ....................... -- -- 157.0 --
--------- --------- --------- ---------
Total income (loss) from discontinued operations ........................... -- (4.2) 133.2 18.8
--------- --------- --------- ---------
Net income (loss) .............................................................. $ 20.7 $ (17.3) $ 211.5 $ (3.4)
========= ========= ========= =========
Other comprehensive income - net of tax:
Unrealized loss on deferred compensation liability ......................... (3.0) -- (3.0) --
Foreign currency translation adjustments ................................... 2.3 (16.9) (31.3) (53.9)
--------- --------- --------- ---------
Comprehensive income (loss) .................................................... $ 20.0 $ (34.2) $ 177.2 $ (57.3)
========= ========= ========= =========
Earnings (loss) per share basic and diluted:
Continuing operations ...................................................... $ 0.08 $ (0.06) $ 0.31 $ (0.09)
Discontinued operations .................................................... -- (0.01) 0.54 0.08
--------- --------- --------- ---------
Total ...................................................................... $ 0.08 $ (0.07) $ 0.85 $ (0.01)
========= ========= ========= =========
Weighted average shares outstanding - basic .................................... 249.0 247.8 248.9 247.7
Weighted average shares outstanding - diluted .................................. 249.6 247.8 249.2 247.7
Cash dividends per share ....................................................... $ 0.05 $ 0.05 $ 0.15 $ 0.15
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
-3-
<PAGE> 4
UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At September 30, 1999 and December 31, 1998
(Millions of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments ......................... $ 137.3 $ 8.8
Accounts receivable - net .............................. 317.0 261.0
Inventories ............................................ 53.0 64.6
Other current assets ................................... 57.7 107.0
--------- ---------
Total current assets ............................. 565.0 441.4
--------- ---------
Properties (successful efforts method): (Note 5)
Cost ................................................... 10,999.8 11,078.2
Accumulated depreciation, depletion and amortization ... (5,384.0) (4,984.9)
--------- ---------
Total properties - net ........................... 5,615.8 6,093.3
--------- ---------
Intangible and other assets ................................ 177.1 180.8
Net assets of discontinued operations (Note 4) ............. -- 926.9
--------- ---------
Total assets ............................................... $ 6,357.9 $ 7,642.4
========= =========
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
-4-
<PAGE> 5
UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At September 30, 1999 and December 31, 1998
(Millions of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 223.5 $ 270.5
Advance payment (Note 9) ................................... 43.1 --
Accrued taxes payable (Note 4) ............................. 247.5 64.9
Short-term debt (Note 10) .................................. 3.0 853.8
Other current liabilities (Note 12) ........................ 215.6 157.5
-------- --------
Total current liabilities ............................. 732.7 1,346.7
-------- --------
Long-term debt (Note 10) ........................................ 2,966.1 3,744.9
Deferred income taxes ........................................... 1,250.2 1,291.6
Other long-term liabilities (Note 12) ........................... 528.6 531.0
Shareholders' equity:
Common stock, no par value:
Authorized shares--400,000,000
Issued and outstanding--251,700,683 and 250,685,204 ...... -- --
Paid-in surplus ............................................ 1,000.3 992.6
Treasury stock, at cost:
Shares--4,429,857 and 3,666,913 ........................ (93.6) (82.5)
Unearned employee stock ownership plan ..................... (82.1) (95.7)
Retained earnings .......................................... 183.5 9.1
Unearned compensation (Note 11) ............................ (4.2) (6.0)
Accumulated other comprehensive income:
Deferred foreign exchange adjustment ................... (115.7) (84.4)
Unrealized gain (loss) on deferred compensation ........ (3.0) --
Minimum pension contra equity .......................... (4.9) (4.9)
-------- --------
Total accumulated other comprehensive income .......... (123.6) (89.3)
-------- --------
Total shareholders' equity ............................ 880.3 728.2
-------- --------
Total liabilities and shareholders' equity ...................... $6,357.9 $7,642.4
======== ========
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
-5-
<PAGE> 6
UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(Millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operations:
Net income (loss) ........................................... $ 211.5 $ (3.4)
Less income from discontinued operations .................... (133.2) (18.8)
Non-cash charges to income:
Depreciation, depletion and amortization ................. 621.4 702.3
Deferred income taxes (benefit) .......................... (53.0) (168.5)
Other non-cash charges - net ............................. 20.2 295.4
Changes in current assets and liabilities ................... 30.3 211.2
-------- --------
Cash provided by operations ........................... 697.2 1,018.2
-------- --------
Cash flows from investing activities:
Capital and exploratory expenditures ........................ (291.6) (1,118.0)
Acquisition of Norcen (Note 3) .............................. -- (2,634.3)
Proceeds from sales of assets (Note 5) ..................... 244.5 262.1
Proceeds from sales of investment ........................... -- 48.4
Proceeds from sale of discontinued operations (Note 4) ...... 1,359.1 --
Cash provided (used) by discontinued operations ............. (202.4) 176.7
-------- --------
Cash provided (used) by investing activities .......... 1,109.6 (3,265.1)
-------- --------
Cash flows from financing activities:
Dividends paid .............................................. (37.3) (37.2)
Proceeds from debt financing - net (Note 10) ................ 500.0 2,323.2
Debt repaid ................................................. (2,122.5) --
Purchase of treasury stock .................................. (11.1) (22.1)
Other financing - net (Note 9) .............................. (7.4) (45.2)
-------- --------
Cash provided (used) by financing activities .......... (1,678.3) 2,218.7
-------- --------
Net change in cash and temporary investments .................... 128.5 (28.2)
Cash at beginning of period ..................................... 8.8 67.1
-------- --------
Cash at end of period ........................................... $ 137.3 $ 38.9
======== ========
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
-6-
<PAGE> 7
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 and cash flows for the nine
months ended September 30, 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
The following table presents summarized segment information for the
Company.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
-------- --------
(Millions of dollars)
<S> <C> <C>
Revenues:
Exploration and production ...... $1,169.2 $1,352.6
Minerals ........................ 95.7 115.5
-------- --------
Total revenues ............... $1,264.9 $1,468.1
======== ========
Operating income:
Exploration and production ...... $ 111.2 $ 87.7
Minerals ........................ 94.7 113.7
Corporate (a) ................... (84.2) (72.2)
-------- --------
Total operating income ....... $ 121.7 $ 129.2
======== ========
</TABLE>
<TABLE>
<CAPTION>
At September 30, At December 31,
1999 1998
--------------- --------------
(Millions of dollars)
<S> <C> <C>
Fixed assets (net of DD&A):
Exploration and production ...... $5,515.1 $5,988.8
Minerals ........................ 10.2 10.2
Corporate ....................... 90.5 94.3
-------- --------
Total fixed assets ........... $5,615.8 $6,093.3
======== ========
</TABLE>
- ----------
(a) Operating income for the Corporate segment consists of general and
administrative expense and restructuring charge.
-7-
<PAGE> 8
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 $2.634 billion (the "Norcen
Acquisition"). In addition, UPRI assumed the long-term debt obligations of
Norcen. The following table presents unaudited pro forma Condensed
Consolidated Statements of Income of the Company for the nine months ended
September 30, 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>
Nine Months Ended
September 30, 1998
------------------
(Millions of dollars,
except per share amounts)
<S> <C>
Revenues ............................... $ 1,567.9
Costs and expenses ..................... 1,469.9
---------
Operating income ....................... 98.0
Interest expense ....................... (214.0)
Other income (expense) - net ........... (32.9)
---------
Loss before income taxes ............... (148.9)
Income tax expense (benefit) ........... (85.2)
---------
Loss from continuing operations ........ $ (63.7)
=========
Loss per share - basic ................. $ (0.26)
Loss per share - diluted ............... (0.26)
</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 the
Company 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 nine months ended September 30,
1999, the two months ended February 28, 1998, and the seven months ended
September 30, 1998. This summarized financial information is being provided
pursuant to Section G of Topic 1 of Staff Accounting Bulletin No. 53 -
"Financial Statement Requirements in Filings Involving the Guarantee of
Securities by a Parent." The Company will continue to provide such
summarized financial information for UPRI for as long as the debt
securities remain outstanding.
-8-
<PAGE> 9
<TABLE>
<CAPTION>
Nine Months Ended Two Months Ended Seven Months Ended
September 30, 1999 February 28, 1998(a) September 30, 1998(b)
------------------ -------------------- ---------------------
(Millions of dollars)
Summarized Statement of Income Information:
<S> <C> <C> <C>
Operating revenues ............................. $263.9 $104.0 $268.9
Operating income (loss) ........................ 49.6 4.0 (104.1)
Net income (loss) .............................. 62.3 (30.0)(c) (106.4)
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999 At December 31, 1998
--------------------- --------------------
(Millions of dollars)
<S> <C> <C>
Summarized Statement of Financial Position Information:
Current assets ........................................... $ 77.7 $ 53.7
Non-current assets ....................................... 2,023.6 1,882.3
Current liabilities ...................................... 78.8 279.8
Non-current liabilities and equity ....................... 2,022.5 1,656.2
</TABLE>
- ---------------------------------
(a) Results for Norcen 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
of accounting for oil and gas operations.
(b) Results for UPRI as of and for the seven months ended September 30,
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.
These operations include 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, including $232.2 million for accrued taxes payable.
Under a process provided for in the Agreement, Duke asserted claims
against the Company for costs to remediate alleged environmental
conditions. The asserted environmental claims exceeded a $40 million
deductible that Duke had assumed for environmental conditions. Under the
terms of the Agreement, the Company had the right to contest any
environmental claims through arbitration. If it had been determined that
there were valid environmental claims in excess of the $40 million
deductible, the Company would have been required to make a payment to
Duke for such excess amount. The Company analyzed Duke's environmental
claims and entered into discussions with Duke about the results of that
analysis. As a result of these discussions, Duke and the Company have
agreed that Duke's environmental claims do not exceed $40 million. The
Company has no further liability with respect to environmental claims
asserted by Duke under the Agreement.
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 segment net
assets that were
-9-
<PAGE> 10
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 and nine months ended September 30, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
------- ------ ------ ------
(Millions of dollars) (Millions of dollars)
<S> <C> <C> <C> <C>
Operating revenues ............................... $ -- $ 83.6 $ 21.5 $294.0
Operating expenses ............................... -- (65.2) (29.7) (193.5)
Depreciation, depletion and amortization ......... -- (18.9) (20.4) (52.8)
------ ------ ------ ------
Operating income (loss) .......................... -- (0.5) (28.6) 47.7
Other income (expense) - net ..................... -- -- -- 0.1
Interest expense (a) ............................. -- (5.3) (8.0) (15.8)
------ ------ ------ ------
Income (loss) before taxes ....................... -- (5.8) (36.6) 32.0
Income tax expense (benefit)...................... -- (1.6) (12.8) 13.2
------ ------ ------ ------
Net income (loss) from discontinued operations ... $ -- $ (4.2) $(23.8) $ 18.8
====== ====== ====== ======
</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. PROPERTIES
During 1999, the Company completed sales of non-core south Texas
properties for a sales price of $137.8 million, including a remaining
$20.6 million note receivable, the Canadian Caroline-Swan Hill property
(the "Caroline property") for $108.6 million, the Deadwood property in
East Texas for $18.0 million and properties in the Rockies for $10.3
million. The Company recorded a pretax gain of $87.2 million in
connection with these sales.
Based upon the Company's analysis of expected future net cash flows
from its crude oil and natural gas properties, certain US Onshore
properties in south Louisiana and south Texas were deemed to be impaired
due to downward revisions in reserve estimates. During the third quarter
of 1999, the Company adjusted the net book value of such properties to
their fair value, with a charge to depreciation, depletion and
amortization of $61.1 million and a $4.5 million charge to exploration
expense -- surrendered lease.
6. RESTRUCTURING CHARGE
During the first quarter of 1999, 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 related 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 September 30, 1999, payments have totaled
$7.8 million. The $6.7 million remaining, represents reserves for
specialty drilling equipment and supplies of $2.5 million and OPEB and
personnel costs of $4.2 million.
-10-
<PAGE> 11
At January 1, 1999, the balance of the reserve for costs related to
the restructuring charge recorded in the fourth quarter 1998 was $14.6
million. During the first nine months of 1999, $5.3 million was paid out
related to workforce reductions and $0.7 million was paid out related to
excess office space commitments. At September 30, 1999, the $8.6 million
remaining, represents reserves for a drilling rig commitment of $5.0
million and excess office space commitments of $3.6 million.
7. FOREIGN CURRENCY
During 1999, the Company recorded $30.0 million non-cash foreign
currency gains included in other income (expense) - net on the Condensed
Consolidated Statement of Income. The gains resulted from remeasurement
of UPRI's U.S. dollar denominated monetary assets and liabilities
(primarily debt obligations).
Also during 1999, the Company recorded $25.5 million non-cash foreign
currency gains included in deferred tax (benefit) expense on the
Condensed Consolidated Statement of Income. The gains resulted from
remeasurement of deferred tax liabilities denominated in the local
currencies of Guatemala and Venezuela.
8. TAX SETTLEMENTS
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 claim 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 was to receive a refund of approximately $54.6
million dollars. In the first quarter of 1999, the Company recorded $7.1
million of interest to other income (expense) -- net and a $27.9 million
deferred income tax benefit related to the settlement. The Company has
received a partial payment from the Canadian tax authorities related to
the refund. The remaining $16.3 million refund, which is expected to be
collected prior to December 31, 1999, is recorded in accounts receivable
in the Condensed Consolidated Statement of Financial Position.
On September 1, 1999, the Company and its former parent, Union Pacific
Corporation ("UPC"), settled certain outstanding issues pertaining to the
allocation of all federal and state tax liabilities, including interest,
for the tax years 1968 through 1982. This settlement was made pursuant to
the Tax Allocation Agreement entered into as of October 6, 1995, between
the Company and UPC. This settlement resulted in the receipt by the
Company from UPC on September 3, 1999 of $29 million (including $20.5
million of interest income recorded in other income) in full and final
settlement of all amounts owed to or by UPR with respect to tax years
1968 through 1982. The tax settlement with UPC enabled the Company to
reevaluate its deferred tax reserves, and as a result, the Company
recorded $11.9 million of deferred tax benefits related to the tax years
covered by the settlement. The Company and UPC also agreed to suspend
settlement rights under the Tax Allocation Agreement with respect to
post-1982 tax years until July 1, 2001.
-11-
<PAGE> 12
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 recognized in other oil and gas
revenues on the Condensed Consolidated Statement of Income as the natural
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. DEBT
During the second quarter of 1999, the Company issued $500 million of
Notes and Debentures. The $200 million 7.3% Notes due May 2009 and the
$300 million 7.95% Debentures due May 2029 were issued under the
Company's existing $1.0 billion shelf registration statement. Proceeds
from the issuance of the Notes and Debentures, along with proceeds from
the GPM Disposition, were used to reduce short-term and long-term debt by
$850.8 million and $778.8 million, respectively.
11. SHAREHOLDERS' EQUITY
In the first quarter of 1999, options for 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 Company common stock price objectives. These stock price
objectives were achieved in April and May 1999, resulting in the
acceleration of vesting of all such shares of restricted stock. The
Company recorded compensation expense of $14.8 million in connection with
the vesting of these restricted stock awards.
12. COMMITMENTS AND CONTINGENCIES
The Company was a party to several long-term firm gas transportation
agreements that supported the gas marketing program within the GPM
segment sold to Duke. Most of these firm transportation contracts were
transferred to Duke as part of the GPM Disposition. As part of the GPM
Disposition, the Company has agreed to keep Duke whole on certain
contracts if the transportation market value falls below the contract
transportation rates, while Duke will pay the Company if the market value
exceeds the contract transportation rates. This keep-whole commitment is
in effect for the ten-year period commencing on March 31, 1999.
Included in the Condensed Consolidated Statement of Financial Position
of the Company is a reserve for the estimated fair value of the
difference between the total rate under the firm transportation
agreements and estimated market rates through March 2009. The reserve,
which is included in other current liabilities and other long-term
liabilities, was $37.0 million and $69.2 million at September 30, 1999,
respectively. The Company may adjust its reserve based on changes in
current quoted future market rates or estimated long-term rates. Such
adjustments could be significant. Management does not believe a
meaningful, permanent change has occurred to the transportation rates in
the market place. However, at September 30, 1999, if the Company had used
current quoted future market rates to estimate the long-term portion of
the reserve, the Company would have recorded an additional reserve of
$60.4 million for the keep-whole commitment period.
-12-
<PAGE> 13
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. 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.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133. SFAS No. 137 defers the
effective date of SFAS No. 133 to fiscal years beginning after June 15,
2000. The Company plans to adopt SFAS No. 133 during the first quarter of
2001.
-13-
<PAGE> 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Union Pacific Resources Group Inc.
Fort Worth, Texas
We have reviewed the accompanying Condensed Consolidated Statement of Financial
Position of Union Pacific Resources Group Inc. (a Utah corporation) and
subsidiaries as of September 30, 1999, and the related Condensed Consolidated
Statements of Income and Comprehensive Income for the three month and nine month
periods ended September 30, 1999 and 1998, and the Condensed Consolidated
Statements of Cash Flows for the nine month periods ended September 30, 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
October 25, 1999
-14-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
------------- -----------
(Millions of dollars)
<S> <C> <C>
Total operating revenues............................................ $ 463.1 $ 558.4
Total operating expenses............................................ 424.5 477.2
Operating income.................................................... 38.6 81.2
Income (loss) from continuing operations............................ 20.7 (13.1)
Net income (loss)................................................... 20.7 (17.3)
Earnings (loss) from continuing operations per share - diluted...... 0.08 (0.06)
Earnings (loss) per share - diluted................................. 0.08 (0.07)
</TABLE>
The Company recorded net income of $20.7 million in the third quarter of
1999, an increase of $38.0 million over third quarter results for 1998. Earnings
per share of $0.08 for the third quarter of 1999 increased $0.15 from last year.
Discontinued operations recorded a loss of $4.2 million in the third quarter of
1998.
RESULTS OF CONTINUING OPERATIONS
The Company recorded income from continuing operations of $20.7 million for
the third quarter of 1999 compared to a loss of $13.1 million in the same period
of 1998. Earnings per share of $0.08 increased $0.14 per share. The increase was
largely due to lower operating expenses and depreciation, depletion and
amortization ("DD&A") expenses by $52.7 million, an $84.0 million favorable
variance related to higher product prices, a $25.2 million after-tax tax
settlement with Union Pacific Corporation ("UPC") and reduced interest expenses
by $19.9 million. Lower sales volumes, however, resulted in a $69.7 million
revenue reduction and the impairment of certain US Onshore properties resulted
in a $65.6 million loss. Included in third quarter 1998 results was a $128.5
million gain on the sale of the Matagorda Island Block 623 Field and surrounding
blocks (the "Matagorda property") compared to gains related to property sales of
$26.1 million in 1999. The Company also recorded a $29.1 million after-tax
foreign currency loss in 1998 compared to an $8.2 million gain this year.
SUMMARY OF SEGMENT FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
------------- ------------
(Millions of dollars)
<S> <C> <C>
Segment operating income:
Exploration and production...................................... $ 26.4 $ 67.4
Minerals........................................................ 32.3 38.3
Corporate/general and administrative............................ (20.1) (24.5)
-------- --------
Total........................................................ $ 38.6 $ 81.2
======== ========
</TABLE>
Operating income decreased by $42.6 million to $38.6 million for the
quarter. Exploration and production operating income decreased by $41.0 million
to $26.4 million despite a 27 percent increase in product prices and
-15-
<PAGE> 16
a $39.8 million reduction in production and exploration expenses associated with
lower sales volumes and a cost savings initiative implemented last year. These
results, however, reflect a revenue reduction of $69.7 million due to lower
sales volumes and a $65.6 million impairment charge related to certain
properties in US Onshore. Gains on property sales declined $102.4 million from
last year.
Minerals operating income decreased $6.0 million, to $32.3 million, largely
due to lower contract sales at Black Butte Coal Company ("Black Butte").
General and administrative ("G&A") costs decreased $4.4 million,
principally due to the reversal of a $3.5 million expense accrual to reflect the
forfeiture of restricted stock awards by former employees and cost reduction
programs.
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
----------- ----------
(Millions of dollars)
<S> <C> <C>
Exploration and production revenues ..................... $403.0 $388.7
Other oil and gas revenues .............................. 27.3 130.9
------ ------
Total operating revenues ................................ 430.3 519.6
------ ------
Operating expenses:
Production ........................................... 105.1 113.2
Exploration .......................................... 47.3 79.0
Depreciation, depletion and amortization ............. 251.5 260.0
------ ------
Total operating expenses ............................. 403.9 452.2
------ ------
Operating income ........................................ $ 26.4 $ 67.4
====== ======
</TABLE>
OPERATING REVENUES
Exploration and production revenues for the third quarter of 1999 increased
by $14.3 million (4%) to $403.0 million due to the $84.0 million increase
associated with higher product prices, net of $79.9 million for hedging losses
on crude oil and natural gas. Lower sales volumes for the third quarter of 1999
reduced revenues by $69.7 million.
Other oil and gas revenues were down $103.6 million, primarily due to the
inclusion of the $128.5 million gain on the sale of the Matagorda property in
1998 results. Results in 1999 include gains of $26.1 million on property sales
in US Onshore.
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------
1999 1998 1999 1998
------ ------ ------ ------
(without hedging) (with hedging)
<S> <C> <C> <C> <C>
Average price realizations - exploration and production:
Natural gas (per Mcf) ................................... $ 2.21 $ 1.62 $ 1.94 $ 1.62
Natural gas liquids (per Bbl) ........................... 12.37 7.33 12.37 7.33
Crude oil (per Bbl) ..................................... 18.04 10.38 13.40 10.28
Average (per Mcfe) ...................................... 2.40 1.63 2.05 1.62
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Production volumes - exploration and production:
Natural gas (MMcfd) ................................ 1,270.0 1,491.6
Natural gas liquids (MBbld) ........................ 30.7 33.2
Crude oil (MBbld) .................................. 114.3 152.8
Total (MMcfed) ..................................... 2,139.9 2,607.7
</TABLE>
-16-
<PAGE> 17
Exploration and production sales volumes of 2,139.9 MMcfed decreased 467.8
MMcfed (18%) from 1998 results primarily due to production declines related to
reduced capital spending levels during late 1998 and early 1999, as well as
property sales. Property sales resulted in an approximate 120 MMcfed unfavorable
variance.
US Onshore realized a 249.5 MMcfed decline, with gains in the Rockies and
Plains/Kansas providing growth that was more than offset by all other areas. The
Rockies realized volume increases related to production from new drilling, while
the Plains/Kansas realized volume increases related to the startup of the helium
plant in the area. The decreases in other onshore areas were related to the
reduction in capital spending and over 60 MMcfed from property sales. Canadian
sales volumes were down 130.0 MMcfed (22%) to 468.4 MMcfed also due to
production declines and property sales (approximately 28 MMcfed). Latin America
realized a drop in sales volumes of 33.5 MMcfed (11%) to 273.3 MMcfed. Sales
volumes decreased in US Offshore by 54.8 MMcfed largely due to property sales
(approximately 29 MMcfed), primarily the sale of the Matagorda property, and
production declines.
Natural gas sales volumes decreased 221.6 MMcfd (15%) to 1,270.0 MMcfd,
principally reflecting the sale of the Matagorda property in the third quarter
of 1998, Canadian properties in late 1998, south Texas properties in early 1999
and the Deadwood property in east Texas in the second quarter of 1999. Also
contributing to the sales volumes decrease were production declines for existing
properties related to reduced capital spending levels.
Natural gas liquid sales volumes decreased 2.5 MBbld (8%) to 30.7 MBbld.
The decline was largely related to the sale of the Canadian Caroline property
and the Matagorda property, partially offset by ethane recovery in 1999 in
contrast to ethane rejection in 1998.
Crude oil sales volumes of 114.3 MBbld decreased 38.5 MBbld (25%) from
results for last year. The decrease reflects production declines due to lower
capital spending. Property sales in US Onshore and Canada also contributed to
the sales volume decline.
OPERATING EXPENSES
Production expenses decreased $8.1 million (7%) to $105.1 million.
Production costs on a per unit basis were $0.53 per Mcfe, up from $0.47 per Mcfe
last year. Approximately $0.07 of the per Mcfe increase was due to higher
production and property taxes. Lease operating expenses fell $21.1 million to
$59.8 million, primarily due to property sales and cost reduction efforts that
were initiated in late 1998. Domestically, these cost reduction efforts have
reduced workover expenses, maintenance and repair costs, salt water disposal
costs and personnel expenses, contributing to the reduction in overall costs of
$13.4 million. Canadian and Latin American lease operating costs were down $5.0
million and $2.7 million, respectively. Lease operating expenses on a per unit
basis dropped from $0.34 per Mcfe in 1998 to $0.30 per Mcfe.
Production and property taxes increased $11.0 million from 1998 due to
higher product prices in the US Onshore operations and increased Guatemalan
government participation in crude oil revenues related to higher product prices.
Production overhead costs increased $2.3 million from 1998 largely due to
increased legal expenses that offset lower personnel costs related to the
reductions in force.
-17-
<PAGE> 18
Exploration expenses decreased $31.7 million from the third quarter of last
year. The decrease was primarily the result of the reduced capital spending
program initiated in mid-1998. Dry hole expense was down $16.9 million, geologic
and geophysical expenses dropped $10.7 million and delay rentals fell $2.3
million. Surrendered lease expense was essentially flat despite a $4.5 million
charge for an impairment. Also contributing to the variance was reduced
exploration overhead, down $1.4 million, largely due to lower personnel and
computer costs.
DD&A expenses decreased by $8.5 million. Included in 1999 results was $61.1
million related to the impairment of certain US Onshore properties. Excluding
the impairment, lower sales volumes resulted in a reduction of $46.6 million,
while lower per unit rates reduced DD&A by another $22.9 million. Also excluding
the impairments, the 1999 per unit rates of $0.97 per Mcfe, compared to $1.08
per Mcfe last year. Overall 1999 per unit rates were lower primarily due to a
lower depreciable asset base resulting from an asset impairment charge taken in
December 1998.
MINERALS OPERATIONS
OPERATING INCOME
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
--------- --------
(Millions of dollars)
<S> <C> <C>
Coal ................. $23.0 $28.8
Soda ash ............. 8.4 9.7
Other ................ 0.9 (0.2)
----- -----
Total ............ $32.3 $38.3
===== =====
</TABLE>
Minerals operating income decreased $6.0 million to $32.3 million, largely
due to lower contract sales at Black Butte.
GENERAL AND ADMINISTRATIVE AND OTHER
G&A expenses were favorable compared to third quarter 1998 by $4.4 million,
primarily reflecting a $3.5 million expense reversal related to the forfeiture
of restricted stock awards by former employees and cost reduction programs. G&A
costs were down $1.5 million in Canada and declined $0.5 million in Latin
America. G&A expenses on a per unit basis were flat at $0.10 per Mcfe.
Other income of $8.7 million was $56.9 million higher than last year.
Improving Canadian foreign currency exchange rates caused a $43.8 million gain
over 1998 results on the remeasurement of U.S. dollar denominated monetary
assets and liabilities in Canada. In addition, the Company's tax settlement with
UPC included $20.5 million of interest income. Partly offsetting these benefits
was a $13.0 million charge related to the revaluation of the firm transportation
keep-whole obligation to Duke associated with the sale of the gathering,
processing and marketing segment ("GPM Disposition").
Interest expense for the quarter declined $19.9 million from 1998 to $52.6
million. The decrease principally reflects the debt reduction resulting from the
GPM Disposition and the property divestiture program.
-18-
<PAGE> 19
The income tax benefit from continuing operations decreased $0.4 million
from the 1998 tax benefit of $26.4 million to $26.0 million for 1999. The 1999
tax settlement with UPC enabled the Company to reevaluate its deferred tax
reserves, and as a result, the Company recorded $11.9 million of deferred tax
benefits related to the tax years covered by the settlement. In addition, 1999
taxes included $7.7 million of foreign currency gains related to the
remeasurement of deferred tax liabilities in Guatemala and Venezuela. Higher
pre-tax income in 1999 caused an offsetting increase in tax expenses of $19.6
million. Section 29 credits were $3.4 million in 1999, compared to $4.1 million
last year.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
------------- ----------
(Millions of dollars)
<S> <C> <C>
Total operating revenues ........................................... $ 1,264.9 $ 1,468.1
Total operating expenses ........................................... 1,143.2 1,338.9
Operating income ................................................... 121.7 129.2
Income (loss) from continuing operations ........................... 78.3 (22.2)
Net income (loss) .................................................. 211.5 (3.4)
Earnings (loss) from continuing operations per share - diluted ..... 0.31 (0.09)
Earnings (loss) per share - diluted ................................ 0.85 (0.01)
</TABLE>
The Company recorded net income of $211.5 million for year-to-date 1999, an
increase of $214.9 million over 1998 results. Earnings per share of $0.85 for
the nine months ended September 1999 increased $0.86 from last year. The
increase was largely due to the $157.0 million after-tax gain on the sale of the
GPM segment to Duke Energy and improved results from continuing operations.
RESULTS OF CONTINUING OPERATIONS
The Company recorded income from continuing operations of $78.3 million for
year-to-date 1999 compared to a loss of $22.2 million in the same period of
1998. Earnings per share of $0.31 increased $0.40 per share. The increase was
largely due to a $125.6 million reduction in production and exploration
expenses, an $80.9 million reduction in DD&A expenses, a $25.2 million after-tax
gain related to the UPC tax settlement and a $32.9 million after-tax gain
related to the Canadian tax settlement. These items were partially offset by the
$125.1 million reduction in exploration and production revenues, largely due to
lower sales volumes. Other items that resulted in lower income include a
reduction of $67.3 million related to gains from property sales, a $65.6 million
impairment of certain properties in US Onshore, the $14.8 million charge
due to the costs associated with the vesting of the January 1999 restricted
stock awards and a $14.5 million restructuring charge taken in the first
quarter of 1999.
-19-
<PAGE> 20
SUMMARY OF SEGMENT FINANCIAL DATA
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
--------- ---------
(Millions of dollars)
Segment operating income:
<S> <C> <C>
Exploration and production ................. $111.2 $ 87.7
Minerals ................................... 94.7 113.7
Corporate/general and administrative ....... (69.7) (72.2)
Restructuring charge ....................... (14.5) --
------ ------
Total ................................... $121.7 $129.2
====== ======
</TABLE>
Operating income decreased by $7.5 million to $121.7 million for the first
nine months of 1999. Exploration and production operating income increased by
$23.5 million to $111.2 million despite a twelve percent drop in sales volumes.
Production and exploration expenses decreased by $125.6 million, associated with
lower sales volumes, cost savings initiatives and the restructuring of the
Company in the first quarter of 1999. Exploration and production DD&A expenses
declined $142.4 million, excluding the $61.1 million charge related to the
impairment, due to both lower sales volumes ($84.0 million) and reduced per unit
rates ($58.4 million). Price improvements added $18.2 million to revenues. Lower
sales volumes resulted in a revenue reduction of $143.3 million, while gains on
property sales were down $67.3 million, largely due to the inclusion of the
Matagorda property sale in 1998 results. Property sales in 1999 include the sale
of the Caroline property in Canada and certain US Onshore properties.
Minerals operating income decreased by $19.0 million to $94.7 million,
primarily related to $12.1 million of lower Black Butte equity income. Also
contributing to the decline were lower soda ash and coal royalties and the
absence of a 1998 gain on a property sale.
G&A costs decreased by $2.5 million, reflecting cost savings related to the
reductions in force that occurred in late 1998 and early 1999, offset by $11.2
million of expense related to the vesting of the January 1999 restricted stock
awards.
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
-------- --------
(Millions of dollars)
<S> <C> <C>
Exploration and production revenues .............. $1,065.2 $1,190.3
Other oil and gas revenues ....................... 104.0 162.3
-------- --------
Total operating revenues ...................... 1,169.2 1,352.6
-------- --------
Operating expenses:
Production .................................... 288.8 337.2
Exploration ................................... 152.4 229.6
Depreciation, depletion and amortization ...... 616.8 698.1
-------- --------
Total operating expenses ...................... 1,058.0 1,264.9
-------- --------
Operating income ................................. $ 111.2 $ 87.7
======== ========
</TABLE>
OPERATING REVENUES
Exploration and production revenues decreased by $125.1 million (11%) to
$1,065.2 million for the first nine months of 1999, due to a $143.3 million
reduction associated with lower sales volumes. The decrease was slightly offset
by an $18.2 million increase associated with higher product prices, net of
$108.3 million for losses on hedging positions for 1999 in both crude oil and
natural gas products. Other revenues realized a decrease of
-20-
<PAGE> 21
$58.3 million, largely due to inclusion of the $128.5 million Matagorda property
gain on sale in 1998 results which more than offsets gains from 1999 property
sales.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------
1999 1998 1999 1998
------ ------ ------ ------
(without hedging) (with hedging)
<S> <C> <C> <C> <C>
Average price realizations - exploration and production:
Natural gas (per Mcf) ................................... $ 1.84 $ 1.77 $ 1.71 $ 1.79
Natural gas liquids (per Bbl) ........................... 9.90 8.09 9.90 8.09
Crude oil (per Bbl) ..................................... 13.58 10.72 11.60 10.76
Average (per Mcfe) ...................................... 1.94 1.74 1.78 1.75
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Production volumes - exploration and production:
Natural gas (MMcfd)............................................... 1,302.7 1,452.7
Natural gas liquids (MBbld)....................................... 27.9 34.7
Crude oil (MBbld)................................................. 120.0 138.1
Total (MMcfed).................................................... 2,190.1 2,489.7
</TABLE>
Exploration and production sales volumes of 2,190.1 MMcfed decreased 299.6
MMcfed (12%) from 1998 results, primarily due to the effect of property sales
(approximately 178 MMcfed) and production declines related to reduced capital
spending levels. Results for 1999 include nine months of sales volumes for
Norcen Acquisition properties in 1999 compared to seven months in 1998.
Latin American sales volumes improved 37.4 MMcfed over the first nine
months of 1998. The inclusion of two additional months of sales volumes in
1999 more than offset the decline resulting from lower capital spending in
Guatemala and Venezuela. Canadian sales volumes were down 42.9 MMcfed primarily
related to the impact of property sales (approximately 71 MMcfed) that were
partially offset by an additional two months of production. US Offshore
production was down 52.9 MMcfed as the impact of property sales (approximately
46 MMcfed) and production declines offset the additional two months of
production from Norcen Acquisition properties. US Onshore sales volumes were
down 241.3 MMcfed, reflecting the decline in capital spending and effects of
property sales. The portion of the US Onshore sales volume reduction
attributable to property sales was approximately 61 MMcfed.
Natural gas sales volumes decreased 150.0 MMcfd to 1,302.7 MMcfd,
principally reflecting the sale of the Matagorda property in the third quarter
of 1998 and other property sales, and production declines for existing
properties, offset by the inclusion of two additional months of sales volumes
from Norcen properties in 1999.
Natural gas liquid sales volumes decreased 6.8 MBbld to 27.9 MBbld. The
decline was largely related to the sale of the Matagorda property and the
Canadian Caroline property during the last year and production declines,
partially offset by improved natural gas liquids sales volumes due to ethane
recovery in US Onshore for most of 1999.
Crude oil sales volumes declined 18.1 MBbld to 120.0 MBbld for the first
nine months of 1999. The decrease reflects production declines in Canada and US
Onshore as well as property sales, offset by two additional months of Norcen
property sales volumes in 1999. Latin America sales volumes improved 6.1 MBbld
largely due to the inclusion of two additional months of Norcen production in
1999 versus 1998.
-21-
<PAGE> 22
OPERATING EXPENSES
Production expenses of $288.8 million for the first nine months of 1999
were down $48.4 million from 1998. Production costs per unit improved from $0.50
per Mcfe last year to $0.48 for 1999. Total lease operating expenses declined
$50.4 million primarily due to property sales and cost reduction efforts that
were initiated in late 1998. The reduction was significant considering that 1999
results include nine months of expenses related to Norcen Acquisition properties
versus seven months in 1998. Lease operating expenses on a per unit basis
dropped from $0.34 per Mcfe in 1998 to $0.30 per Mcfe. Production and property
taxes increased $4.4 million from last year, reflecting increased product prices
for US Onshore operations and higher Guatemalan governmental participation due
to higher crude oil revenues, also related to higher prices. Production overhead
costs were down $1.8 million from 1998, including $3.6 million of costs related
to the January 1999 restricted stock awards. The majority of the overhead
savings in 1999 were the result of lower personnel and related costs in
connection with the recent reductions in force.
Exploration expenses of $152.4 million were down $77.2 million from the
first nine months of 1998, primarily reflecting the reduced capital spending
program. Dry hole expense decreased by $40.9 million, geological and geophysical
costs were $24.9 million lower and surrendered lease costs dropped $5.8 million,
net of a $4.5 million charge for impairment of a south Louisiana property.
Exploration overhead costs declined $4.0 million from lower personnel and
computer costs caused by recent staff reductions.
DD&A expenses declined $81.3 million from last year to $616.8 million for
the first nine months of 1999. Included in the 1999 results is $61.1 million
related to the impairment of certain US Onshore properties. Excluding the
impairment, lower production volumes caused an $84.0 million reduction, while
lower rates produced a $58.4 million decline. Per unit rates were down from
$1.03 per Mcfe last year to $0.93 per Mcfe in 1999 largely as a result of the
asset impairment write-down recorded by the Company in December 1998.
MINERALS OPERATIONS
OPERATING INCOME
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
--------- ---------
(Millions of dollars)
<S> <C> <C>
Coal .................... $ 70.8 $ 86.2
Soda ash ................ 22.3 26.1
Other ................... 1.6 1.4
------ ------
Total ............... $ 94.7 $113.7
====== ======
</TABLE>
Operating income for Minerals was $94.7 million for the first nine months
of 1999, down $19.0 million from last year. Equity income from the Black Butte
joint venture declined $12.1 million, reflecting lower sales volumes. Coal
royalty income decreased by $3.2 million from lower sales volumes as mining
operations focused on federal sections, and soda ash royalties decreased $3.2
million. Results from 1998 include a $2.0 million gain on the sale of industrial
minerals properties.
-22-
<PAGE> 23
GENERAL AND ADMINISTRATIVE AND OTHER
General and administrative expenses of $69.7 million were down $2.5 million
from the first nine months of 1998. Included in 1999 costs were $11.2 million of
expenses related to the January 1999 restricted stock awards. Offsetting these
expenses were reductions in several cost categories reflecting savings from the
late 1998 and early 1999 reductions in force, early retirement programs and the
GPM Disposition. A restructuring charge of $14.5 million related to the
Company's reorganization effort was recorded in the first quarter of 1999.
Other income increased $74.3 million over 1998 to $41.4 million for the
first nine months of 1999. Foreign currency gains of $30.0 million related to
the remeasurement of U.S. dollar denominated monetary assets and liabilities in
Canada caused the majority of the improvement compared to the inclusion in 1998
results of a $43.4 million charge for the same issue. Included in 1999 results
was $27.6 million of interest income from the Canadian ($7.1 million) and UPC
($20.5 million) tax settlements that offset 1998 interest income of $8.2 million
from excess cash reserves. There also was a charge of $13.0 million related to
the revaluation of the firm transportation keep-whole agreement in 1999 results.
Interest expense was $167.6 million for the first nine months of 1999, down
$11.9 million from 1998. The decrease was primarily due to the retirement of
debt with the proceeds from the GPM Disposition and other property sales. This
reduction partially offset the effect of nine months of debt from the Norcen
Acquisition in 1999 compared to only seven months during 1998.
Income taxes were a benefit of $82.8 million in 1999 compared to a benefit
of $61.0 million in 1998. Included in 1999 results were a $27.9 million benefit
related to the Canadian tax settlement and a $11.9 million benefit related to
the UPC tax settlement. Other benefits in 1999 included $25.5 million from the
foreign currency remeasurement of deferred tax liabilities in Guatemala and
Venezuela. These income tax benefits were offset by improvement in taxable
income compared to last year. Section 29 credits of $10.2 million were recorded
in 1999 compared to $12.3 million last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash during the first nine months of 1999
were the proceeds from the GPM Disposition and sales of other properties,
proceeds from issuance of debt and cash provided by operations. Cash outflows
for the first nine months of 1999 included repayment of commercial paper,
capital investment and exploratory expenditures and cash used by discontinued
operations.
Cash from operations was $697.2 million for the first nine months of 1999,
a $321.0 million decrease from the prior year period. The $180.9 million
decrease in the changes in current assets and liabilities and the $275.2 million
decrease in other non-cash charges were primarily the result of working capital
and other miscellaneous assets and liabilities acquired in the Norcen
Acquisition.
-23-
<PAGE> 24
Cash provided from investing activities was $1.1 billion for the first nine
months of 1999, compared to a use of $3.3 billion in the first nine months of
1998. The Company received $1.36 billion on the 1999 GPM Disposition, while
using $2.6 billion in 1998 for the Norcen Acquisition. Discontinued operations
also required a use of cash of $202.4 million in 1999 compared to $176.7 million
provided from discontinued operations last year.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
CAPITAL AND EXPLORATORY EXPENDITURES 1999 1998
----------- -----------
(Millions of dollars)
<S> <C> <C>
Exploration and production
Exploration ................................ $ 58.9 $ 260.9
Production ................................. 217.2 706.4
Property purchases ......................... 13.8 112.6
-------- --------
Total exploration and production ............ 289.9 1,079.9
Minerals, G&A and other .......................... 1.7 38.1
-------- --------
Sub-total continuing operations ............. 291.6 1,118.0
Norcen purchase price ............................ -- 2,634.3
-------- --------
Continuing operations ....................... $ 291.6 $3,752.3
======== ========
Discontinued operations - GPM .................... $ 32.9 $ 75.4
</TABLE>
Exploration and production capital spending was down $790.0 million to
$289.9 million, principally reflecting the effort to control capital spending in
light of depressed product prices earlier in 1999 and to achieve debt reduction
goals. The major categories of capital spending included development drilling
($162.7 million), other development capital ($54.5 million) and exploratory
drilling ($22.6 million). Exploration and development drilling by area included
$102.7 million in the US Onshore, $23.7 million in the US Offshore, $44.4
million in Canada and $14.5 million in Latin America, including $11.5 million in
Venezuela.
Property purchases of $13.8 million in 1999 primarily reflected the
purchase of a partner's interest in west Texas properties. Minerals, G&A and
other capital was down $36.4 million to $1.7 million. Spending in 1998 included
costs related to the Fort Worth office relocation.
Cash flows from financing activities were a $1.7 billion use of cash for
1999 as the Company repaid $2.1 billion in debt, partially offset by the
issuance of new debt. Cash provided from financing activities was $2.2 billion
in 1998, as the Company financed its acquisition of Norcen through proceeds from
debt issuance and commercial paper. In April 1999, the Company issued $200
million 7.3% Notes due April 15, 2009, and $300 million 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. Its commercial
paper ratings were downgraded by Standard & Poor's to A3 and by Moody's to P3.
Fitch IBCA has continued to rate the Company's senior unsecured credit with a
BBB+ rating.
The Company did not renew its $750 million 364 Day Competitive
Advance/Revolving Credit Agreement after its expiration in October 1999. The
Company's $750 million Five-Year Competitive Advance/Revolving Credit Agreement,
entered into in October 1998, will remain in place.
-24-
<PAGE> 25
As of September 30, 1999, and December 31, 1998, the total capitalization
of the Company was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
(Millions of dollars)
<S> <C> <C>
Long-term and short-term debt:
Commercial paper and other, net ...................... $ 209.3 $2,351.9
Notes and debentures ................................. 2,725.0 2,225.0
Capital lease obligations ............................ 16.7 17.4
(Discount) premium on notes and debentures - net ..... 18.1 4.4
-------- --------
Total debt ........................................ 2,969.1 4,598.7
Shareholders' equity ....................................... 880.3 728.2
-------- --------
Total capitalization ................................. $3,849.4 $5,326.9
======== ========
Debt to total capitalization ............................... 77.1% 86.3%
</TABLE>
The Company anticipates total capital spending of approximately $450
million for 1999 and approximately $700 million for 2000, with focus on
development projects that generate more immediate cash flow. At the end of the
third quarter, the Company had commenced drilling three more Frontier horizontal
wells in the Rockies area to delineate its earlier success. It also is
continuing its low risk drilling program in the Deep Giddings field of the
Austin Chalk. In US Offshore, the Company is negotiating with a party to reduce
its capital exposure in the Gomez project by selling or transferring a portion
of its working interest. The next Gomez well is planned to commence in the first
half of 2000. In the fourth quarter, the Company plans several exploratory wells
in south Louisiana, two exploratory wells and two horizontal development wells
in Guatemala and an exploratory well in northeast British Columbia, Canada. Also
in Canada, the Company has begun a 30 well heavy oil program for the fourth
quarter 1999, which extends to approximately 100 wells in 2000.
The Company plans to fund its operations and capital program primarily with
cash generated from operations. While no significant oil and gas property sales
are currently planned for the remainder of 1999, the potential exists for
additional gains to be recognized related to properties sold earlier in 1999.
Excluding property sales, production sales volumes are expected to decline
in 1999 from 1998 levels, as a result of lower capital spending. The Company
expects sales volumes to be approximately 2,160 MMcfed for 1999. With increased
drilling activity in the second half of 1999 and higher capital spending for
2000, the Company expects to stabilize the production decline. The Company's
ability to replace reserves in 1999 has been impacted by the postponement of
the Gomez well until 2000, together with the production declines related to
reduced capital spending. Therefore, the Company does not currently anticipate
that it will fully replace reserves in 1999.
Crude oil and natural gas prices have risen sharply since the beginning of
1999 and the outlook for the remainder of the year and into next year is
favorable for both products. The Company expects to continue to experience
commodity price fluctuations and manages a portion of its price risk with
hedging activities; however, lower 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 September 30, 1999.
-25-
<PAGE> 26
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
In the areas of IT infrastructure, information systems, and process control
and embedded technology, the Company has completed remediation, verification and
deployment phases of its readiness program for critical systems. The Company has
also implemented "Year 2000 clean management" procedures to ensure that Year
2000 readiness is maintained and that any changes to these technology
environments are carefully managed for Year 2000 readiness.
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 Securities and Exchange Commission
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 focused on business contingency planning in
recognition of the uncertainties inherent in evaluating third-party readiness.
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 essentially completed its initial Year 2000
business contingency plans as of July 1999, and completed a scheduled review and
update of these plans in September 1999. To incorporate future changes in status
information available from third parties, an additional update of these
contingency plans is scheduled for 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 Year 2000
related costs embedded in the cost of replacing its information systems between
1993 and 1997, the Company anticipates spending a total of between $2.0 million
-26-
<PAGE> 27
and $2.5 million during 1998 and 1999 for Year 2000 related modifications and
testing. This estimate is $0.5 million lower than the previous estimate due to
the lower than anticipated incidence of Year 2000 issues in the process control
and embedded technology area. 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 believes that its Year 2000 Readiness Program has
significantly reduced the possibility of significant interruptions of normal
operations.
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) slowdowns 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 Securities and Exchange Commission (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 sales 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," "could",
"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 crude oil, natural 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 crude oil and natural 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.
-27-
<PAGE> 28
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, the ability
to find working interest partners to share certain capital risks 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 sales 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 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.
-28-
<PAGE> 29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the GPM Disposition, 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 sales
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 Disposition.
COMMODITY PRICE RISK -- NON-TRADING ACTIVITIES
The Company uses derivative financial instruments for non-trading purposes
in the normal course of business to manage and reduce risks associated with
price volatility, contractual commitments and other market variables. The
Company's hedging approach is designed to respond to changing market conditions
where practicable, while at the same time evaluating the need to protect against
significant commodity price reductions. The volume of production hedged and the
mix of derivative instruments employed are regularly evaluated and adjusted in
response to changing market conditions and Company objectives.
Utilization of the Company's hedging program may result in crude oil and
natural gas prices varying from market prices. Due to these pricing differences,
revenues were lower by $108.3 million, in the first nine months of 1999.
The following table summarizes the Company's open positions at September 30,
1999, which hedge the Company's future crude oil and natural 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 Nov - Dec 1999 150MMcfd $2.38 $ 0.5 $ 0.5
Gas Calls Sold Nov - Dec 1999 150MMcfd $3.04 (1.5) (1.5)
Gas Puts Purchased Jan - Jul 2000 150MMcfd $2.31 4.3 4.3
Gas Calls Sold Jan - Jul 2000 150MMcfd $2.85 (7.0) (7.0)
Gas Puts Purchased Aug - Sep 2000 250MMcfd $2.25 1.7 1.7
Gas Calls Sold Aug - Sep 2000 250MMcfd $2.66 (3.2) (3.2)
Gas Swaps Nov - Dec 1999 100MMcfd Var. (0.3) (0.3)
Gas Swaps Jan - Mar 2000 100MMcfd Var. (0.3) (0.3)
Gas Futures Nov - Dec 1999 200MMcfd $2.64 (2.5) (2.5)
Gas Futures Nov - Dec 1999 5MMcfd $2.28 (0.2) (0.2)
Gas Futures Jan - Jul 2000 200MMcfd $2.46 (8.0) (8.0)
Gas Fixed Price Oct - Dec 1999 20MMcfd $2.12 (0.6) (0.6)
Gas Fixed Price Jan - Oct 2000 10MMcfd $2.80 1.7 1.7
Gas Fixed Price Jan - Dec 2000 10MMcfd $1.54 (2.7) (2.7)
Gas Fixed Price Jan - Oct 2001 10MMcfd $1.54 (2.0) (2.0)
Gas Physical Call Apr - Oct 2000 14MMcfd $2.17 (0.1) 0.3
Oil Puts Purchased Jan - Dec 2000 29.5MBbld $17.00 7.5 7.5
Oil Calls Sold Jan - Dec 2000 29.5MBbld $21.46 (19.3) (19.3)
Oil Swaps Oct - Dec 1999 70MBbld $14.51 (60.7) (60.7)
Oil Swaps Jan - Aug 2000 8MBbld $18.96 (4.4) (4.4)
Oil Swaps Sep - Dec 2000 4MBbld $18.81 (0.3) (0.3)
Oil Swaps Oct - Dec 1999 2MBbld $16.08 (0.2) (0.2)
Oil Swaps Jan - Dec 2000 2MBbld $16.08 (0.4) (0.4)
Oil Fixed Price Oct - Dec 1999 2MBbld $18.38 0.1 0.1
Oil Fixed Price Jan - Feb 2000 2MBbld $18.38 0.0 0.0
Oil Fixed Price Oct - Dec 1999 2MBbld $15.64 (0.1) (0.1)
Oil Fixed Price Jan - Oct 2000 2MBbld $15.64 (0.5) (0.5)
Oil Fixed Price Oct - Dec 1999 8MBbld $18.28 0.1 0.1
Oil Fixed Price Jan - Apr 2000 8MBbld $18.28 0.3 0.3
Oil Fixed Price Oct - Dec 1999 2MBbld $18.83 0.0 0.0
------ ------
Totals: $(98.1) $(97.7)
====== ======
</TABLE>
-29-
<PAGE> 30
The following table summarizes the Company's closed positions at September
30, 1999, relating to the Company's natural gas production:
<TABLE>
<CAPTION>
UNRECOGNIZED
GAIN/(LOSS)
PRODUCT TYPE TIME PERIOD (MILLIONS)
------- ---- ----------- ----------
<S> <C> <C> <C>
Gas Options Oct 1999 $ (2.0)
Gas Futures/Swaps Oct 1999 (4.0)
------
Totals: $ (6.0)
======
</TABLE>
At September 30, 1999, the Company had margin deposits of $56.1 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 September 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVG. UNRECOGNIZED
CONTRACT PRICE FAIR VALUE GAIN/(LOSS)
PRODUCT TYPE TIME PERIOD VOLUME PER MCF (MILLIONS) (MILLIONS)
------- ---- ----------- ------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gas Futures/Swaps Nov - Dec 1999 4.0Bcf $3.16 $ 0.4 $ 0.4
Purchased
Gas Futures/Swaps Jan - Dec 2000 8.8Bcf $3.00 1.6 1.6
Purchased
Gas Futures/Swaps Jan - Apr 2001 0.2Bcf $3.17 0.1 0.1
Purchased
Gas Futures/Swaps Nov - Dec 1999 2.1Bcf $3.28 0.2 0.2
Sold
Gas Futures/Swaps Jan - Dec 2000 5.8Bcf $2.87 (1.2) (1.2)
Sold
----- -----
Totals: $ 1.1 $ 1.1
===== =====
</TABLE>
The Company was a party to several long-term firm gas transportation
agreements that supported the gas marketing program within the GPM segment sold
to Duke. Most of these firm transportation contracts were transferred to Duke
as part of the GPM Disposition. As part of the GPM Disposition, the Company has
agreed to keep Duke whole if the transportation market value falls below the
contract transportation rates, while Duke will pay the Company if the market
value exceeds the contract transportation rates. This keep-whole commitment is
in effect for the ten-year period commencing on March 31, 1999. The fair value
of these contracts at September 30, 1999, was a loss of $106.2 million, which
is included in other current liabilities and other long-term liabilities on the
Condensed Consolidated Statement of Financial Position. The Company may adjust
its reserve based on changes in current quoted future market rates or estimated
long-term rates. Such adjustments could be significant. Management does not
believe a meaningful, permanent change has occurred to transportation rates in
the market place. However, at September 30, 1999, if the Company had used
current quoted future market rates to estimate the long-term portion of the
reserve, the Company would have recorded an additional reserve of $60.4 million
for the keep-whole commitment period.
-30-
<PAGE> 31
FOREIGN CURRENCY RISK
The Company periodically enters into foreign currency contracts to hedge
specific currency exposures from commercial transactions. The following table
summarizes the Company's open foreign currency positions at September 30, 1999:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT FAIR VALUE
YEAR (US$ MILLIONS) FORWARD RATE (US$ MILLIONS)
---- -------------- ------------ --------------
<S> <C> <C> <C>
1999 ......... $ 36.0 C$1.3535 $ (2.9)
2000 ......... 8.0 C$1.3750 (0.5)
2004 ......... 70.0 C$1.3630 (5.1)
--------- ---------
$ 114.0 $ (8.5)
========= =========
</TABLE>
As a result of the Norcen Acquisition, the Company acquired foreign currency
forward exchange contracts with 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 September 30, 1999, excluding
the $2.7 million remaining unamortized deferred liability, was $5.8 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 segment to Duke. As a result, the Company
has eliminated all price/rate risk related 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 September 30, 1999, the Company's credit risk related to these
positions was immaterial.
To eliminate price risk associated with the forward sale transaction entered
into by the Company in March 1999, the Company entered into a swap transaction
that was in a closed position at September 30, 1999. At September 30, 1999, the
unrealized gain relating to this financial transaction was $21.7 million.
At September 30, 1999, the Company's largest credit risk associated with any
single counterparty, represented by the net fair value of open contracts, was
$7.0 million.
In connection with the GPM Disposition, the Company entered into a long-term
sales agreement with Duke, which obligates the Company to sell most of its
domestic natural gas and natural gas liquids 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.
-31-
<PAGE> 32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MINERAL RESERVATION LITIGATION
In August 1994, the surface owners (McCormick, et al.) of portions of five
sections of Colorado land that are subject to mineral reservations made by the
Company's predecessor in title brought suit against the Company in State
District Court, Weld County, Colorado, to quiet title to minerals, including
crude oil (in some of the lands) and natural gas. On June 23, 1997, the State
District Court granted the Company's motion for summary judgment, holding as a
matter of law that the mineral reservations at issue were unambiguous and
included all valuable nonsurface substances, including oil and gas. The Colorado
Court of Appeals affirmed the decision of the State District Court in granting
the Company's motion for summary judgment on December 10, 1998 and then denied
the surface owners' motion for rehearing. The surface owners then filed a
Petition for Writ with the Colorado Supreme Court, which was granted in
September, 1999. Oral arguments are expected to be heard during the first
half of 2000.
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 materially 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
<TABLE>
<S> <C>
10.1 Form of Agreement relating to Change in Control by and between Union
Pacific Resources Group Inc. and George Lindahl III, dated October 21,
1999, superceding and replacing the agreement dated
February 4, 1997.
10.2 Settlement and Release Agreement by and between Union Pacific Resources
Group Inc. and V. Richard Eales, effective September 1, 1999.
11 Computation of earnings per share.
12 Computation of ratio of earnings to fixed charges.
15 Awareness letter of Arthur Andersen LLP dated November 12, 1999.
27 Financial data schedule.
</TABLE>
-32-
<PAGE> 33
(b) REPORTS ON FORM 8-K
On August 3, 1999, the Company filed a Current Report on Form
8-K under Item 5, containing (i) a press release issued by the
Registrant on July 15, 1999, announcing the retirement of the
Registrant's Chairman and Chief Executive Officer, Jack L. Messman and
announcing that Mr. Messman was succeeded by George Lindahl III who the
Board of Directors elected unanimously as Chairman of the Board,
President and Chief Executive Officer and (ii) a press release issued
by the Registrant on July 27, 1999, announcing the Company's financial
results for the second quarter of 1999, including operating revenues,
net income and certain other financial information.
-33-
<PAGE> 34
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: November 12, 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)
-34-
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 Form of Agreement relating to Change in Control by and between Union
Pacific Resources Group Inc. and George Lindahl III, dated October 21,
1999, superceding and replacing the agreement dated February 4, 1997.
10.2 Settlement and Release Agreement by and between Union Pacific Resources
Group Inc. and V. Richard Eales, effective September 1, 1999.
11 Computation of earnings per share.
12 Computation of ratio of earnings to fixed charges.
15 Awareness letter of Arthur Andersen LLP dated November 12, 1999.
27 Financial data schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AGREEMENT
THIS AGREEMENT, dated October 21, 1999, is made by and between UNION
PACIFIC RESOURCES GROUP INC., a Utah corporation (the "Company"), and GEORGE
LINDAHL III (the "Executive").
WHEREAS, the Company considers it essential to the best interests of
its shareholders to facilitate the recruitment and foster the continuous
employment of senior executive officers; and
WHEREAS, the Board recognizes that, as is the case with many publicly
held corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it raises, may result in
the departure or distraction of the Company's senior executive officers to the
detriment of the Company and its shareholders; and
WHEREAS, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of the
Company's senior executive officers, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. DEFINED TERMS. The definitions of capitalized terms used in this
Agreement are provided in the last Section hereof.
2. COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive to
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 3 hereof, the Company agrees, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein in the event the Executive's
employment with the Company is (or, under the terms of this Agreement, is deemed
to have been)
-1-
<PAGE> 2
terminated following a Change in Control and during the term of this Agreement.
Except as provided herein, no amount or benefit shall be payable under this
Agreement unless there shall have been (or, under the terms of this Agreement,
there shall be deemed to have been) a termination of the Executive's employment
with the Company following a Change in Control and during the term of this
Agreement. This Agreement shall not be construed as creating an express or
implied contract of employment and, except as otherwise agreed in writing
between the Executive and the Company, the Executive shall not have any right to
be retained in the employment of the Company.
3. THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to the
terms and conditions of this Agreement, in the event of a Potential Change in
Control during the term of this Agreement, the Executive will remain in the
employ of the Company until the earliest of (i) a date which is six (6) months
following the date of such Potential Change in Control, (ii) the date of a
Change in Control, (iii) the date of termination by the Executive of the
Executive's employment for Good Reason or by reason of death, Disability or
Retirement, or (iv) the termination by the Company of the Executive's employment
for any reason.
4. TERM OF AGREEMENT. This Agreement shall commence on the date hereof
and shall continue in effect for a period of thirty-six (36) months beyond the
month in which a Change in Control occurs (or, if later, thirty-six (36) months
beyond the consummation of the transaction the approval of which by the
Company's shareholders constitutes a Change in Control under Section 15(E)(III)
or (IV) hereof).
5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS.
5.1 Following a Change in Control and during the term of this
Agreement, if the Executive fails to perform the Executive's full-time duties
with the Company as a result of incapacity due to physical or mental illness,
the Company shall pay the Executive's full salary to the Executive at the rate
in effect at the commencement of the relevant period, together with all
compensation and benefits payable to the Executive under the terms of any
compensation or benefits plan, program or
-2-
<PAGE> 3
arrangement maintained by the Company during such period, until the Executive's
employment is terminated by the Company for Disability.
5.2 If the Executive's employment is terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits to which the Executive is
entitled in respect of all periods preceding the Date of Termination under the
terms of the Company's compensation and benefits plans, programs or
arrangements.
5.3 If the Executive's employment is terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay the Executive's normal post-termination compensation and benefits to
the Executive as such payments become due. Such post-termination compensation
and benefits shall be determined under, and paid in accordance with, the
Company's retirement, insurance and other compensation or benefit plans,
programs and arrangements.
5.4 Notwithstanding any provision herein or any provision in the
Company's 1995 Stock Option and Retention Stock Plan (or any agreement entered
into thereunder) to the contrary (except any contrary provision dealing with a
pooling of interests transaction), (A) upon a Change in Control, any Option then
held by the Executive (other than an Option the exercisability of which is based
exclusively on the attainment of performance targets which, at the time of the
Change in Control, have not been met), shall be fully exercisable and any
restriction on any Retention Share then held by the Executive (other than a
Retention Share the vesting of which is based exclusively on the attainment of
performance targets, which, at the time of the Change in Control, have not been
met) shall lapse or be deemed fully satisfied, as applicable, and (B) if,
following a Change in Control and during the term of this Agreement, the
Executive is terminated by the Company for any reason other than Cause or the
Executive terminates with Good Reason, then, with respect to any Option then
held by the Executive, the Executive (or his Beneficiary, if applicable) shall
have the right to exercise such Option at any time during the earlier or (i) the
five-year period following such termination or (ii) the term of the Option;
-3-
<PAGE> 4
provided, however, that, with respect to any provision in (A) or (B) in this
Section 5.4, if it is intended that the transaction constituting a Change in
Control be accounted for as a pooling of interests under Accounting Principles
Board Opinion No. 16 (or any successor thereto), and if the existence and/or
operation of any such provision would violate Paragraph 47(c) thereof (or any
successor thereto), then any such provision shall (in whole or in part to the
minimum extent necessary to avoid a violation) be deemed null and void ad initio
and/or any operation of such provision shall (in whole or in part to the minimum
extent necessary to avoid a violation) be deemed to have no force or effect
under law; provided further, however, that the foregoing proviso shall apply
only if the transaction is otherwise eligible to be accounted for as a pooling
of interests.
6. SEVERANCE PAYMENTS.
6.1 Subject to Section 6.2 hereof, the Company shall pay the
Executive the payments described in this Section 6.1 (the "Severance Payments")
upon the termination of the Executive's employment following a Change in Control
and during the term of this Agreement, in addition to any payments and benefits
to which the Executive is entitled under Section 5 hereof, unless such
termination is (i) by the Company for Cause, (ii) by reason of the Executive's
death or Disability, or (iii) by the Executive without Good Reason. For purposes
of this Agreement, the Executive's employment shall be deemed to have been
terminated by the Company without Cause or by the Executive with Good Reason
following a Change in Control if, following a Potential Change in Control, (i)
the Executive's employment is terminated without Cause prior to a Change in
Control and such termination was at the request or direction of a Person who has
entered into an agreement with the Company the consummation of which would
constitute a Change in Control, (ii) the Executive terminates his employment
with Good Reason prior to a Change in Control and the circumstance or event
which constitutes Good Reason occurs at the request or direction of such Person,
or (iii) the Executive's employment is terminated without Cause prior to a
Change in Control and such termination is otherwise in connection with or in
anticipation of a Change in Control which actually occurs. For purposes of any
determination regarding the applicability of the immediately preceding sentence,
any position taken by the Executive shall be presumed to be correct unless the
Company establishes to the
-4-
<PAGE> 5
Board by clear and convincing evidence that such position is not correct.
Notwithstanding the foregoing, if the Executive terminates employment with the
Company by means of a Discretionary Termination, he shall be entitled to 50% of
the Severance Benefits set forth in (A) - (F) below.
(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Executive, the Company shall
pay to the Executive a lump sum severance payment, in cash, equal to
three (3) times the sum of (i) the greater of the Executive's annual
base salary in effect immediately prior to the occurrence of the event
or circumstance upon which the Notice of Termination is based or the
Executive's annual base salary in effect immediately prior to the
Change in Control, and (ii) the greater of the average of the annual
bonuses earned or received by the Executive from the Company or its
subsidiaries in respect of the two (2) consecutive fiscal years
immediately preceding that in which the Date of Termination occurs or
the average of the annual bonuses so earned or received in respect of
the two (2) consecutive fiscal years immediately preceding that in
which the Change in Control occurs.
(B) Notwithstanding any provision of any annual or long-term
incentive plan to the contrary, the Company shall pay to the Executive
a lump sum amount, in cash, equal to the sum of (i) any incentive
compensation which has been allocated or awarded to the Executive for a
completed fiscal year or other measuring period preceding the Date of
Termination under any such plan but which, as of the Date of
Termination, is contingent only upon the continued employment of the
Executive to a subsequent date or otherwise has not been paid, and (ii)
a pro rata portion to the Date of Termination of the aggregate value of
all contingent incentive compensation awards to the Executive for all
then uncompleted periods under any such plan, calculated as to each
such award by multiplying the award that the Executive would have
earned on the last day of the performance award period, assuming the
achievement, at the target level, of the individual and corporate
performance goals established with respect to such award, by the
fraction obtained by dividing the number of full months and
-5-
<PAGE> 6
any fractional portion of a month during such performance award period
through the Date of Termination by the total number of months contained
in such performance award period.
(C) Notwithstanding any provision of the Company's supplemental
pension and thrift plans (the "Supplemental Plans") to the contrary,
upon the termination of the Executive's employment by the Executive for
Good Reason or by the Company, in either case at any time following the
occurrence of a Change in Control and during the term of this
Agreement, the Executive shall be deemed to have an additional
thirty-six (36) months of benefit credit under each of the Supplemental
Plans and shall be entitled to receive such additional credit either
(1) as part of the benefit otherwise payable under the Supplemental
Plan or (2) as a lump sum.
(D) For the thirty-six (36) month period immediately following
the Date of Termination, the Company shall arrange to provide the
Executive with life, disability, accident and health insurance benefits
substantially similar to those which the Executive is receiving
immediately prior to the Notice of Termination (without giving effect
to any amendment to such benefits made subsequent to a Change in
Control which amendment adversely affects in any manner the Executive's
entitlement to or the amount of such benefits); provided, however,
that, unless the Executive consents to a different method (after taking
into account the effect of such method on the calculation of "parachute
payments" pursuant to Section 6.2 hereof), such health insurance
benefits shall be provided though a third-party insurer. Benefits
otherwise receivable by the Executive pursuant to this Section 6.1(D)
shall be reduced to the extent comparable benefits are actually
received by the Executive without cost during the thirty-six (36) month
period following the Executive's termination of employment (and any
such benefits actually received by the Executive shall be reported to
the Company by the Executive).
(E) If the Executive would have become entitled to benefits
under the Company's post-retirement health care or life insurance plans
had the Executive's employment
-6-
<PAGE> 7
terminated at any time during the period of thirty-six (36) months
after the Date of Termination, the Company shall provide such
post-retirement health care or life insurance benefits to the Executive
commencing on the later of (i) the date that such coverage would have
first become available and (ii) the date that like benefits described
in subsection (D) of this Section 6.1 terminate.
(F) From and after the occurrence of Change in Control and
notwithstanding any provision in the Company's 1995 Stock Option and
Retention Stock Plan (or any agreement entered into thereunder or any
successor stock compensation plan or agreement thereunder) to the
contrary, any Option held by the Executive shall be fully exercisable
and any restriction on any Retention Share held by the Executive shall
lapse or be deemed fully satisfied, as applicable.
6.2 (A) Whether or not the Executive becomes entitled to the
Severance Payments, if any payment or benefit received or to be received by the
Executive in connection with a Change in Control or the termination of the
Executive's employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with the Company, any Person whose actions
result in a Change in Control or any Person affiliated with the Company or such
Person) (all such payments and benefits, including the Severance payments, being
hereinafter called "Total Payments") will be subject (in whole or part) to the
Excise Tax, then the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Total Payments and any federal, state
and local income and employment tax and Excise Tax upon the Gross-Up-Payment,
shall be equal to the Total Payments. For purposes of determining the amount of
the Gross-Up Payment, the Executive shall be deemed to pay federal income and
employment taxes at the highest marginal rate of federal income and employment
taxation in the calendar year in which the Gross-Up Payment is to be made and
state and local income taxes at the highest marginal rate of taxation in the
state and locality of the Executive's residence on the Date of Termination, net
of the maximum reduction in federal income taxes which could be obtained from
deduction of such state and local taxes.
-7-
<PAGE> 8
(B) For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amount of such Excise Tax,
(i) all of the Total Payments shall be treated as "parachute payments" within
the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax
counsel (the "Tax Counsel") reasonably acceptable to the Executive and selected
by the accounting firm (the "Auditor") which was, immediately prior to the
Change in Control, the Company's independent auditor, such other payments or
benefits (in whole or in part) do not constitute parachute payments, including
by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute
payments" within the meaning of section 280G(b)(1) of the Code shall be treated
as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess
parachute payments (in whole or part) represent reasonable compensation for
services actually rendered, within the meaning of section 280G(b)(4)(B) of the
Code, in excess of the Base Amount allocable to such reasonable compensation, or
are otherwise not subject to the Excise Tax, and (iii) the value of any noncash
benefits or any deferred payment or benefit shall be determined by the Auditor
in accordance with the principles of section 280G(d)(3) and (4) of the Code.
Prior to the payment date set forth in Section 6.3 hereof, the Company shall
provide the Executive with its calculation of the amounts referred to in this
Section 6.2(B) and such supporting materials as are reasonably necessary for the
Executive to evaluate the Company's calculations. If the Executive disputes the
Company's calculations (in whole or in part), the reasonable opinion of Tax
Counsel with respect to the matter in dispute shall prevail.
(C) In the event that (i) amounts are paid to the Executive
pursuant to subsection (A) of this Section 6.2, and (ii) the Excise Tax is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of the Executive's employment, the Executive shall
repay to the Company, at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-Up Payment attributable to
such reduction plus interest on the amount of such repayment at the rate
provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax
is determined to exceed the amount taken into account hereunder at the time of
the termination of the Executive's employment (including by reason of any
payment the existence or amount of which cannot be determined at the time of the
Gross-Up Payment), the Company shall
-8-
<PAGE> 9
make an additional Gross-Up Payment to the Executive in respect of such excess
(plus any interest, penalties or additions payable by the Executive with respect
to such excess and such portion) at the time that the amount of such excess is
finally determined.
6.3 The payments provided for in subsections (A), (B) and, if
applicable, (C) of Section 6.1 hereof and Section 6.2 hereof shall be made not
later than the fifth day following the Date of Termination; provided, however,
that if the amounts of such payments, or, if applicable, the Excise Tax, cannot
be finally determined on or before such day, the Company shall pay to the
Executive on such day an estimate, as determined in good faith by the Executive
or, in the case of Gross-Up Payments under Section 6.2 hereof, in accordance
with Section 6.2 hereof, of the minimum amount of such payments to which the
Executive is clearly entitled and shall pay the remainder of such payments
(together with interest at the rate provided in section 1274(b)(2)(B) of the
Code) as soon as the amount thereof can be determined but in no event later than
the thirtieth (30th) day after the Date of Termination. In the event that the
amount of the estimated payments exceeds the amount subsequently determined to
have been due, such excess shall constitute a loan by the Company to the
Executive, payable on the fifth (5th) business day after demand by the Company
(together with interest at the rate provided in section 1274(b)(2) (B) of the
Code). At the time that payments are made under this Section, the Company shall
provide the Executive with a written statement setting forth the manner in which
such payments were calculated and the basis for such calculations including,
without limitation, any opinions or other advice the Company has received from
outside counsel, auditors or consultants (and any such opinions or advice which
are in writing shall be attached to the statement). In the event the Company
should fail to pay when due the amounts described in subsections (A), (B) and,
if applicable, (C) of Section 6.1 hereof or Section 6.2 hereof, the Executive
shall also be entitled to receive from the Company an amount representing
interest on any unpaid or untimely paid amounts from the due date, as determined
under this Section 6.3 (without regard to any extension of the Date of
Termination pursuant to Section 7.3 hereof), to the date of payment at a rate
equal to the prime rate of Citibank as in effect from time to time after such
due date.
6.4 The Company also shall pay to the Executive all legal fees and
expenses incurred by the Executive in disputing in good faith any issue relating
to the termination of the
-9-
<PAGE> 10
Executive's employment following a Change in Control (including a termination of
employment following a Potential Change in Control if the Executive alleges in
good faith that such termination will be deemed to have occurred following a
Change in Control pursuant to the second sentence of Section 6.1 hereof) or in
seeking in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made as such fees and
expenses are incurred by the Executive, but in no event later than five (5)
business days after delivery of the Executive's written requests for payment
accompanied with such evidence of fees and expenses incurred as the Company
reasonably may require.
7. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE.
7.1 NOTICE OF TERMINATION. After a Change in Control and during the
term of this Agreement, any purported termination of the Executive's employment
(other than by reason of death) shall be communicated by written Notice of
Termination from one party hereto to the other party hereto in accordance with
Section 10 hereof. For purpose of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. Further, a Notice of Termination
for Cause is required to include a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters (3/4) of the entire membership
of the Board at a meeting of the Board which was called and held for the purpose
of considering such termination (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel, to be
heard before the Board) finding that, in the good faith opinion of the Board,
the Executive was guilty of conduct set forth in clause (i) or (ii) of the
definition of Cause herein, and specifying the particulars thereof in detail.
7.2 DATE OF TERMINATION. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the term of this
-10-
<PAGE> 11
Agreement, shall mean (i) if the Executive's employment is terminated for
Disability, thirty (30) days after Notice of Termination is given (provided that
the Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination by the Company,
shall not be less than thirty (30) days (except in the case of a termination for
Cause) and, in the case of a termination by the Executive, shall not be less
than fifteen (15) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).
7.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days
after any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier of (i) the date on which the term of this Agreement ends
(taking into account any extensions thereof that shall have occurred) or (ii)
the date on which the dispute is finally resolved, either by mutual written
agreement of the parties or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided, however, that the Date of Termination shall be extended by a notice of
dispute given by the Executive only if such notice is given in good faith and
the Executive pursues the resolution of such dispute with reasonable diligence.
7.4 COMPENSATION DURING DISPUTE. If a purported termination occurs
following a Change in Control and during the term of this Agreement and the Date
of Termination is extended in accordance with Section 7.3 hereof, the Company
shall continue to pay the Executive the full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to,
salary) and continue the Executive as a participant in all compensation, benefit
and insurance plans in which the Executive was participating when the notice
giving rise to the dispute was given, until the Date of Termination, as
determined in accordance with Section 7.3 hereof. Amounts paid under this
-11-
<PAGE> 12
Section 7.4 are in addition to all other amounts due under this Agreement s and
shall not be offset against or reduce any other amounts due under this
Agreement.
8. NO MITIGATION. The Company agrees that, if the Executive's
employment with the Company terminates during the term of this Agreement, the
Executive is not required to seek other employment or to attempt in any way to
reduce any amounts payable to the Executive by the Company pursuant to Section 6
hereof or Section 7.4 hereof. Further, the amount of any payment or benefit
provided for in this Agreement (other than Section 6.1(D) hereof) shall not be
reduced by any compensation earned by the Executive as the result of employment
by another employer, by retirement benefits, by offset against any amount
claimed to be owed by the Executive to the Company, or otherwise.
9. SUCCESSORS; BINDING AGREEMENT.
9.1 In addition to any obligations imposed by law upon any successor
to the Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which such succession becomes effective shall be deemed
the Date of Termination.
9.2 This Agreement shall inure to the benefit of and be enforceable
by the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the
-12-
<PAGE> 13
Executive hereunder (other than amounts which, by their terms, terminate upon
the death of the Executive) if the Executive had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the executors, personal representatives or
administrators of the Executive's estate.
10. NOTICES. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address shown for the Executive in the personnel records of
the Company and, if to the Company, to the address set forth below, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon actual receipt:
To the Company:
Union Pacific Resources Group Inc.
777 Main Street
Ft. Worth, TX 76102
Attention: Vice President and General Counsel
11. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of a similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time. This Agreement supersedes any other agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof (i.e., benefits payable to the Executive by reason of the
occurrence of a Change in Control) which have been made by either party. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the laws of the State of Texas. All references to sections of the
Exchange Act or the Code shall be deemed also to refer to any successor
provisions
-13-
<PAGE> 14
to such sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed. The obligations of the
Company and the Executive under Sections 6 and 7 hereof shall survive the
expiration of the term of this Agreement. All obligations of the Company under
this Agreement shall remain unfunded and unsecured for federal income tax
purposes and the Executive's right to any payments shall be that of a general
creditor of the Company. Nevertheless, the Company shall establish a so-called
"rabbi trust" for purposes of providing payments hereunder and, in the event of
a Potential Change in Control, the Company shall immediately transfer to such
rabbi trust sufficient funds to satisfy all payment obligations to the
Executives hereunder.
12. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
13. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. SETTLEMENT OF DISPUTES; ARBITRATION. All claims by the Executive
for benefits under this Agreement shall be directed to and determined by the
Board and shall be in writing. Any denial by the Board of a claim for benefits
under this Agreement shall be delivered to the Executive in writing and shall
set forth the specific reasons for the denial and the specific provisions of
this Agreement relied upon. The Board shall afford a reasonable opportunity to
the Executive for a review of the decision denying a claim and shall further
allow the Executive to appeal to the Board a decision of the Board within sixty
(60) days after notification by the Board that the Executive's claim has been
denied. Any further dispute, controversy or claim arising out of or relating to
this Agreement, or the interpretation or alleged breach thereof, shall be
settled by arbitration in accordance with the Center for Public Resources, Inc.
Non-Administered Arbitration Rules, by three arbitrators, none of whom shall be
appointed by either party. The arbitration shall be governed by United States
Arbitration Act 9 U.S.C. Section 1-16, and judgment upon the award rendered by
the arbitrators may be entered by any court having
-14-
<PAGE> 15
jurisdiction thereof. The place of the arbitration shall be Ft. Worth, Texas.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction. Notwithstanding any provision of this Agreement to the contrary,
the Executive shall be entitled to seek specific performance of the Executive's
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
15. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings indicated below:
(A) "Base Amount" shall have the meaning set forth in section
280G(b)(3) of the Code.
(B) "Beneficial Owner" shall have the meaning set forth in Rule
13d-3 under the Exchange Act.
(C) "Board" shall mean the Board of Directors of the Company.
(D) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive's
duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or its subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, (x) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's act, or failure to
act, was in the best interest of the Company and (y) in the
-15-
<PAGE> 16
event of a dispute concerning the application of this provision, no claim by the
Company that Cause exists shall be given effect unless the Company establishes
to the Board by clear and convincing evidence that Cause exists.
(E) A "Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have occurred:
(I) any Person is or becomes the Beneficial Owner, directly
or indirectly, of securities of the Company (not including in
the securities beneficially owned by such Person any securities
acquired directly from the Company or its affiliates other than
in connection with the acquisition by the Company or its
affiliates of a business) representing 15% or more of either the
then outstanding shares of common stock of the Company or the
combined voting power of the Company's then outstanding
securities; or
(II) the following individuals cease for any reason to
constitute a majority of the number of directors then serving:
individuals who, on the date hereof, constitute the Board and
any new director (other than a director whose initial assumption
of office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation,
relating to the election of directors of the Company (as such
terms are used in Rule 14a-11 of Regulation 14A under the
Exchange Act)) whose appointment or election by the Board or
nomination for election by the Company's shareholders was
approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on the date
hereof or whose appointment, election or nomination for election
was previously so approved; or
(III) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation or
approve the
-16-
<PAGE> 17
issuance of voting securities of the Company in connection with
a merger or consolidation of the Company (or any direct or
indirect subsidiary of the Company) pursuant to applicable stock
exchange requirements, other than (i) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity
or any parent thereof), in combination with the ownership of any
trustee or other fiduciary holding securities under an employee
benefit plan of the Company, at least 50% of the combined voting
power of the voting securities of the Company or such surviving
entity or any parent thereof outstanding immediately after such
merger or consolidation, or (ii) a merger or consolidation
effected to implement a recapitalization of the Company (or
similar transaction) in which no Person is or becomes the
Beneficial Owner, directly or indirectly, of securities of the
Company (not including in the securities Beneficially Owned by
such Person any securities acquired directly from the Company or
its affiliates other than in connection with the acquisition by
the Company or its affiliates of a business) representing 15% or
more of either the then outstanding shares of common stock of
the Company or the combined voting power of the Company's then
outstanding securities; or
(IV) the shareholders of the Company approve a plan of
complete liquidation or dissolution of the Company or an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or
disposition by the Company of all or substantially all of the
Company's assets to an entity, at least 50% of the combined
voting power of the voting securities of which are owned by
Persons in substantially the same proportions as their ownership
of the Company immediately prior to such sale.
-17-
<PAGE> 18
Notwithstanding the foregoing, no "Change in Control" shall be deemed to have
occurred if there is consummated any transaction or series of integrated
transactions immediately following which the record holders of the common stock
of the Company immediately prior to such transaction or series of transactions
continue to have substantially the same proportionate ownership in an entity
which owns all or substantially all of the assets of the Company immediately
following such transaction or series of transactions.
(F) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(G) "Company" shall mean Union Pacific Resources Group Inc. and,
except in determining under Section 15(E) hereof whether or not any Change in
Control of the Company has occurred, shall include its subsidiaries and any
successor to its business and/or assets which assumes and agrees to perform this
Agreement by operation of law, or otherwise.
(H) "Date of Termination" shall have the meaning stated in
Section 7.2 hereof.
(I) "Disability" shall be deemed the reason for the termination
by the Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of six (6) consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability following such consecutive six
(6) month period, and within thirty (30) days after such Notice of Termination
is given, the Executive shall not have returned to the full-time performance of
the Executive's duties.
(J) "Discretionary Termination" shall mean a voluntary
termination of employment by the Executive at any time during the 30-day period
immediately following the first anniversary of the Change in Control.
-18-
<PAGE> 19
(K) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
(L) "Excise Tax" shall mean any excise tax imposed under section
4999 of the Code.
(M) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(N) "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence (without the Executive's
express written consent) after any Change in Control, or after any Potential
Change in Control under the circumstances described in the second sentence of
Section 6.1 hereof (treating all references in paragraphs (I) and (VII) below to
a "Change in Control" as references to a "Potential Change in Control"), of any
one of the following acts by the Company, or failures by the Company to act,
unless, in the case of any act or failure to act described in paragraph (I),
(V), (VI) or (VII) below, such act or failure to act is corrected prior to the
Date of Termination specified in the Notice of Termination given in respect
thereof:
(I) the assignment to the Executive of any duties
inconsistent with the Executive's status as a senior executive
officer of the Company or a substantial alteration in the nature
or status of the Executive's responsibilities from those in
effect immediately prior to the Change in Control other than any
such alteration primarily attributable to the fact that the
Company may no longer be a public company;
(II) a reduction by the Company in the Executive's
compensation (annual base salary plus bonus) as in effect on the
date hereof or as the same may be increased from time to time;
-19-
<PAGE> 20
(III) the relocation of the Company's principal executive
offices to a location more than 50 miles from the location of
such offices immediately prior to the Change in Control or the
Company's requiring the Executive to be based anywhere other
than the Company's principal executive offices except for
required travel on the Company's business to an extent
substantially consistent with the Executive's present business
travel obligations;
(IV) the failure by the Company to pay to the Executive any
portion of the Executive's current compensation or to pay to the
Executive any portion of an installment of deferred compensation
under any deferred compensation program of the Company, within
seven (7) days of the date such compensation is due;
(V) the failure by the Company to continue in effect any
compensation plan in which the Executive participates
immediately prior to the Change in Control which is material to
the Executive's total compensation, including but not limited to
the Company's stock option, restricted stock, stock appreciation
right, incentive compensation, bonus and other plans or any
substitute plans adopted prior to the Change in Control, unless
an equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or
the failure by the Company to continue the Executive's
participation therein (or in such substitute or alternative
plan) on a basis not materially less favorable, both in terms of
the amount of benefits provided and the level of the Executive's
participation, relative to other participants, as existed
immediately prior to the Change in Control;
(VI) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those enjoyed
by the Executive under any
-20-
<PAGE> 21
of the Company's pension, life insurance, medical, health and
accident, or disability plans in which the Executive was
participating immediately prior to the Change in Control, the
taking of any action by the Company which would directly or
indirectly materially reduce any of such benefits or deprive the
Executive of any material fringe benefit enjoyed by the
Executive at the time of the Change in Control, or the failure
by the Company to maintain a vacation policy with respect to the
Executive that is at least as favorable as the vacation policy
(whether formal or informal) in place with respect to the
Executive immediately prior to the Change in Control; or
(VII) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of
Termination satisfying the requirements of Section 7.1 hereof;
for purposes of this Agreement, no such purported termination
shall be effective.
The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be presumed to
be correct unless the Company establishes to the Board by clear and convincing
evidence that Good Reason does not exist.
(O) "Gross-Up Payment" shall have the meaning set forth in
Section 6.2 hereof.
(P) "Notice of Termination" shall have the meaning stated in
Section 7.1 hereof.
-21-
<PAGE> 22
(Q) "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) the Company or any of its affiliated
(as defined in Rule 12b-2 promulgated under the Exchange Act), (ii) a trustee or
other fiduciary holding securities under an employee benefit plan of the Company
or any of its affiliates, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, or (iv) a corporation owned,
directly or indirectly, by the shareholders of the Company in substantially the
same proportions as their ownership of stock of the Company.
(R) "Potential Change in Control" shall be deemed to have
occurred if the event set forth in any one of the following paragraphs shall
have occurred:
(I) the Company enters into an agreement, the consummation
of which would result in the occurrence of a Change in Control;
(II) the Company or any Person publicly announces an
intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control;
(III) any Person becomes the Beneficial Owner, directly or
indirectly, or securities of the Company representing 10% or
more of either the then outstanding shares of common stock of
the Company or the combined voting power of the Company's then
outstanding securities; or
(IV) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has
occurred.
(S) "Retirement" shall be deemed the reason for the termination
of the Executive's employment if such employment is terminated in accordance
with the Company's
-22-
<PAGE> 23
retirement policy generally applicable to its salaried employees, as in effect
immediately prior to the Change in Control, or in accordance with any retirement
arrangement established with the Executive's consent with respect to the
Executive.
(T) "Severance Payments" shall mean those payments described in
Section 6.1 hereof.
(U) "Total Payments" shall mean those payments described in
Section 6.2 hereof.
UNION PACIFIC RESOURCES GROUP INC.
By: /S/ Joseph A. Lasala, Jr.
----------------------------------------------
JOSEPH A. LASALA, JR.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
EXECUTIVE
By: /S/ George Lindahl III
----------------------------------------------
GEORGE LINDAHL III
-23-
<PAGE> 1
EXHIBIT 10.2
SETTLEMENT AND RELEASE AGREEMENT
V. Richard Eales ("Employee") and Union Pacific Resources Group Inc. for itself
and its past and present related companies (collectively the "Company), have
negotiated in good faith the terms of this Settlement and Release Agreement
(this "Agreement") offered by the Company on August 27, 1999, and have reached
the following mutual agreement.
FIRST: SETTLEMENT
Employee shall cease to be an employee of the Company as of close of business
September 1, 1999, the "Separation Date." In consideration for the mutual
covenants and representations herein, Employee agrees to the terms of this
Agreement as set forth below:
1.1 For the period from August 27, 1999, through close of business
September 1, 1999, Employee will be permitted to continue in the employ
of the Company at his current title and base salary provided he does
not give the Company just cause to terminate his employment. Further,
during this period of employment, Employee will not be permitted to
obligate or bind the Company, through agreement or otherwise, without
the prior approval of the Chairman, Chief Executive Officer, and
President, George Lindahl III. In the event of a breach of this
provision, all monies and enhanced benefits provided by the Company
shall be returned by the Employee to the Company.
1.2 The Company will, pursuant to the terms of the Supplemental Pension
Plan for Exempt Salaried Employees of Union Pacific Resources Group
Inc. and Affiliates, provide Employee with a retirement benefit equal
in amount to that which he would have received if he had attained age
65 with 10 years of service on September 1, 1999.
1.3 The Company will pay Employee a lump sum of $236,000.00 with applicable
tax deductions withheld, on the first payday following the expiration
of the Revocation Period, and the Company will agree to pay the entire
premium for COBRA coverage for up to 18 months, beginning October 1999.
1.4 The Company will pay Employee on the first payday following the
expiration of the Revocation Period for all earned but unused 1999
vacation and accrued 2000 vacation in a lump sum, with applicable tax
deductions withheld.
1.5 The Company will make the following disposition on outstanding stock
options and retention stock:
(i) The vesting requirement associated with the grant of
non-qualified stock options on October 1, 1996, will be
waived.
(ii) The vesting restriction on retention shares awarded on October
1, 1996, shall lapse.
(iii) The vesting requirement associated with the grant of incentive
stock options on October 1, 1996, will be waived.
(iv) The vesting requirement associated with the grant of
non-qualified stock options on January 21, 1999, will be
waived as to 60.5% of the options and the remaining options
will be forfeited.
1 Initials _____
<PAGE> 2
1.6 Employee will have the option to elect to continue the following fringe
benefits:
(i) 1999 tax return preparation and financial consulting fees will
be covered by the Company as defined in the Executive Benefits
Manual.
(ii) The Petroleum Club of Fort Worth membership will be
transferred to Employee's name and he will assume the monthly
dues.
(iii) The home security alarm system will be transferred to
Employee's name at no cost and he will assume the monthly fees
for continued operation.
(iv) Mobile hand-held or car phone equipment will be transferred to
Employee's name at no cost and he will assume the monthly fees
for continued operation.
1.7 The Company agrees that the Employee shall not otherwise be eligible to
participate in any of the Company's compensation and benefit programs
after the Separation Date. The foregoing shall not affect Employee's
entitlement to benefits under the Company's 401 (k) and pension plans
that are vested.
1.8 Employee agrees that the benefits provided herein are more than the
Company is required to pay under its normal policies and procedures and
that Employee is not otherwise entitled to such benefits by law or
contract.
1.9 The right of Employee (or any beneficiary of Employee) in any benefit
or to any payment under this Agreement shall not be subject to
attachment or other legal process for debts: and any such benefit or
payment shall not be subject to anticipation, alienation, sale,
transfer, assignment or encumbrance.
SECOND: COMPLETE RELEASE
2.1 In exchange for the Settlement described in the FIRST Paragraph,
Employee hereby releases, covenants not to sue and forever discharges
the Company, its past and present affiliate and subsidiary companies,
its and their past and present directors, officers, employees and
agents and benefit programs (and the trustees, administrators,
fiduciaries and insurers of such programs) and any other persons acting
by, through, under or in concert with any of the persons or entities
listed above, from any and all claims or rights Employee may have (or
which may arise before this Agreement becomes effective), including,
but not limited to, claims based on Employee's employment or the
termination of that employment. This includes, but is not limited to, a
release of claims or rights Employee may have under the federal Age
Discrimination in Employment Act of 1967, as amended, which prohibits
age discrimination in employment; Title VII of the Civil Rights Act of
1964, as amended, and the Civil Rights Act of 1991, which prohibit
discrimination in employment based on race, color, national origin,
religion or sex; The Americans With Disabilities Act of 1990, which
prohibits discrimination against the disabled; or any and all other
federal, state or local laws or regulations or ordinances prohibiting
employment discrimination. Employee also releases any claims for
wrongful discharge, for breach of an express or implied employment
contract or personal injuries arising therefrom, if any. This Agreement
covers both claims that Employee knows about and those Employee may not
know about, but does not release any claims which arise after this
Agreement becomes effective. Employee represents that he has not filed
or caused to be filed a lawsuit asserting any claims that are released
in this Paragraph. Further, Employee agrees not to pursue any charges
or claims or commence any actions of any kind with any local, state or
federal agency or state or federal court pertaining to claims that are
released in this Paragraph. Excluded from this Agreement are claims
which cannot be waived by law, including, but not limited to, the right
2 Initials _____
<PAGE> 3
to file a charge with or participate in an investigation with the EEOC.
Employee is waiving, however, his right to any monetary recovery or
relief should the EEOC or any other agency pursue any claims on his
behalf.
THIRD: NON-ADMISSION OF LIABILITY
3.1 The Company enters into this Agreement to avoid the cost of defending
against any possible lawsuit. By entering into this Agreement, the
Company does not admit that it has done anything wrong.
3.2 The Employee enters into this Agreement as a resolution of all issues
related to his separation from the Company. By entering into this
Agreement, the Employee does not admit that he has done anything wrong.
FOURTH: CONSEQUENCES OF EMPLOYEE VIOLATION OF PROMISES
4.1 If Employee breaks Employee's promise in the Second Paragraph of this
Agreement and files a claim, charge or lawsuit based on legal claims
that Employee has released, Employee will pay for all costs incurred by
the Company, any related companies or the directors or employees of any
of them, including reasonable attorney's fees, in defending against
Employee's claim.
FIFTH: PERIOD OF REVIEW AND CONSIDERATION OF AGREEMENT, SIGNATURE
5.1 Employee acknowledges that Employee has been given a period of 21 days
to review and consider this Agreement before signing it and that this
period will expire at the close of business on September 17, 1999.
Employee further understands that Employee may use as much of the
21-day period as Employee wishes prior to signing. If Employee desires
to enter into this Agreement, Employee should sign it and deliver it to
Anne M. Franklin, Vice President - People, Union Pacific Resources
Group Inc., 777 Main Street, Fort Worth, Texas 76102 or fax to (817)
321-7522 before the close of business on September 17, 1999. This
Agreement will then be effective and enforceable unless Employee
revokes it by following the procedure in the SEVENTH Paragraph. If
Employee does not sign this Agreement and deliver it to Anne M.
Franklin before the close of business on September 17, 1999, this
Agreement will not be effective or enforceable and Employee will not
receive the benefits described in the FIRST Paragraph.
SIXTH: CONSULTATION WITH ATTORNEY
6.1 The Company has advised Employee to consult with an Attorney before
signing this Agreement. Employee understands that whether or not to do
so is Employee's decision. Any costs incurred by Employee as a result
of consulting with an attorney must be paid by Employee.
SEVENTH: EMPLOYEE'S RIGHT TO REVOKE AGREEMENT
7.1 Employee may revoke this Agreement within 7 days of Employee's signing
and delivering it to Anne M. Franklin. Revocation can be made by
delivering a written notice of revocation to Anne M. Franklin, by
mailing it to the address or faxing it to the number provided in the
FIFTH Paragraph. For this revocation to be effective, written notice
must be received by Anne M. Franklin no later than the close of
business on the seventh day after Employee signs and delivers this
Agreement. If Employee revokes this Agreement it will not be effective
or enforceable and Employee will not receive the benefits described in
the FIRST Paragraph and this Agreement will have no force or effect.
3 Initials _____
<PAGE> 4
EIGHTH: CONFIDENTIALITY
8.1 As a material inducement to the Company to enter into this Agreement,
Employee agrees not to retaliate against any present or former employee
of the Company nor will he contact any present or former employee to
discuss his separation from the Company, except for Anne M. Franklin.
Further, Employee and the Company agree not to disclose in any manner
the existence and terms of this Agreement or the content or prior
discussions leading thereto, except in the instance of the Employee, to
his spouse, to his attorney or to his tax advisor or as may be required
in conjunction with the submission of a financial statement or credit
application or as may be required by law and in the instance of the
Company, to its employees in a "need to know" capacity and/or in a
capacity to implement the terms of this Agreement and only to the
extent necessary and to its attorney(s) or as may be required by law.
Employee's spouse, attorney and tax advisor shall be bound by this
provision as if a party to this Agreement and breach by any one of them
shall constitute a breach of this Agreement by Employee. In the event
of a breach of this provision, all monies and enhanced benefits
provided by the Company shall be returned to the Company.
8.2 Employee acknowledges that as an officer of the Company, Employee has
had access to proprietary and confidential information that directly or
indirectly relates to the business of the Company and its past and
present affiliates and subsidiary companies. For purposes of this
Agreement, "Confidential Information" means all information about the
Company and its past and present affiliates and subsidiary companies
obtained or developed by Employee while an officer of the Company
including, but not limited to, information regarding the Company's
officers and other key personnel, financial information or plans and
legal and other matters, and which the Company has requested be held in
confidence or could reasonably be expected to desire to be held in
confidence, or the disclosure of which would likely be disparaging or
disadvantageous to the Company or any of its employees, officers and
directors but shall not include information already in the public
domain. Employee agrees that Employee will not, without prior written
consent of the Company or except pursuant to lawful process, (i)
disclose to any person any Confidential Information, or (ii) take with
the Employee any property of the Company or any document or papers
containing or relating to any Confidential Information, except for
documents that the Company has agreed to in writing that the Employee
may take. Further, Employee agrees not to take any actions, either
directly or indirectly, that interfere with or adversely affect the
business operations of the Company or have a financial or disparaging
impact on the Company. In the event of a breach of this provision, all
monies and enhanced benefits provided by the Company shall be returned
to the Company.
NINTH: EQUITABLE REMEDIES
9.1 The Company and Employee agree that money damages may not be adequate
to compensate Company for Employee's breach of the EIGHTH Paragraph,
8.2, and that the Company will be entitled to a decree for specific
performance, immediate injunctive relief to prohibit any further
conduct by Employee in violation of the terms of this Agreement, or
other appropriate remedy to enforce Employee's Performance of this
Paragraph.
TENTH: TERMINATION AGREEMENT
10.1 Employee acknowledges that if this Agreement becomes effective his
employment with Union Pacific Resources Company will end irrevocably
and forever and will not be resumed at any time in the future.
4 Initials _____
<PAGE> 5
ELEVENTH: GOVERNING LAW
11.1 Notwithstanding any other provision of this Agreement, any dispute
concerning any question of fact or law arising under this Agreement
which is not disposed of by agreement between Employee and the Company
shall be decided by a court of competent jurisdiction of the State of
Texas in accordance with the laws of Texas without regard to rules or
principles governing conflicts of law.
TWELFTH: WAIVER OF BREACH
12.1 The waiver by the Company of a breach of any provision of this
Agreement by Employee shall not operate or be construed as a waiver of
any subsequent breach by Employee.
THIRTEENTH: SEVERABILITY
13.1 Every provision of this Agreement is intended to be severable. If any
term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity
of the remainder of this Agreement.
FOURTEENTH: ENTIRE AGREEMENT
14.1 This Agreement constitutes the entire agreement between Employee and
the Company. The Company has made no promises to Employee other than
those in this Agreement.
PLEASE READ THIS AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL KNOWN AND
UNKNOWN CLAIMS.
EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS READ THIS AGREEMENT, UNDERSTANDS IT AND
IS VOLUNTARILY ENTERING INTO IT.
UNION PACIFIC RESOURCES GROUP INC.
By /s/ Anne M. Franklin
---------------------------------------
Anne M. Franklin
Vice President - People
Date August 26, 1999
-------------------------------------
ACCEPTED AND AGREED TO THIS ___ DAY OF ___________________, 1999.
/s/ V. Richard Eales
- ------------------------------------
Employee, V. Richard Eales
5 Initials _____
<PAGE> 1
EXHIBIT 11
UNION PACIFIC RESOURCES GROUP INC.
COMPUTATION OF EARNINGS PER SHARE
(Shares in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Basic weighted average number of shares outstanding .............. 248,934 247,687
Dilutive weighted average shares issuable on exercise of stock
options less shares repurchasable from proceeds ............. 218 --
------------ ------------
Diluted weighted average number of common and common
equivalent shares ........................................... 249,152 247,687
============ ============
Income (loss) from continuing operations (millions) .............. $ 78.3 $ (22.2)
Income from discontinued operations (millions) ................... 133.2 18.8
------------ ------------
Net income (millions) ............................................ $ 211.5 $ (3.4)
============ ============
Per share - basic and diluted
Income (loss) from continuing operations ......................... $ 0.31 $ (0.09)
Income from discontinued operations .............................. 0.54 0.08
------------ ------------
Net income (loss) ................................................ $ 0.85 $ (0.01)
============ ============
</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>
Nine Months Ended
September 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Income (loss) before income taxes ......................................... $ (4.5) $ (83.2)
Add (deduct) distributions greater (less) than
income of unconsolidated affiliates .................................. (1.9) (2.5)
Fixed charges from below .................................................. 173.2 190.9
Capitalized interest included in fixed charges ............................ (0.4) (4.7)
-------- --------
Earnings available for fixed charges ............................. $ 166.4 $ 100.5
======== ========
Fixed charges:
Interest expense, including amortization of debt discount/premium .... $ 167.6 $ 179.5
Portion of rentals representing an interest factor ................... 5.2 6.7
Interest capitalized ................................................. 0.4 4.7
-------- --------
Total fixed charges .............................................. $ 173.2 $ 190.9
======== ========
Ratio of earnings to fixed charges (a) .................................... 1.0 0.5
======== ========
</TABLE>
(a) For the nine months ended September 30, 1999 and 1998, earnings are
insufficient by $6.8 million and $90.4 million, respectively, to cover fixed
charges of the Company.
<PAGE> 1
EXHIBIT 15
AWARENESS LETTER OF INDEPENDENT PUBLIC ACCOUNTANTS
November 12, 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
September 30, 1999, which includes our report dated October 25, 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 STATMENT OF FINANCIAL
POSITION AT SEPTEMBER 30, 1999 AND THE RELATED CONDENSED CONSOLIDATAED STATEMENT
OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 137
<SECURITIES> 0
<RECEIVABLES> 327
<ALLOWANCES> 10
<INVENTORY> 53
<CURRENT-ASSETS> 565
<PP&E> 11,000
<DEPRECIATION> 5,384
<TOTAL-ASSETS> 6,358
<CURRENT-LIABILITIES> 733
<BONDS> 2,966
033
0,966
<COMMON> 0
<OTHER-SE> 880
<TOTAL-LIABILITY-AND-EQUITY> 6,358
<SALES> 1,161
<TOTAL-REVENUES> 1,265
<CGS> 0,161
<TOTAL-COSTS> 1,143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0,143
<INTEREST-EXPENSE> 168
<INCOME-PRETAX> (5)
<INCOME-TAX> (83)
<INCOME-CONTINUING> 78
<DISCONTINUED> 133
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 211
<EPS-BASIC> .85
<EPS-DILUTED> .85
</TABLE>
