<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 June 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 July 31, 1999, there were 251,884,057 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>
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Statements of Income and Comprehensive Income -
For the Three Months and Six Months Ended June 30, 1999 and 1998.......................... 3
Condensed Consolidated Statements of Financial Position -
At June 30, 1999 and December 31, 1998.................................................... 4 - 5
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1999 and 1998........................................... 6
Notes to Condensed Consolidated Financial Statements...................................... 7 - 12
Report of Independent Public Accountants.................................................. 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................................. 14 - 26
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 27 - 29
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS......................................................................... 30
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 30
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 31
SIGNATURE.......................................................................................... 32
</TABLE>
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<PAGE> 3
UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months and Six Months Ended June 30, 1999 and 1998
(Millions of dollars, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues:
Oil and gas operations:
Exploration and production......................................... $ 343.2 $ 437.7 $ 662.2 $ 801.9
Other oil and gas revenues (Note 5)................................ 12.8 27.4 76.7 31.1
-------- -------- -------- --------
Total oil and gas operations.................................... 356.0 465.1 738.9 833.0
Minerals.............................................................. 30.7 36.6 62.9 76.7
-------- -------- -------- --------
Total operating revenues....................................... 386.7 501.7 801.8 909.7
-------- -------- -------- --------
Operating expenses:
Production............................................................ 93.2 128.7 183.7 224.0
Exploration, including exploratory dry holes.......................... 53.5 94.5 105.1 150.6
Minerals.............................................................. 0.1 0.6 0.5 1.3
Depreciation, depletion and amortization.............................. 185.2 266.5 368.4 440.8
General and administrative............................................ 30.9 24.6 46.5 45.0
Restructuring charge (Note 6)......................................... -- -- 14.5 --
-------- -------- -------- --------
Total operating expenses.................................... 362.9 514.9 718.7 861.7
-------- -------- -------- --------
Operating income (loss)................................................... 23.8 (13.2) 83.1 48.0
Other income (expense) - net (Notes 7 and 8).............................. 21.3 14.0 32.7 15.3
Interest expense.......................................................... (50.7) (73.0) (115.0) (107.0)
-------- -------- -------- --------
Income (loss) before income taxes......................................... (5.6) (72.2) 0.8 (43.7)
Income tax expense (benefit) (Notes 7 and 8).............................. (20.9) (38.4) (56.8) (34.6)
-------- -------- -------- --------
Income (loss) from continuing operations.................................. 15.3 (33.8) 57.6 (9.1)
Discontinued operations: (Note 4)
Income (loss) from discontinued operations - net of tax .............. -- 16.5 (23.8) 23.0
Gain on sale of discontinued operations - net of tax.................. -- -- 157.0 --
-------- -------- -------- --------
Total income from discontinued operations............................. -- 16.5 133.2 23.0
-------- -------- -------- --------
Net income (loss)......................................................... $ 15.3 $ (17.3) $ 190.8 $ 13.9
======== ======== ======== ========
Other comprehensive income - net of tax:
Foreign currency translation adjustments.............................. 1.7 (40.6) (33.6) (37.0)
-------- -------- -------- --------
Comprehensive income (loss)............................................... $ 17.0 $ (57.9) $ 157.2 $ (23.1)
======== ======== ======== ========
Earnings (loss) per share basic and diluted:
Continuing operations................................................. $ 0.06 $ (0.13) $ 0.23 $ (0.03)
Discontinued operations............................................... -- 0.06 0.54 0.09
-------- -------- -------- --------
Total................................................................ $ 0.06 $ (0.07) $ 0.77 $ 0.06
======== ======== ======== ========
Weighted average shares outstanding - basic.............................. 249.1 247.6 248.9 247.6
Weighted average shares outstanding - diluted............................ 249.4 247.6 249.0 247.6
Cash dividends per share................................................. $ 0.05 $ 0.05 $ 0.10 $ 0.10
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At June 30, 1999 and December 31, 1998
(Millions of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments......................................... $ 24.9 $ 8.8
Accounts receivable - net .............................................. 313.6 261.0
Inventories ............................................................ 55.6 64.6
Other current assets (Notes 5 and 8) ................................... 113.1 107.0
--------- ---------
Total current assets ............................................. 507.2 441.4
--------- ---------
Properties (successful efforts method): (Note 5)
Cost ................................................................... 10,979.4 11,078.2
Accumulated depreciation, depletion and amortization ................... (5,218.0) (4,984.9)
--------- ---------
Total properties - net ........................................... 5,761.4 6,093.3
--------- ---------
Intangible and other assets ................................................ 174.2 180.8
Net assets of discontinued operations (Note 4) ............................. -- 926.9
--------- ---------
Total assets ............................................................... $ 6,442.8 $ 7,642.4
========= =========
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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<PAGE> 5
UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At June 30, 1999 and December 31, 1998
(Millions of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 207.9 $ 270.5
Advance payment (Note 9) ............................ 107.2 --
Accrued taxes payable (Note 4) ...................... 236.4 64.9
Short-term debt (Note 10) ........................... 3.0 853.8
Other current liabilities ........................... 231.0 157.5
--------- -----------
Total current liabilities ...................... 785.5 1,346.7
--------- -----------
Long-term debt (Note 10) ................................. 3,029.7 3,744.9
Deferred income taxes .................................... 1,227.9 1,291.6
Other long-term liabilities .............................. 526.8 531.0
Shareholders' equity:
Common stock, no par value:
Authorized shares--400,000,000
Issued and outstanding--251,886,092 and 250,685,204 -- --
Paid-in surplus ..................................... 1,013.3 992.6
Treasury stock, at cost:
Shares--4,337,431 and 3,666,913 ................... (92.0) (82.5)
Unearned employee stock ownership plan .............. (93.2) (95.7)
Retained earnings ................................... 175.1 9.1
Unearned compensation (Note 11) ..................... (7.4) (6.0)
Accumulated other comprehensive income:
Deferred foreign exchange adjustment .............. (118.0) (84.4)
Minimum pension contra equity ..................... (4.9) (4.9)
--------- -----------
Total accumulated other comprehensive income ... (122.9) (89.3)
--------- -----------
Total shareholders' equity ..................... 872.9 728.2
--------- -----------
Total liabilities and shareholders' equity ............... $ 6,442.8 $ 7,642.4
========= ===========
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
(Millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash flows provided by operations:
Net income ............................................................. $ 190.8 $ 13.9
Less income from discontinued operations ............................... (133.2) (23.0)
Non-cash charges to income:
Depreciation, depletion and amortization ............................ 368.4 440.8
Deferred income taxes (benefit) ..................................... (24.7) (54.9)
Other non-cash charges - net ........................................ 8.6 136.5
Changes in current assets and liabilities .............................. (61.1) 227.4
---------- ----------
Cash provided by operations ...................................... 348.8 740.7
---------- ----------
Cash flows from investing activities:
Capital and exploratory expenditures ................................... (180.8) (853.2)
Acquisition of Norcen (Note 3) ......................................... -- (2,634.3)
Proceeds from sales of assets (Note 5) ................................ 222.6 50.3
Proceeds from sales of investment ...................................... -- 48.4
Proceeds from sale of discontinued operations (Note 4) ................. 1,359.1 --
Cash provided (used) by discontinued operations ........................ (204.5) 236.6
---------- ----------
Cash provided (used) by investing activities ..................... 1,196.4 (3,152.2)
---------- ----------
Cash flows from financing activities:
Dividends paid ......................................................... (24.8) (24.8)
Proceeds from debt financing - net (Note 10) ........................... 500.0 2,488.5
Debt repaid ............................................................ (2,069.7) --
Purchase of treasury stock ............................................. (9.5) (21.6)
Other financing - net (Note 9) ......................................... 74.9 2.9
---------- ----------
Cash provided (used) by financing activities ..................... (1,529.1) 2,445.0
---------- ----------
Net change in cash and temporary investments ............................... 16.1 33.5
Cash at beginning of period ................................................ 8.8 67.1
---------- ----------
Cash at end of period ...................................................... $ 24.9 $ 100.6
========== ==========
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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<PAGE> 7
UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS
The Condensed Consolidated Financial Statements of Union Pacific
Resources Group Inc. and subsidiaries (the "Company") have been prepared by
management, are unaudited and reflect all adjustments (including normal
recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results of
the Company for the interim periods. However, these condensed statements do
not include all of the information and footnotes required by generally
accepted accounting principles to be included in a full set of financial
statements. The report of Arthur Andersen LLP commenting on their review
accompanies the Condensed Consolidated Financial Statements and is included
in Part I, Item 1 in this report. The Condensed Consolidated Statement of
Financial Position at December 31, 1998, is derived from audited financial
statements. The Condensed Consolidated Financial Statements should be read
in conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. The results of operations and cash flows for the six
months ended June 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>
Six Months Ended June 30,
1999 1998
--------- ---------
<S> <C> <C>
(Millions of dollars)
Revenues:
Exploration and production.......................................... $ 738.9 $ 833.0
Minerals............................................................ 62.9 76.7
--------- ---------
Total revenues................................................... $ 801.8 $ 909.7
========= =========
Operating income:
Exploration and production.......................................... $ 84.7 $ 20.2
Minerals............................................................ 62.4 75.4
Corporate (a)....................................................... (64.0) (47.6)
--------- ---------
Total operating income........................................... $ 83.1 $ 48.0
========= =========
</TABLE>
-7-
<PAGE> 8
<TABLE>
<CAPTION>
At June 30, At December 31,
1999 1998
----------- ---------------
(Millions of dollars)
<S> <C> <C>
Fixed assets (net of DD&A):
Exploration and production ............... $5,658.6 $5,988.8
Minerals ................................. 10.2 10.2
Corporate ................................ 92.6 94.3
-------- --------
Total fixed assets .................... $5,761.4 $6,093.3
======== ========
</TABLE>
- ----------
(a) Operating income for the Corporate segment consists of general and
administrative expense.
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, the Company 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 six
months ended June 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>
Six Months Ended
June 30, 1998
----------------
(Millions of dollars,
except per share amounts)
<S> <C>
Revenues ............................. $ 1,009.5
Costs and expenses ................... 992.7
---------
Operating income ..................... 16.8
Interest expense ..................... (141.5)
Other income (expense) - net ......... 15.3
---------
Loss before income taxes ............. (109.4)
Income tax (benefit) ................. (58.8)
---------
Loss from continuing operations....... $ (50.6)
=========
Loss per share - basic ............... $ (0.20)
Loss per share - diluted ............. (0.20)
</TABLE>
The unaudited pro forma condensed consolidated information presented
above is not necessarily indicative of the results of operations which
would have occurred had the Norcen Acquisition been consummated on January
1, 1998, nor is it necessarily indicative of future results of operations.
NORCEN SUMMARIZED FINANCIAL INFORMATION
In 1998, as a result of the Norcen Acquisition, UPRI assumed and
unconditionally guaranteed the public debt obligations of Norcen. The
following table presents summarized financial information for UPRI (as
successor to Norcen) as of and for the six months ended June 30, 1999, the
two months ended February 28, 1998, and the four months ended June 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
-8-
<PAGE> 9
summarized financial information for UPRI for as long as the debt
securities remain outstanding and guaranteed by UPRI.
<TABLE>
<CAPTION>
Six Months Ended Two Months Ended Four Months Ended
June 30, 1999 February 28, 1998(a) June 30, 1998(b)
---------------- --------------------- -----------------
(Millions of dollars)
<S> <C> <C> <C>
Summarized Statement of Income Information:
Operating revenues...................................... $ 187.8 $ 104.0 $ 170.4
Operating income (loss)................................. 43.6 4.0 (68.0)
Net income (loss)....................................... 68.7 (30.0)(c) (40.8)
At June 30, 1999 At December 31, 1998
---------------- ---------------------
Summarized Statement of Financial Position Information:
Current assets.......................................... $ 111.1 $ 53.7
Non-current assets...................................... 1,881.1 1,882.3
Current liabilities..................................... 75.4 279.8
Non-current liabilities and equity...................... 1,916.8 1,656.2
</TABLE>
- ---------------------------------
(a) Results for UPRI as of and for the two months ended February 28,
1998. Results have not been restated in accordance with U.S. generally
accepted accounting principles ("GAAP") and reflect the full cost method
for accounting for oil and gas operations.
(b) Results for UPRI as of and for the four months ended June 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.
Under a process provided for in the Agreement, Duke has asserted
claims against the Company for costs to remediate alleged environmental
conditions. These environmental claims are in excess of a $40 million
deductible that Duke has assumed for environmental conditions. Under the
terms of the Agreement, the Company has the right to contest any
environmental claims through arbitration. If it is determined that there
are valid environmental claims in excess of the $40 million deductible,
then the Company will be required to make a payment to Duke for such
excess amount. The Company has analyzed Duke's environmental claims and
has been in discussions with Duke about the results of its analysis. As a
result of these discussions, Duke has lowered its claims. The Company
continues to believe that there are substantial defenses to the remaining
Duke environmental claims, and the likelihood that any payment to Duke
will be required is remote.
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<PAGE> 10
The GPM segment results of operations and cash flows have been
excluded from continuing operations for all periods presented and have
been reported as discontinued operations in the accompanying Condensed
Consolidated Statements of Income and Cash Flows. The GPM net assets that
were sold were segregated from continuing operations in the Company's
Condensed Consolidated Statement of Financial Position at December 31,
1998.
Summarized information relating to results of discontinued operations
for the three months and six months ended June 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Millions of dollars) (Millions of dollars)
<S> <C> <C> <C> <C>
Operating revenues ......................... $ -- $ 119.4 $ 21.5 $ 210.4
Operating expenses ......................... -- (70.2) (29.7) (128.3)
Depreciation, depletion and amortization ... -- (17.1) (20.4) (33.9)
-------- -------- --------
Operating income (loss) .................... -- 32.1 (28.6) 48.2
Other income (expense)-- net ............... -- -- -- 0.1
Interest expense (a) ....................... -- (5.3) (8.0) (10.5)
-------- -------- --------
Income (loss) before taxes ................. -- 26.8 (36.6) 37.8
Income taxes expense (benefit) ............. -- 10.3 (12.8) 14.8
-------- -------- -------- --------
Net income (loss) from discontinued
operations ............................... $ -- $ 16.5 $ (23.8) $ 23.0
======== ======== ======== ========
</TABLE>
- ---------------
(a) The Company allocated interest expense to the GPM segment
based on the ratio of net assets of discontinued operations to
total Company net assets, excluding $3.6 billion of debt
associated with the Norcen Acquisition.
5. PROPERTY DIVESTITURES
During 1999, the Company completed sales of non-core South Texas
properties for a sales price of $137.8 million, including a $30 million
note receivable, the Canadian Caroline-Swan Hill property (the "Caroline
property") for $108.6 million and the Deadwood property in East Texas for
$18.0 million. The Company recorded a pretax gain of $61.1 million in
connection with these sales.
6. RESTRUCTURING CHARGE
During the first quarter, the Company reorganized into five operating
groups, announced workforce reductions for its Canadian and U.S.
operations and established an early retirement program. As a result of
these actions, the Company recorded a $14.5 million restructuring charge
in the first quarter. The charge included $4.2 million for pension
benefits and other postretirement benefits ("OPEB") in connection with
the early retirement program and the workforce reductions. Also included
were $7.1 million for severance costs 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 June 30, 1999, the $6.4 million remaining in
the reserve represents reserves for specialty drilling equipment and
supplies of $2.4 million and OPEB and personnel costs of $4.0 million.
At January 1, 1999, the balance of the reserve for costs related to
the 1998 restructuring charge was $14.6 million. During the first six
months of 1999, $5.3 million was paid out related to workforce reductions
and $0.3 million was paid out related to excess office space commitments.
At June 30, 1999, the $9.0 million remaining in the reserve represents a
drilling rig commitment ($5.0 million) and excess office space
commitments ($4.0 million).
-10-
<PAGE> 11
7. FOREIGN CURRENCY
During 1999, the Company recorded a $29.5 million non-cash foreign
currency gain included in other income (expense) - net on the Condensed
Consolidated Statement of Income. The gain resulted from remeasurement of
UPRI's U.S. dollar denominated monetary assets and liabilities (primarily
debt obligations).
Also during 1999, the Company recorded a $17.9 million non-cash
foreign currency gain included in deferred tax benefit (expense) on the
Condensed Consolidated Statement of Income. The gain resulted from
remeasurement of deferred tax liabilities denominated in the local
currencies of Guatemala and Venezuela.
8. TAX SETTLEMENT
In 1997, Norcen received a reassessment from Canadian tax authorities
in the amount of $81.1 million concerning the deductibility of certain
expenses and foreign exchange losses claimed for income tax purposes
during the period 1989 through 1993. In spite of Norcen's disagreement
and appeal, the reassessment was fully funded in 1997. As a result of the
Norcen Acquisition, the Company valued this issue at $17.0 million, net
of any valuation allowance, as part of the purchase price allocation. On
March 8, 1999, UPRI entered into an agreement with Canadian tax
authorities to settle these claims out of court. Under the terms of the
settlement, the Company will receive a refund of approximately $54.6
million dollars. The expected refund was recorded in other current assets
in the Statement of Financial Position. In the first quarter of 1999, the
Company recorded $7.1 million of interest to other income and a $27.9
million deferred income tax benefit related to the settlement.
9. ADVANCE PAYMENT
In March 1999, the Company entered into a forward sale transaction,
whereby it received $150.0 million in cash and is required to deliver
approximately 401 MMcf of natural gas per day to the purchaser beginning
in April 1999 and continuing through October 1999. The Company has
recorded the obligation associated with this transaction as an advance
payment. This current liability will be recognized in other oil and gas
revenues on the Condensed Consolidated Statement of Income as the gas is
delivered over the term of the contract. In addition, the Company has
entered into a gas price swap to hedge exposure to price risk associated
with this transaction (see Quantitative and Qualitative Disclosures About
Market Risk in Part I, Item 3 of this report).
10. 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
$851.8 million and $715.2 million, respectively.
11. SHAREHOLDERS' EQUITY
In the first quarter of 1999, options covering 1,171,439 shares of
Company common stock were granted to directors, officers and certain
non-officer executives of the Company, each with an exercise price of
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<PAGE> 12
$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 $12.7 million in the second
quarter and $14.8 million for the year in connection with the vesting of
the 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 and 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
and 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 current and other long-term liabilities, was $103.7
million at June 30, 1999. 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 June 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 $56
million for the ten year period.
The Company is subject to federal, state, provincial and local
environmental laws and regulations and currently is participating in the
investigation and remediation of a number of sites. Where the remediation
costs can reasonably be determined, and where such remediation is
probable, the Company has recorded a liability. Management does not
expect future environmental obligations to have a material impact on the
results of operations, financial condition or cash flows of the Company.
In connection with the disposition of significant plant, pipeline,
refining and producing property assets, the Company has made certain
representations and warranties related to the assets sold and provided
certain indemnities with respect to liabilities associated with such
assets. The Company has been advised of possible claims which may be
asserted by the purchasers of certain disposed assets for alleged
breaches of such representations and warranties and under certain
indemnities. Certain claims related to compliance with environmental laws
remain pending, including those discussed in Note 4. In addition, as some
of the representations, warranties and indemnities related to some of the
disposed assets have not expired, further claims may be made against the
Company. While no assurance can be given as to the ultimate outcome of
these claims, the Company does not expect these matters to have a
material adverse effect on its results of operations, financial condition
or cash flows.
The Company is a defendant in a number of other lawsuits and is
involved in governmental proceedings arising in the ordinary course of
business in addition to those described above. The Company also has
entered into commitments and provided guarantees for specific financial
and contractual obligations of its subsidiaries and affiliates. The
Company does not expect these lawsuits, commitments or guarantees to have
a material adverse effect on its results of operations, financial
condition or cash flows.
-12-
<PAGE> 13
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 June 30, 1999, and the related Condensed Consolidated
Statements of Income and Comprehensive Income for the three month and six month
periods ended June 30, 1999 and 1998, and the Condensed Consolidated Statements
of Cash Flows for the periods ended June 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 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
July 27, 1999
-13-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1999 COMPARED TO JUNE 30, 1998
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
------- -------
(Millions of dollars)
<S> <C> <C>
Total operating revenues............................................ $ 386.7 $ 501.7
Total operating expenses............................................ 362.9 514.9
Operating income (loss)............................................. 23.8 (13.2)
Income (loss) from continuing operations............................ 15.3 (33.8)
Net income (loss)................................................... 15.3 (17.3)
Earnings (loss) from continuing operations per share - diluted...... 0.06 (0.13)
Earnings (loss) per share - diluted................................. 0.06 (0.07)
</TABLE>
The Company recorded net income of $15.3 million in the second quarter of
1999, an increase of $32.6 million over second quarter results for 1998.
Earnings per share of $0.06 for the second quarter of 1999 increased $0.13 from
1998. Discontinued operations contributed income of $16.5 million in the second
quarter of last year.
RESULTS OF CONTINUING OPERATIONS
The Company recorded income from continuing operations of $15.3 million, or
$0.06 per share, for the second quarter of 1999 compared to a loss of $33.8
million, or $0.13 per share, in the same period of 1998. The increase was due
largely to lower production and exploration expenses which contributed $76.5
million, $81.3 million of favorable depreciation, depletion and amortization
("DD&A") caused by lower per unit rates and lower sales volumes and $22.3 of
reduced interest expense. Also included in second quarter results were $31.5
million in after-tax foreign currency remeasurement gains. Lower sales volumes,
however, resulted in a $92.6 million revenue reduction and the costs related to
the vesting of the January 1999 restricted stock award resulted in a $12.7
million charge for the quarter. Included in second quarter 1998 results was a
$26.0 million gain on the sale of properties in the Denver-Julesburg Basin (the
"DJ Basin properties").
SUMMARY OF SEGMENT FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
-------- ---------
(Millions of dollars)
<S> <C> <C>
Segment operating income (loss):
Exploration and production...................................... $ 25.6 $ (23.1)
Minerals........................................................ 30.6 36.0
Corporate/general and administrative............................ (32.4) (26.1)
-------- ---------
Total operating income (loss)................................. $ 23.8 $ (13.2)
======== =========
</TABLE>
Operating income increased by $37.0 million to $23.8 million for the
quarter. Exploration and production operating income improved $48.7 million to
$25.6 million despite of a 21 percent drop in sales volumes. These
-14-
<PAGE> 15
results reflect lower operating expenses associated with lower sales volumes and
cost savings initiatives implemented in 1998, and reduced overhead due to the
recent restructuring of the Company. Lower per unit DD&A rates, primarily
related to the 1998 year-end asset impairment write-down, contributed $25.4
million for the quarter while lower sales volumes reduced DD&A by $55.9 million.
Lower sales volumes caused a drop of $92.6 million in revenues, while slightly
lower product prices resulted in a $1.9 million reduction in revenues. Second
quarter 1998 results included the $26.0 million gain on the sale of the DJ Basin
properties while 1999 results include a $6.4 million gain on the settlement in
1995 of Columbia Gas Transmission Company's bankruptcy.
Minerals operating income decreased $5.4 million, to $30.6 million, due to
lower equity income from Black Butte Coal Company ("Black Butte") reflecting
lower volumes under an amended coal supply contract and the absence of a $2.0
million gain on a 1998 property sale. The decrease was partially offset by
favorable results at the Company's soda ash joint venture, reflecting $2.2
million of prior period adjustments included in 1998 results.
General and administrative ("G&A") costs increased $6.3 million to $32.4
million, principally due to $9.7 million of expense related to the vesting costs
of the January 1999 restricted stock awards, offset by cost savings related to
the reductions in force that occurred in late 1998 and early 1999.
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
--------- ---------
(Millions of dollars)
<S> <C> <C>
Exploration and production revenues.................................. $ 343.2 $ 437.7
Other oil and gas revenues .......................................... 12.8 27.4
--------- ---------
Total operating revenues.......................................... 356.0 465.1
--------- ---------
Operating expenses:
Production........................................................ 93.2 128.7
Exploration....................................................... 53.5 94.5
Depreciation, depletion and amortization.......................... 183.7 265.0
-------- ---------
Total operating expenses.......................................... 330.4 488.2
-------- ---------
Operating income (loss).............................................. $ 25.6 $ (23.1)
======== =========
</TABLE>
OPERATING REVENUES
Exploration and production revenues for the second quarter of 1999
decreased by $94.5 million (22%) to $343.2 million, largely due to the $92.6
million reduction associated with lower sales volumes (discussed below). Product
prices were slightly lower in 1999, reducing revenues by $1.9 million. Other
revenues were down $14.6 million due to the $26.0 million gain in 1998 on the
sale of the DJ Basin properties, partially offset by the $6.4 million gain in
1999 associated with the settlement in 1995 of Columbia Gas Transmission
Company's bankruptcy.
-15-
<PAGE> 16
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------
1999 1998 1999 1998
------ ------- ------- -------
(without hedging) (with hedging)
<S> <C> <C> <C> <C>
Average price realizations - exploration and production:
Natural gas (per Mcf).............................. $ 1.78 $ 1.84 $ 1.58 $ 1.80
Natural gas liquids (per Bbl)...................... 9.28 7.66 9.28 7.66
Crude oil (per Bbl)................................ 13.37 10.11 12.03 10.27
Average (per Mcfe)................................. 1.90 1.74 1.71 1.72
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
------- -------
<S> <C> <C>
Production volumes - exploration and production:
Natural gas (MMcfd)............................................... 1,311.6 1,586.7
Natural gas liquids (MBbld)....................................... 28.4 38.1
Crude oil (MBbld)................................................. 119.6 162.3
Total (MMcfed).................................................... 2,199.6 2,788.8
</TABLE>
Exploration and production sales volumes of 2,199.6 MMcfed decreased 589.2
MMcfed (21%) from 1998 results primarily due to property sales and the effects
of production declines related to reduced capital spending levels. Total Latin
American sales volumes realized the smallest decrease in sales volumes, down
23.5 MMcfed (8%) to 285.5 MMcfed. Production declines caused by the reduction in
capital spending and the effects of property sales contributed to production
declines in US Onshore (264.6 MMcfed), Canada (214.1 MMcfed) and US Offshore
(87.6 MMcfed).
The Company announced the results of three significant wells that came
on-line during the second quarter of 1999. The Rock Island 4-H in the Rockies
had initial gross production of 14 MMcfed. The Company has substantial
undeveloped acreage in the area. Two wells in Central Texas, the Dierking 1-H
and the Theldick 1-H, had realized combined initial production sales volumes of
73 MMcfed. The Company's net production for the three wells was 56 MMcfed.
Natural gas sales volumes decreased 275.1 MMcfd (17%) to 1,311.6 MMcfd,
principally reflecting the sale of the Matagorda Island 623 and surrounding
blocks (the "Matagorda property") in the third quarter of 1998, Canadian
properties in late 1998 and Canadian and South Texas properties in early 1999,
as well as production declines for existing properties.
Natural gas liquids sales volumes decreased 9.7 MBbld (25%) to 28.4 MBbld.
The decline is largely related to the sale of the offshore Matagorda property
and the Canadian Caroline property during the past year and production declines
caused by reduced capital spending.
Crude oil sales volumes of 119.6 MBbld decreased 42.7 MBbld (26%),
reflecting production declines in Canada and US Onshore, property sales and
lower sales volumes in Guatemala due to higher water content.
OPERATING EXPENSES
Production expenses decreased $35.5 million (28%) to $93.2 million.
Production costs on a per unit basis were $0.47 per Mcfe, down from $0.51 per
Mcfe last year. Total lease operating expenses fell $32.1 million to $58.6
million primarily due to cost reduction efforts that were initiated in late 1998
and costs incurred in 1998 related to properties sold. Lease operating expenses
on a per unit basis dropped from $0.36 per Mcfe in 1998 to $0.29 per Mcfe.
Production and property taxes were down $1.7 million from 1998 due to lower
sales volumes. Production overhead costs declined $0.6 million from 1998 largely
due to reduced personnel costs related to the reductions in force. Partially
offsetting the reductions in production overhead was the inclusion of $3.0
million
-16-
<PAGE> 17
in costs related to the vesting of the January 1999 restricted stock awards.
Exploration expenses decreased $41.0 million from the second quarter of
last year, primarily the result of the reduced capital spending program
initiated in mid-1998. Dry hole expense was down $15.0 million and included
$10.7 million for Venezuela Delta Centro. Additionally, surrendered lease was
$14.9 million lower than the second quarter of last year and geologic and
geophysical expenses were down $9.7 million. Also contributing to the variance
was reduced exploration overhead, down $1.0 million, due to reduced computer and
personnel costs related to staff reductions.
DD&A expenses decreased by $81.3 million. Lower sales volumes resulted in a
reduction of $55.9 million while lower per unit rates contributed another $25.4
million. DD&A per unit was $0.92 per Mcfe in 1999, down from $1.04 per Mcfe last
year, largely the result of the asset impairment write-down recorded in December
1998. Included in 1998 results was a $4.0 million write-off related to two
offshore fields.
MINERALS OPERATIONS
OPERATING INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
-------- --------
(Millions of dollars)
<S> <C> <C>
Coal ........................................................ $ 23.0 $ 27.5
Soda ash .................................................... 7.5 6.6
Other ....................................................... 0.1 1.9
-------- --------
Total operating income................................ $ 30.6 $ 36.0
======== ========
</TABLE>
Minerals operating income decreased $5.4 million to $30.6 million, largely
due to lower Black Butte equity income reflecting lower sales volumes under an
amended coal supply contract ($4.5 million) and lower product prices for soda
ash royalty volumes ($0.5 million) related to short-term over capacity. Also
included in 1998 results was the $2.0 million gain on the sale of industrial
minerals properties. Results at the Company's soda ash joint venture were
favorable $1.4 million largely due to $2.2 million of prior period adjustments
included in 1998 that were partially offset by lower sales volumes and prices in
1999.
GENERAL AND ADMINISTRATIVE AND OTHER
G&A expenses increased $6.3 million, to $32.4 million, principally due to
the $9.7 million of expense related to the vesting costs of the January 1999
restricted stock awards. Providing some offset was the cost savings realized in
the second quarter of 1999 related to the late 1998 and early 1999 reductions in
force. G&A expenses per unit, excluding the restricted stock expense, increased
by $0.01 per Mcfe to $0.11 per Mcfe for the quarter.
Other income/expense of $21.3 million was $7.3 million higher than last
year primarily due to the $20.5 million gain on the remeasurement of U.S. dollar
denominated liabilities in Canada. Included in 1998 results was an $11.0 million
gain on foreign exchange contracts entered into in connection with the Norcen
Acquisition and gains of $2.3 million related to the close of Norcen interest
rate swaps and crude oil positions.
Interest expense for the quarter decreased $22.3 million from last year to
$50.7 million. The decrease principally reflects the reduction in borrowings
associated with the deleveraging program designed to reduce the Company's debt.
The income tax benefit of $20.9 million declined $17.5 million from the
second quarter of 1998. The
-17-
<PAGE> 18
majority of the variance results from improvements in pre-tax results due to
higher operating income. Results for 1999 also include a favorable $11.0 million
foreign currency remeasurement of deferred tax liabilities in Guatemala and
Venezuela. Section 29 tax credits were $3.4 million for the quarter, down from
$4.1 million in 1998.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO JUNE 30, 1998
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
------- -------
(Millions of dollars)
<S> <C> <C>
Total operating revenues............................................ $ 801.8 $ 909.7
Total operating expenses............................................ 718.7 861.7
Operating income.................................................... 83.1 48.0
Income (loss) from continuing operations............................ 57.6 (9.1)
Net income ......................................................... 190.8 13.9
Earnings (loss) from continuing operations per share - diluted...... 0.23 (0.03)
Earnings per share - diluted........................................ 0.77 0.06
</TABLE>
The Company recorded net income of $190.8 million for year-to-date 1999, an
increase of $176.9 million over 1998 results. Earnings per share of $0.77 for
the six months ended June 1999 increased $0.71 from results in 1998. The
increase was largely due to the $157.0 million after-tax gain on the sale of the
GPM business segment to Duke Energy and improved results from continuing
operations.
RESULTS OF CONTINUING OPERATIONS
The Company recorded income from continuing operations of $57.6 million for
year-to-date 1999 compared to a loss of $9.1 million in the same period of 1998.
Earnings per share of $0.23 increased $0.26 per share. The increase was largely
due to the $72.4 million reduction in DD&A expenses, $37.7 million of higher
gains from property sales, a $85.8 million reduction in production and
exploration expenses, $47.4 million in foreign currency after-tax gains and a
$32.9 million after-tax gain related to the Canadian tax settlement. These items
were partially offset by the $139.7 million reduction in exploration and
production revenues, the $14.8 million charge due to the vesting costs of the
January 1999 restricted stock awards and a $14.5 million restructuring charge
taken in the first quarter.
SUMMARY OF SEGMENT FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
-------- --------
(Millions of dollars)
<S> <C> <C>
Segment operating income:
Exploration and production...................................... $ 84.7 $ 20.2
Minerals........................................................ 62.4 75.4
Corporate/general and administrative............................ (49.5) (47.6)
Restructuring charge............................................ (14.5) --
-------- --------
Total operating income....................................... $ 83.1 $ 48.0
======== ========
</TABLE>
-18-
<PAGE> 19
Operating income increased by $35.1 million to $83.1 million for the
period. Exploration and production operating income increased by $64.5 million
to $84.7 million despite of a nine percent drop in sales volumes. These results
reflect a reduction of $72.8 million in DD&A expenses due to both lower sales
volumes ($38.6 million) and reduced per unit rates ($34.2 million) resulting
from a 1998 asset impairment write-down. Gains on property sales were $37.7
million higher in the first half of 1999, as the $61.1 million gain on the sale
of the Caroline property was countered by the $26.0 million gain in 1998 on the
sale of the DJ Basin properties. Operating expenses decreased by $85.8 million
associated with lower sales volumes and cost savings initiatives, while overhead
costs declined due to the recent restructuring of the Company. Offsetting these
improvements was a $139.7 million decline in revenues due to lower sales volumes
($70.8 million) and lower product prices ($68.9 million).
Minerals operating income decreased $13.0 million to $62.4 million,
primarily relating to $7.2 million of lower Black Butte equity income resulting
from lower sales volumes under an amended coal supply contract. Also
contributing to the decline were lower coal and soda ash royalties and the
absence of a 1998 gain on a property sale.
G&A costs increased $1.9 million, reflecting $11.2 million of expense
related to the vesting of the January 1999 restricted stock awards, offset by
cost savings related to the reductions in force that occurred in late 1998 and
early 1999.
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
-------- -------
(Millions of dollars)
<S> <C> <C>
Exploration and production revenues.................................. $ 662.2 $ 801.9
Other oil and gas revenues .......................................... 76.7 31.1
-------- -------
Total operating revenues.......................................... 738.9 833.0
-------- -------
Operating expenses:
Production........................................................ 183.7 224.0
Exploration....................................................... 105.1 150.6
Depreciation, depletion and amortization.......................... 365.4 438.2
-------- -------
Total operating expenses.......................................... 654.2 812.8
-------- -------
Operating income..................................................... $ 84.7 $ 20.2
======== =======
</TABLE>
OPERATING REVENUES
Exploration and production revenues decreased by $139.7 million (17%) to
$662.2 million for the first half of 1999, due to a $70.8 million reduction
associated with lower sales volumes and a $68.9 million decline associated with
lower product prices. Other revenues improved $45.6 million due to $37.7 million
of higher gains on property sales and the $6.4 million gain associated with the
settlement in 1995 of the Columbia Gas Transmission Company's bankruptcy.
-19-
<PAGE> 20
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------
1999 1998 1999 1998
------- ------- ------- -------
(without hedging) (with hedging)
<S> <C> <C> <C> <C>
Average price realizations - exploration and production:
Natural gas (per Mcf).............................. $ 1.65 $ 1.85 $ 1.60 $ 1.87
Natural gas liquids (per Bbl)...................... 8.45 8.45 8.45 8.45
Crude oil (per Bbl)................................ 11.46 10.92 10.76 11.04
Average (per Mcfe)................................. 1.71 1.80 1.65 1.82
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
------- -------
<S> <C> <C>
Production volumes - exploration and production:
Natural gas (MMcfd)............................................... 1,319.3 1,432.9
Natural gas liquids (MBbld)....................................... 26.5 35.5
Crude oil (MBbld)................................................. 122.9 130.6
Total (MMcfed).................................................... 2,215.6 2,429.8
</TABLE>
Exploration and production sales volumes of 2,215.6 MMcfed decreased 214.2
MMcfed (9%) from 1998 results primarily due to the effect of property sales and
production declines related to reduced capital spending levels. The overall
decline occurred despite the inclusion of six months of sales volumes for Norcen
Acquisition properties in 1999 compared to four months of sales volumes in 1998.
Latin America sales volumes improved 73.5 MMcfed over the first half of
1998, as the inclusion of two additional months of sales volumes in 1999 more
than offset the impact of higher water content in Guatemala. Canadian sales
volumes were up 1.4 MMcfed and U.S. Offshore sales volumes declined 52 MMcfed,
as the impact of property sales and production declines offset the additional
two months of production for Norcen Acquisition properties. U.S. Onshore sales
volumes were down 237.1 MMcfed, reflecting the decline in capital spending and
effects of property sales.
Natural gas sales volumes decreased 113.6 MMcfd to 1,319.3 MMcfd,
principally reflecting the sale of the offshore Matagorda property in the third
quarter of 1998 and other property sales, and production declines for existing
properties, offset by the exclusion of two months of sales volumes from Norcen
properties in 1998.
Natural gas liquids sales volumes decreased 9.0 MBbld to 26.5 MBbld. The
decline is largely related to the sale of the offshore Matagorda property and
the Canadian Caroline property during the last year, production declines and
ethane and propane rejection in the U.S. Onshore in the first quarter of 1999.
Crude oil sales volumes declined 7.7 MBbld to 122.9 MBbld for the first
half of 1999. The decrease reflects production declines in Canada and US Onshore
and property sales, offset by two additional months of Norcen property sales
volumes in 1999. US Onshore and Canada decreased 16.7 MBbld and 2.3 MBbld,
respectively, while Latin America sales volumes improved 12.1 MBbld.
OPERATING EXPENSES
Production expenses of $183.7 million for the first half were down $40.3
million from 1998. Production costs per unit improved over 10 percent from $0.51
per Mcfe last year to $0.46 for 1999. Total lease operating expenses declined
$29.3 million primarily due to property sales and cost reduction efforts that
were initiated in late 1998. Lease operating expenses on a per unit basis
dropped from $0.34 per Mcfe in 1998 to $0.30 per Mcfe in 1999. Production and
property taxes declined $6.7 million from last year, reflecting volume
reductions offset
-20-
<PAGE> 21
by higher governmental participation in Guatemala. Production overhead costs
were down $4.0 million from 1998, including $3.6 million of costs related to the
January 1999 restricted stock awards.
Exploration expenses of $105.1 million were down $45.5 million from the
first half of 1998, primarily reflecting the reduced capital spending program.
Dry hole expense decreased by $24.0 million, geological and geophysical costs
were $14.3 million lower and surrendered lease costs dropped $5.4 million.
Exploration overhead costs declined $2.6 million from lower personnel and
computer costs caused by recent staff reductions.
DD&A costs declined $72.8 million from last year to $365.4 million for the
first half of 1999. Lower production sales volumes caused a $38.6 million
reduction, while lower rates, down from $1.00 per Mcfe last year to $0.91 per
Mcfe in 1999, produced a $34.2 million decline. The lower per unit rates in 1999
are largely the result of an asset impairment write-down recorded by the Company
in December 1998.
MINERALS OPERATIONS
OPERATING INCOME
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
-------- --------
(Millions of dollars)
<S> <C> <C>
Coal ....................................................... $ 47.9 $ 57.4
Soda ash ....................................................... 13.8 16.4
Other ....................................................... 0.7 1.6
-------- --------
Total ................................................... $ 62.4 $ 75.4
======== ========
</TABLE>
Operating income for Minerals was $62.4 million for the first half of 1999,
down $13.0 million from last year. Equity income from the Black Butte joint
venture declined $7.2 million, reflecting lower sales volumes under an amended
coal supply contract. Coal royalty income decreased by $2.4 million from lower
sales volumes as mining operations focused on federal sections, and soda ash
royalties decreased $1.9 million from lower prices. Operating income at the
Company's soda ash joint venture was down $0.7 from 1998, with lower sales
volumes and prices, which offset the absence of $2.2 million of prior period
adjustments recorded in 1998. Results from 1998 also include a $2.0 million gain
on the sale of industrial minerals properties.
GENERAL AND ADMINISTRATIVE AND OTHER
General and administrative expenses of $49.5 million were $1.9 million
higher than the first six months of 1998. Included in 1999 costs were $11.2
million expense relating to the January 1999 restricted stock awards. Offsetting
this cost were the benefits in several cost categories reflecting savings from
the late 1998 and early 1999 reductions in force, early retirement programs and
sale of the GPM business. The resulting restructuring of the Company produced
savings across nearly all overhead cost categories, most significantly salaries,
wages and benefits ($2.9 million), computer costs ($2.3 million) and
professional and temporary services ($1.4 million). A restructuring charge
relating to the Company's reorganization effort of $14.5 million was recorded in
the first quarter of 1999.
Other income increased $17.4 million over 1998 to $32.7 million for the
first six months of 1999. Foreign currency gains of $29.5 million relating to
the remeasurement of U.S. dollar denominated debt in Canada caused the majority
of the improvement, offsetting the inclusion in 1998 results of an $11.0 million
gain on foreign exchange contracts entered into in connection with the Norcen
Acquisition and $2.3 million of gains on the closing of Norcen interest rate
swaps and crude oil positions.
-21-
<PAGE> 22
Interest expense was $115.0 million for the first half, up $8.0 million
over 1998. The increase was primarily the result of six months of debt from the
Norcen Acquisition in 1999 compared to only four months last year after the
March 3, 1998, acquisition. This was partly offset by the use of proceeds from
the sale of the gathering, processing and marketing ("GPM") business to pay down
debt at the end of March 1999, and the other actions taken to reduce debt since
mid 1998 in connection with the Company's deleveraging program.
Income taxes were a benefit of $56.8 million in 1999 compared to a benefit
of $34.6 million in 1998. Included in 1999 taxes is a $27.9 million benefit
related to the Canadian tax settlement and $17.9 million of benefits from the
foreign currency remeasurement of deferred tax liabilities in Guatemala and
Venezuela. The remaining reduction of income tax benefit reflects the
improvement in taxable income compared to last year. Section 29 credits of $6.8
million were recorded in 1999 compared to $8.2 million last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash during the first six months of 1999
were the proceeds from sales of the GPM segment and other properties, proceeds
from issuance of debt and cash provided by operations. Cash outflows for the
first six months of 1999 included repayment of commercial paper, capital
investment and exploratory expenditures and cash used by discontinued
operations.
Cash from operations was $348.8 million for the first six months of 1999, a
$391.9 million decrease from the prior year period. The $61.1 million decrease
in working capital for the 1999 period was the result of an increase in accounts
receivable primarily due to higher prices for oil and gas in June 1999 as
compared to December 1998 and decreases in accounts payable due in part to lower
capital expenditure levels and cost reduction efforts. During the prior year
period, working capital increased $227.4 million, excluding working capital
acquired in the Norcen Acquisition, primarily as a result of decreases in
accounts receivable. The decrease in accounts receivable was primarily the
result of decreases in oil and gas prices for June 1998 as compared to December
1997. Non-cash adjustments in the 1998 period were the result of working capital
and other miscellaneous assets and liabilities acquired in the Norcen
Acquisition.
Cash provided from investing activities was $1.2 billion for the first six
months of 1999, compared to a use of $3.2 billion in the first six months of
1998. The Company received $1.36 billion on the 1999 sale of discontinued
operations while using $2.6 billion in 1998 for the Norcen Acquisition.
Discontinued operations also required a use of cash of $204.5 million in 1999
compared to $236.6 million provided from discontinued operations last year. In
addition, 1998 included $98.7 million in proceeds from the sale of assets and
the sale of the remaining investment in Superior Propane, while 1999 proceeds
from asset sales were $222.6 million, due to the sale of the Canadian Caroline,
the South Texas and the East Texas Deadwood properties.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
--------- ---------
(Millions of dollars)
<S> <C> <C>
Capital and exploratory expenditures:
Exploration and production........................................ $ 178.7 $ 828.1
Minerals and other................................................ 2.1 25.1
--------- ---------
Subtotal .................................................... 180.8 853.2
Norcen purchase price............................................. -- 2,634.3
--------- ---------
Total capital and exploratory expenditures................... $ 180.8 $ 3,487.5
========= =========
</TABLE>
Exploration and production capital spending, excluding the Norcen
Acquisition, was down $649.4 million
-22-
<PAGE> 23
to $178.7 million, principally reflecting the effort to control capital
spending in light of depressed product prices. The major categories of capital
spending included development drilling ($98.8 million), other development
capital ($37.1 million) and exploratory drilling ($17.0 million). Exploration
and development drilling by area included $64.2 million in the U.S. Onshore,
$14.3 million in the U.S. Offshore, $23.3 million in Canada and $12.4 million in
Venezuela.
Property purchases of $10.6 million in 1999 primarily reflected the $9.1
million purchase of partners' interest in West Texas properties. Minerals and
other capital was down $23.0 million to $2.1 million. Other spending in 1998
included costs related to the Fort Worth office relocation.
Cash flows from financing activities were a $1.5 billion use of cash for
1999 as the Company repaid $2.1 billion in debt, partially offset by the
issuance of new debt. In 1998, cash provided from financing activities of $2.4
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, and its
commercial paper ratings were downgraded by Standard & Poor's to A3 and by
Moody's to P3.
As of June 30, 1999, and December 31, 1998, the total capitalization of the
Company was as follows:
<TABLE>
<CAPTION>
June December
30, 1999 31, 1998
--------- ---------
(Millions of dollars)
<S> <C> <C>
Long-term and short-term debt:
Commercial paper and other - net..................................... $ 273.5 $ 2,351.9
Notes and debentures................................................. 2,725.0 2,225.0
Capital lease obligations............................................ 17.2 17.4
(Discount) premium on notes and debentures - net..................... 17.0 4.4
--------- ---------
Total debt........................................................ 3,032.7 4,598.7
Shareholders' equity....................................................... 872.9 728.2
--------- ---------
Total capitalization................................................. $ 3,905.6 $ 5,326.9
========= =========
Debt to total capitalization......................................... 77.7% 86.3%
</TABLE>
The Company anticipates total capital spending of approximately $500
million for 1999, with focus on development projects that generate more
immediate cash flow. The Company expects to drill three more Frontier horizontal
wells in the Rockies area and continue its drilling program in the Deep Giddings
field of the Austin Chalk and the Hatton field project in Canada. The Company
also plans several exploratory wells in South Louisiana, a deepwater Gomez well
in the Gulf of Mexico and two exploratory wells and two horizontal development
wells in Guatemala. The Company may reduce its capital exposure in the Gomez
project by selling or transferring a portion of its working interest. Excluding
property sales, production sales volumes are expected to decline slightly in
1999 from 1998 levels, as a result of lower capital. The Company expects sales
volumes to be approximately 2,200 MMcfed for 1999.
-23-
<PAGE> 24
Crude oil and natural gas prices have risen sharply since the beginning of
1999 and the outlook for the remainder of the 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 June
30, 1999.
YEAR 2000 ISSUE
The Company has established a formal Year 2000 Readiness Program to address
the Company's issues relating to the Year 2000. Program activities are directed
by a Program Management Office staffed with a Year 2000 Program Manager, several
senior Information Technology ("IT") and engineering project managers and
representatives from key internal functions including exploration and
production, operations, purchasing, finance and legal. The Program Management
Office operates under the oversight of a Year 2000 Executive Steering Committee
and the Audit Committee of the Board of Directors. The Company has engaged CSC
Consulting ("CSC") during the inventory and assessment phases of the program and
continues to make use of CSC services for program management recommendations and
reviews. The Company has also engaged the law firm of Morgan, Lewis & Bockius
LLP for legal advice on Year 2000 related issues.
The general phases for the Company's Year 2000 Readiness Program are (i)
inventory of Year 2000 items; (ii) assessment of business criticality and
compliance status of inventory items; (iii) remediation and verification
planning for items determined to be material to the Company; (iv) remediation
(including repairing, retiring, replacing or preparing work-arounds) of material
items that are determined not to be Year 2000 compliant; (v) verification that
material items are Year 2000 compliant; and (vi) deployment of corrected items
into the ongoing business environment.
The Company's Year 2000 Readiness Program is organized around the following
major areas:
o IT infrastructure
o Information systems
o Process control and embedded technology
o Third party suppliers, partners, customers and governmental entities
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 SEC mandated disclosures of third
parties. Remaining work includes follow-up evaluations of the readiness of
"mission critical" third-party dependencies. Emphasis in this area has focused
on business contingency planing, 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
-24-
<PAGE> 25
Year 2000 business contingency plans as of July 1999. Periodic updates of these
contingency plans are scheduled for September and November 1999 to incorporate
the change in status information available from third parties.
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
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's Year 2000 Readiness Program is expected to significantly reduce the
Company's level of uncertainty about Year 2000 issues. The Company believes
that, with the completion of the Year 2000 Readiness Program, the possibility of
significant interruptions of normal operations should be reduced.
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," "assume,"
"believe" or other words that convey the uncertainty of future events or
outcomes.
Such forward looking information is based upon management's current plans,
expectations, estimates and assumptions and is subject to a number of risks and
uncertainties that could significantly affect current plans, anticipated
actions, the timing of such actions and the Company's financial condition and
results of operations. As a consequence, actual results may differ materially
from expectations, estimates or assumptions expressed in or implied by any
forward looking statements made by or on behalf of the Company. The risks and
uncertainties include generally the volatility of oil, gas and hydrocarbon-based
financial derivative prices; basis risk and counterparty credit risk in
executing hydrocarbon price risk management activities; economic, political,
-25-
<PAGE> 26
judicial and regulatory developments; competition in the oil and gas industry as
well as competition from other sources of energy; the economics of producing
certain reserves; demand for and supply of oil and gas; the ability to find or
acquire and develop reserves of natural gas and crude oil; and the actions of
customers and competitors. Additionally, unpredictable or unknown factors not
discussed herein could have material adverse effects on actual results related
to matters which are the subject of forward looking information.
With respect to expected capital expenditures and drilling activity,
additional factors such as oil and gas prices, the extent of the Company's
success in acquiring oil and gas properties and in identifying prospects for
drilling, the availability of acquisition opportunities which meet the Company's
objectives as well as competition for such opportunities, exploration and
operating risks, the success of management's cost reduction efforts, 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.
-26-
<PAGE> 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the sale of the GPM segment, the Company has reduced its risk
exposure in several areas. The Company now has lower plant volumes subject to
price risk, lower risk relating to marketing activities for third party 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 sale.
COMMODITY PRICE RISK -- NON-TRADING ACTIVITIES
The following table summarizes the Company's open positions at June 30,
1999, which hedge the Company's future oil and gas production:
<TABLE>
<CAPTION>
WEIGHTED AVG. UNRECOGNIZED
CONTRACT PRICE PER FAIR VALUE GAIN/(LOSS)
PRODUCT TYPE TIME PERIOD VOLUME MCF OR BBL (MILLIONS) (MILLIONS)
- --------- -------------- -------------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gas Puts Purchased Aug - Oct 1999 430MMcfd $ 1.90 $ 0.3 $ (5.6)
Gas Calls Sold Aug 1999 1.0Bcfd $ 2.54 1.5 1.6
Gas Net Calls Sold Sept 1999 950MMcfd $ 2.54 2.8 0.1
Gas Net Calls Sold Oct 1999 400MMcfd $ 2.50 1.9 (0.8)
Gas Swaps Aug 1999 768MMcfd Var. ( 2.3) (2.3)
Gas Swaps Sep 1999 738MMcfd Var. ( 2.1) (2.1)
Gas Swaps Oct 1999 568MMcfd Var. ( 2.0) (2.0)
Gas Futures Aug 1999 278MMcfd $ 1.93 ( 4.0) (4.0)
Gas Futures Sep 1999 87MMcfd $ 1.95 ( 1.2) (1.2)
Gas Futures Nov - Dec 1999 149MMcfd $ 2.59 ( 0.5) (0.5)
Gas Futures Jan - Jul 2000 148MMcfd $ 2.43 ( 0.8) (0.8)
Gas Fixed Price Jul - Dec 1999 20MMcfd $ 2.12 0.1 0.1
Gas Fixed Price Jan - Oct 2000 10MMcfd $ 2.80 2.4 2.4
Gas Fixed Price Jan - Dec 2000 10MMcfd $ 1.54 (1.9) (1.9)
Gas Fixed Price Jan - Oct 2001 10MMcfd $ 1.54 ( 1.5) (1.5)
Oil Swaps Jul 1999 76MBbld $ 14.68 (10.8) (10.8)
Oil Swaps Aug - Dec 1999 70MBbld $ 14.51 (46.8) (46.8)
Oil Swaps Jan - Dec 2000 2MBbld $ 13.37 ( 0.4) (0.4)
Oil Swaps Jan - Dec 2000 2MBbld $ 13.37 ( 0.5) (0.5)
Oil Fixed Price Jul - Aug 1999 2MBbld $ 13.44 ( 0.2) (0.2)
Oil Fixed Price Jul - Dec 1999 2MBbld $ 15.35 0.2 0.2
Oil Fixed Price Jan - Feb 2000 2MBbld $ 15.35 0.1 0.1
Oil Fixed Price Jul - Dec 1999 2MBbld $ 12.69 ( 0.7) (0.7)
Oil Fixed Price Jul - Oct 2000 2MBbld $ 12.69 ( 0.5) (0.5)
Oil Fixed Price Jul - Dec 1999 8MBbld $ 15.23 0.5 0.5
Oil Fixed Price Jan - Apr 2000 8MBbld $ 15.23 0.6 0.6
Oil Fixed Price Jul - Dec 1999 2MBbld $ 15.47 0.1 0.1
---------- ----------
Totals: $ (65.7) $( 76.9)
========== ==========
</TABLE>
-27-
<PAGE> 28
The following table summarizes the Company's closed positions at June
30, 1999, relating to the Company's gas production:
<TABLE>
<CAPTION>
UNRECOGNIZED
GAIN/(LOSS)
PRODUCT TYPE TIME PERIOD (MILLIONS)
------- ------- ----------- ------------
<S> <C> <C> <C>
Gas Various Jul 1999 $ (6.7)
Gas Futures Aug 1999 $ (1.8)
Gas Futures Sept 1999 $ (0.2)
Gas Futures Oct 1999 $ (0.3)
------------
Totals: $ (9.0)
============
</TABLE>
The following table summarizes the Company's open positions at June 30,
1999, relating to the Company's oil storage:
<TABLE>
<CAPTION>
FAIR UNRECOGNIZED
AVERAGE VALUE GAIN/(LOSS)
PRODUCT TYPE TIME PERIOD VOLUME PRICE (MILLIONS) (MILLIONS)
------- ----- ----------- ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Oil Swaps Jul 1999 5.8 MBbld $ 13.87 $ (1.0) $ (1.0)
Oil Swaps Aug 1999 7.9 MBbld $ 16.00 $ (0.8) $ (0.8)
------ ------------
Totals: $ (1.8) $ (1.8)
====== ============
</TABLE>
At June 30, 1999, the Company had margin deposits of $45.6 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 June 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 Aug - Dec 1999 5.7Bcf $2.65 $1.0 $1.0
Purchased
Gas Futures/Swaps Jan - Dec 2000 6.0Bcf $2.89 $1.1 $1.1
Purchased
Gas Futures/Swaps Jan - Apr 2001 0.2Bcf $2.40 $0.0 $0.0
Purchased
Gas Futures/Swaps Aug - Dec 1999 2.1Bcf $2.55 $(0.5) $(0.5)
Sold
Gas Futures/Swaps Jan - Dec 2000 2.8Bcf $2.64 $(0.7) $(0.7)
Sold
----- -----
Totals: $ 0.9 $ 0.9
===== =====
</TABLE>
The Company was a party to several long-term firm gas transportation
agreements that supported the gas marketing program and 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 and 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 subsequent to March
31, 1999. The fair value of these contracts at June 30, 1999, was a loss of
$103.7 million, which is included in other current liabilities and other
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
-28-
<PAGE> 29
a meaningful, permanent change has occurred to transportation rates in the
market place. However, at June 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 $56 million for the ten
year period.
FOREIGN CURRENCY RISK
The Company periodically enters into foreign currency contracts to hedge
specific currency exposures from commercial transactions. The following table
summarizes the Company's open foreign currency positions at June 30, 1999:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT FAIR VALUE
YEAR (US$ MILLIONS) FORWARD RATE (US$ MILLIONS)
---- --------------- ------------ --------------
<S> <C> <C> <C>
1999...... $ 72.0 C$1.3535 $ (5.8)
2000...... 8.0 C$1.3750 (0.5)
2004...... 70.0 C$1.3630 (5.2)
------- -------
$ 150.0 $ (11.5)
======= =======
</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 June 30, 1999, excluding the
$4.1 million remaining unamortized deferred liability, was $7.4 million.
CREDIT RISK
In conjunction with the GPM Disposition, on March 31, 1999, the Company
entered into a swap transaction with Duke which in effect transferred all
financial positions held by the GPM business to Duke. As a result, the Company
has eliminated all price/rate risk relating to these positions, and is only
subject to credit risk for amounts due from Duke or other counterparties under
the terms of the swap transactions with Duke or the underlying swap
transactions. At June 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 has an outstanding swap
transaction of .4Bcf from July through October 1999. At June 30, 1999, the
unrealized gain relating to this financial transaction is $27.6 million.
At June 30, 1999, the Company's largest credit risk associated with any
single counterparty, represented by the net fair value of open contracts, was
$27.0 million.
In connection with the sale of the GPM segment, the Company entered into a
long-term sales agreement with Duke, which obligates the Company to sell most of
its domestic natural gas and NGLs to Duke for a five-year period beginning on
the date of the GPM Disposition. Prices received will be tied to the current
market price for each product. As a result, a significant portion of the
Company's credit risk will be with a single customer. Duke is currently
considered a good credit risk; however, periodic credit evaluations will
continue. Further, due to certain agreements with Duke, letter of credit and/or
other assurances can be demanded under certain circumstances.
-29-
<PAGE> 30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL
The Company is a defendant in a number of lawsuits and is involved in
governmental proceedings arising in the ordinary course of business, including,
but not limited to, royalty claims, contract claims, personal injury claims and
environmental claims. While management of the Company cannot predict the outcome
of such litigation and other proceedings, management does not expect these
matters to have a 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 1999, the Annual Meeting of the Shareholders of the Company was
held in Fort Worth, Texas for the purpose of electing a Board of Directors and
voting on the proposals described below. There was no solicitation in opposition
to management's nominees for director as listed in the proxy statement.
Each of the directors nominated by the Board (which number constitutes the
entire Board of the Company) and listed in the proxy statement was elected with
the votes as follows:
<TABLE>
<CAPTION>
NOMINEES SHARES FOR SHARES WITHHELD
--------------------------- ----------- ---------------
<S> <C> <C>
H. Jesse Arnelle 218,585,305 7,435,025
Lynne V. Cheney 218,922,250 7,095,080
Preston M. Geren III 219,273,140 6,744,190
Lawrence M. Jones 219,252,055 6,765,275
Drew Lewis 218,613,219 7,404,111
Claudine B. Malone 218,905,086 7,112,244
Jack L. Messman 218,819,115 7,198,215
John W. Poduska, Sr., Ph.D. 219,279,933 6,737,397
Michael E. Rossi 218,931,464 7,085,866
Samuel K. Skinner 218,937,288 7,080,042
James R. Thompson 218,560,933 7,456,397
</TABLE>
Amendments to the Company's 1995 Stock Option and Retention Stock Plan, as
amended and restated effective June 1, 1997, were approved with the following
vote: 204,689,849 shares for; 16,566,131 shares against; 4,760,329 shares
abstaining; and 1,020 broker nonvotes. The amendments (1) increase the aggregate
number of shares available for grants of stock options and stock appreciation
rights and awards of retention stock under the plan from 16,000,000 to
23,000,000 shares, and (2) increase the maximum percentage of available shares
that can be granted or awarded to an individual participant from 10% of the
shares available under such plan to 25% of such shares.
An amendment to the Company's 1995 Directors Stock Option Plan, as amended
and restated effective July 14, 1998, to increase the number of shares that may
be issued under the plan from 1,000,000 to 1,500,000 shares, was approved with
the following vote: 197,836,604 shares for; 23,288,324 shares against; 4,891,380
shares abstaining; and 1,021 broker nonvotes.
-30-
<PAGE> 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 1995 Stock Option and Retention Stock Plan of Union Pacific Resources
Group Inc. as amended and restated, effective July 15, 1999.
10.2 Second Amendment, effective May 18, 1999, to 1995 Directors Stock
Incentive Plan of Union Pacific Resources Group Inc. as amended and
restated, effective July 14, 1998.
11 Computation of earnings per share.
12 Computation of ratio of earnings to fixed charges.
15 Awareness letter of Arthur Andersen LLP dated August 11, 1999.
27 Financial data schedule.
(b) REPORTS ON FORM 8-K
On August 3, 1999, the Company filed a Current Report on Form 8-K
containing (i) the 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. Mr. Messman will be 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 announcing the Company's financial results for the second
quarter of 1999, including operating revenues, net income and certain
other financial information.
-31-
<PAGE> 32
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: August 11, 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)
-32-
<PAGE> 33
UNION PACIFIC RESOURCES GROUP INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 1995 Stock Option and Retention Stock Plan of Union Pacific
Resources Group Inc. as amended and restated, effective
July 15, 1999.
10.2 Second Amendment, effective May 18, 1999, to 1995 Directors
Stock Incentive Plan of Union Pacific Resources Group Inc. as
amended and restated, effective July 14, 1998.
11 Computation of earnings per share.
12 Computation of ratio of earnings to fixed charges.
15 Awareness letter of Arthur Andersen LLP dated August 11, 1999.
27 Financial data schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
[UPR LOGO]
1995
STOCK OPTION AND RETENTION STOCK PLAN
OF
UNION PACIFIC RESOURCES GROUP INC.
AS AMENDED AND RESTATED
(EFFECTIVE JULY 15, 1999)
<PAGE> 2
1995 STOCK OPTION AND RETENTION STOCK PLAN
OF UNION PACIFIC RESOURCES GROUP INC.
(AS AMENDED AND RESTATED EFFECTIVE JULY 15, 1999)
================================================================================
1. PURPOSE
This 1995 Stock Option and Retention Stock Plan of Union Pacific Resources Group
Inc. is to promote and closely align the interests of officers and employees
with those of the shareholders of Union Pacific Resources Group Inc. by
providing stock based compensation. The Plan is intended to strengthen Union
Pacific Resources Group Inc.'s ability to reward performance which enhances long
term shareholder value; to increase employee stock ownership through performance
based compensation plans; and to strengthen the company's ability to attract and
retain an outstanding employee and executive team.
================================================================================
2. DEFINITIONS
The following terms shall have the following meanings:
"Act" means the Securities Exchange Act of 1934, as amended.
"Approved Leave of Absence" means a leave of absence of definite length
approved by the Vice President - People of the Company, or by any other officer
of the Company to whom the Committee delegates such authority.
"Award" means an award of Retention Shares pursuant to the Plan.
"Beneficiary" means any person or persons designated in writing by a
Participant to the Committee on a form prescribed by it for that purpose, which
designation shall be revocable at any time by the Participant prior to his or
her death, provided that, in the absence of such a designation or the failure of
the person or persons so designated to survive the Participant, "Beneficiary"
shall mean such Participant's estate; and further provided that no designation
of Beneficiary shall be effective unless it is received by the Company before
the Participant's death.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, or the
corresponding provisions of any successor statute.
"Committee" means the Committee designated by the Board to administer
the Plan pursuant to Section 3.
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"Common Stock" means the Common Stock of the Company.
"Company" means Union Pacific Resources Group Inc., a Utah corporation,
or any successor corporation.
"Option" means each non-qualified stock option, incentive stock option
and stock appreciation right granted under the Plan, including a Rollover
Option.
"Optionee" means the Chairman of the Board or any employee of the
Company or a Subsidiary (including directors who are also such employees) who is
granted an Option under the Plan.
"Participant" means the Chairman of the Board or any employee of the
Company or a Subsidiary (including directors who are also such employees) who is
granted an Award under the Plan.
"Plan" means this 1995 Stock Option and Retention Stock Plan of Union
Pacific Resources Group Inc., as amended from time to time.
"Retention Shares" means shares of Common Stock subject to an Award
granted under the Plan, including Rollover Retention Shares.
"Restriction Period" means the period defined in Section 9(a).
"Rollover Option" means an Option granted under the Plan in exchange
for UPC Stock Options.
"Rollover Retention Shares" means shares of Common Stock subject to an
Award granted under the Plan in exchange for UPC Retention Shares.
"Subsidiary" means any corporation, partnership, or limited liability
company of which the Company owns directly or indirectly at least a majority of
the outstanding shares of voting stock or other voting interest.
"UPC" means Union Pacific Corporation, a Utah corporation.
"UPC Plans" mean the 1993 Stock Option and Retention Stock Plan of
Union Pacific Corporation, the 1990 Retention Stock Plan of Union Pacific
Corporation, the 1988 Stock Option and Restricted Stock Plan of Union Pacific
Corporation and the 1982 Stock Option and Restricted Stock Plan of Union Pacific
Corporation.
"UPC Stock Option" means any option granted under any UPC Plan.
"UPC Retention Shares" means shares of common stock of UPC granted and
subject to restrictions under the UPC Plans.
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"Vesting Condition" means any condition to the vesting of Retention
Shares established by the Committee pursuant to Section 9.
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3. ADMINISTRATION
The Plan shall be administered by the Committee which shall comprise not less
than three persons, who shall be members of the Board, none of whom shall be
employees of the Company or any Subsidiary. Any actions taken with respect to a
"covered employee" within the meaning of Code section 162(m) shall be taken by
two or more "outside directors" as required by Code section 162(m). The
Committee shall (i) grant Options to Optionees and make Awards of Retention
Shares to Participants, and (ii) determine the terms and conditions of such
Options and Awards of Retention Shares, all in accordance with the provisions of
the Plan. The Committee shall have full authority to construe and interpret the
Plan, to establish, amend and rescind rules and regulations relating to the
Plan, to administer the Plan, and to take all such steps and make all such
determinations in connection with the Plan and Options and Awards granted
thereunder as it may deem necessary or advisable. The Committee may delegate its
authority under the Plan to one or more officers or employees of the Company or
a Subsidiary, provided, however, that no delegation shall be made of authority
to take an action which is required by Rule 16b-3 promulgated under the Act to
be taken by "non-employee directors" in order that the Plan and transactions
thereunder meet the requirements of such Rule. Each Option and grant of
Retention Shares shall, if required by the Committee, be evidenced by an
agreement to be executed by the Company and the Optionee or Participant,
respectively, and contain provisions not inconsistent with the Plan. All
determinations of the Committee shall be by a majority of its members and shall
be evidenced by resolution, written consent or other appropriate action, and the
Committee's determinations shall be final. Each member of the Committee, while
serving as such, shall be considered to be acting in his or her capacity as a
director of the Company.
================================================================================
4. ELIGIBILITY
To be eligible for selection by the Committee to participate in the Plan an
individual must be an employee of the Company or a Subsidiary, provided, that
the Chairman of the Board shall be eligible to receive Rollover Options.
Directors other than the Chairman of the Board who are not full-time salaried
employees shall not be eligible. In granting Options or Awards of Retention
Shares to eligible persons, the Committee shall take into account their duties,
their present and potential contributions to the success of the Company or a
Subsidiary, and such other factors as the Committee shall deem relevant in
connection with accomplishing the purpose of the Plan.
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================================================================================
5. STOCK SUBJECT TO THE PLAN
Subject to the provisions of Section 11 hereof, the maximum number and kind of
shares as to which Options or Retention Shares may at any time be granted under
the Plan are 23 million shares of Common Stock. No Participant may receive
Options (excluding Rollover Options) or Awards (excluding Rollover Retention
Shares) aggregating more than 25% of the shares of Common Stock available under
the Plan. Shares of Common Stock subject to Options or Awards under the Plan may
be either authorized but unissued shares or shares previously issued and
reacquired by the Company. Upon the expiration, termination or cancellation (in
whole or in part) of unexercised Options, shares of Common Stock subject thereto
shall again be available for option or grant as Retention Shares under the Plan.
Shares of Common Stock covered by an Option, or portion thereof, which is
surrendered upon the exercise of a stock appreciation right, shall thereafter be
unavailable for option or grant as Retention Shares under the Plan. Upon the
forfeiture (in whole or in part) of a grant of Retention Shares, the shares of
Common Stock subject to such forfeiture shall again be available for option or
grant as Retention Shares under the Plan if no dividends have been paid on the
forfeited shares, and otherwise shall be unavailable for such an option or
grant.
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6. TERMS AND CONDITIONS OF NON-QUALIFIED OPTIONS
All non-qualified options under the Plan shall be granted subject to the
following terms and conditions:
(a) OPTION PRICE. The option price per share with respect to each
option, other than Rollover Options, shall be determined by the Committee but
shall not be less than 100% of the fair market value of the Common Stock on the
date the option is granted, such fair market value to be determined in
accordance with the procedures to be established by the Committee. Rollover
Options shall each have an option price per share determined by the Committee,
provided that, unless the Committee determines otherwise in a specific case, the
aggregate gain or loss, as determined by the Committee, implicit in the Rollover
Options granted to each Optionee shall be equal to the aggregate gain or loss
implicit in the UPC Stock Options surrendered in exchange for such Rollover
Options.
(b) DURATION OF OPTIONS. Options shall be exercisable at such time or
times and under such conditions as set forth in the written agreement evidencing
such option, but in no event shall any option be exercisable subsequent to the
tenth anniversary of the date on which the option is granted or, in the case of
Rollover Options, of the date of grant of the UPC Stock Option for which such
Rollover Option was exchanged.
(c) EXERCISE OF OPTION. Except as provided in Section 6(h), 6(i) or
8(c), the shares of Common Stock covered by an option may not be purchased prior
to the first anniversary of the date on which the option is granted or, in the
case of Rollover Options, prior to the date of exercise of the UPC Stock Option
for which such Rollover Option was exchanged (unless the
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Committee shall determine otherwise), or such longer period or periods, and
subject to such conditions, as the Committee may determine, but thereafter may
be purchased at one time or in such installments over the balance of the option
period as may be provided in the option, provided, however, that no option
(other than Rollover Options) shall be exercisable before the earlier of (i)
December 31, 1997, or (ii) one year after UPC no longer owns at least 50% of the
voting power of all shares of the Company entitled to vote generally in the
election of directors. Any shares not purchased on the applicable installment
date may, unless the Committee shall have determined otherwise, be purchased
thereafter at any time prior to the final expiration of the option. To the
extent that the right to purchase shares has accrued thereunder, options may be
exercised from time to time by written notice to the Company stating the number
of shares with respect to which the option is being exercised.
(d) PAYMENT. Shares of Common Stock purchased under options shall, at
the time of purchase, be paid for in full, unless the Committee shall otherwise
determine. All, or any portion, of the option exercise price may, at the
discretion of the Committee, be paid by the surrender to the Company, at the
time of exercise, of shares of previously acquired Common Stock owned by the
Optionee, to the extent that such payment does not require the surrender of a
fractional share of such previously acquired Common Stock. In addition, to the
extent permitted by the Committee, the option exercise price may be paid by
authorizing the Company to withhold Common Stock otherwise issuable on exercise
of the option. Such shares previously acquired or shares withheld to pay the
option exercise price shall be valued at fair market value on the date the
option is exercised in accordance with the procedures to be established by the
Committee. A holder of an option shall have none of the rights of a stockholder.
If an amount is payable by an Optionee to the Company or a Subsidiary under
applicable withholding tax laws in connection with the exercise of non-qualified
options, the Committee may, in its discretion and subject to such rules as it
may adopt, permit the Optionee to make such payment, in whole or in part, by
electing to authorize the Company to withhold or accept shares of Common Stock
having a fair market value equal to the amount to be paid under such withholding
tax laws.
(e) RESTRICTIONS. The Committee shall determine, with respect to each
option, the nature and extent of the restrictions, if any, to be imposed on the
shares of Common Stock which may be purchased thereunder including restrictions
on the transferability of such shares acquired through the exercise of such
option. Without limiting the generality of the foregoing, the Committee may
impose conditions restricting absolutely or conditionally the transferability of
shares acquired through the exercise of options for such periods, and subject to
such conditions, including continued employment of the Optionee by the Company
or a Subsidiary, as the Committee may determine.
(f) PURCHASE FOR INVESTMENT. The Committee shall have the right to
require that each Optionee or other person who shall exercise an option under
the Plan represent and agree that any shares of Common Stock purchased pursuant
to such option will be purchased for investment and not with a view to the
distribution or resale thereof or that such shares will not be sold except in
accordance with such restrictions or limitations as may be set forth in the
written agreement granting such option.
(g) NON-TRANSFERABILITY OF OPTIONS. During an Optionee's lifetime, the
option may be exercised only by the Optionee. Options shall not be transferable,
except for exercise by the
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Optionee's legal representatives or heirs. An officer of the Company may, with
prior approval from the Committee (or its designee) as to form, transfer an
exercisable non-qualified Option or Rollover Option to (a) a member or members
of the officer's immediate family (spouse, children and grandchildren, including
step and adopted children and grandchildren), (b) a trust, the beneficiaries of
which consist exclusively of members of the officer's immediate family, (c) a
partnership, the partners of which consist exclusively of members of the
officer's immediate family, or (d) any similar entity created for the exclusive
benefit of members of the officer's immediate family. The Committee or its
designee must approve the form of any transfer of a Grant to or for the benefit
of any immediate family member or members before such transfer shall be
recognized as valid hereunder. For purposes of the preceding sentence, any
remote, contingent interest of persons other than a member of the officer's
immediate family shall be disregarded. For purposes of this Section 6(g), the
term "officer" shall have the same meaning as that term is defined in Rule
16a-1(f) of the Act. A person's status as an officer shall be determined at the
time of the intended transfer.
(h) TERMINATION OF EMPLOYMENT. Upon the termination of an Optionee's
employment, for any reason other than death, the option shall be exercisable
only as to those shares of Common Stock which were then subject to the exercise
of such option, provided that (I) in the case of disability as described below,
any holding period required by Section 6(c) shall automatically be deemed to be
satisfied and (II) the Committee may determine that particular limitations and
restrictions under the Plan shall not apply, and such option shall expire
according to the following schedule (unless the Committee shall otherwise
determine):
(i) RETIREMENT. Option shall expire, unless exercised, five
(5) years after the Optionee's retirement from the Company or any
Subsidiary under the provisions of the Company's or a Subsidiary's
pension plan.
(ii) DISABILITY. Option shall expire, unless exercised, five
(5) years after the date the Optionee is eligible to receive disability
benefits under the provisions of the Company's or a Subsidiary's
long-term disability plan.
(iii) GROSS MISCONDUCT. Option shall expire upon receipt by
the Optionee of the notice of termination if he or she is terminated
for deliberate, willful or gross misconduct as determined by the
Company.
(iv) ALL OTHER TERMINATIONS. Option shall expire, unless
exercised, three (3) months after the date of such termination.
(i) DEATH OF OPTIONEE. Upon the death of an Optionee during his or her
period of employment, the option shall be exercisable only as to those shares of
Common Stock which were subject to the exercise of such option at the time of
his or her death, provided that (I) any holding period required by Section 6(c)
shall automatically be deemed to be satisfied and (II) the Committee may
determine that particular limitations and restrictions under the Plan shall not
apply, and such option shall expire, unless exercised by the Optionee's legal
representatives or heirs, five (5) years after the date of death (unless the
Committee shall provide for a shorter period at the time the option is granted).
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In no event, however, shall any option be exercisable pursuant
to Sections 6(h) or (i) subsequent to the tenth anniversary of the date on which
it is granted or, in the case of a Rollover Option, of the date of grant of the
UPC Stock Option(s) for which such Rollover Option was exchanged.
(j) ROLLOVER OPTIONS. Rollover Options may be granted only in exchange
for UPC Stock Options and only during the period prior to 90 days after UPC no
longer owns at least 50% of the voting power of all of the shares of the Company
entitled to vote generally in the election of directors. The ratio for such
exchange shall be determined by the Committee, provided that the requirements of
Section 6(a) are met.
================================================================================
7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
(a) GENERAL. The Committee may also grant a stock appreciation right in
connection with a non-qualified option, either at the time of grant or by
amendment. Such stock appreciation right shall cover the same shares covered by
such option (or such lesser number of shares of Common Stock as the Committee
may determine) and shall, except for the provisions of Section 6(d) hereof, be
subject to the same terms and conditions as the related non-qualified option.
(b) EXERCISE AND PAYMENT. Each stock appreciation right shall entitle
the Optionee to surrender to the Company unexercised the related option, or any
portion thereof, and to receive from the Company in exchange therefor an amount
equal to the excess of the fair market value of one share of Common Stock over
the option price per share times the number of shares covered by the option, or
portion thereof, which is surrendered. Payment shall be made in shares of Common
Stock valued at fair market value, or in cash, or partly in shares and partly in
cash, all as shall be determined by the Committee. The fair market value shall
be the value determined in accordance with procedures established by the
Committee. Stock appreciation rights may be exercised from time to time upon
actual receipt by the Company of written notice stating the number of shares of
Common Stock with respect to which the stock appreciation right is being
exercised, provided that if a stock appreciation right expires unexercised, it
shall be deemed exercised on the expiration date if any amount would be payable
with respect thereto. No fractional shares shall be issued but instead cash
shall be paid for a fraction or, if the Committee should so determine, the
number of shares shall be rounded downward to the next whole share. If an amount
is payable by an Optionee to the Company or a Subsidiary under applicable
withholding tax laws in connection with the exercise of stock appreciation
rights, the Committee may, in its discretion and subject to such rules as it may
adopt, permit the Optionee to make such payment, in whole or in part, by
electing to authorize the Company to withhold or accept shares of Common Stock
having a fair market value equal to the amount to be paid under such withholding
tax laws.
(c) RESTRICTIONS. The obligation of the Company to satisfy any stock
appreciation right exercised by an Optionee subject to Section 16 of the Act
shall be conditioned upon the
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prior receipt by the Company of an opinion of counsel to the Company that any
such satisfaction will not create an obligation on the part of such Optionee
pursuant to Section 16(b) of the Act to reimburse the Company for any statutory
profit which might be held to result from such satisfaction.
================================================================================
8. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
(a) GENERAL. The Committee may also grant incentive stock options as
defined under section 422 of the Code. All incentive stock options issued under
the Plan shall, except for the provisions of Sections 6(g) (to the extent it
allows the Committee to permit options to be transferred to, or for the benefit
of, the Optionee's immediate family members), 6(h) and (i) and Section 7 hereof,
be subject to the same terms and conditions as the non-qualified options granted
under the Plan, and may be Rollover Options subject to Section 6(j) hereof;
provided, however, that no incentive stock option which is a Rollover Option
shall confer additional benefits (within the meaning of section 424(h)(3) of the
Code) upon the Optionee which the Optionee did not have under the UPC Stock
Option surrendered in exchange therefor. In addition, incentive stock options
shall be subject to the conditions of Sections 8(b), (c), (d) and (e).
(b) LIMITATION OF EXERCISE. The aggregate fair market value (determined
as of the date the incentive stock option is granted) of the shares of stock
with respect to which incentive stock options are exercisable for the first time
by such Optionee during any calendar year, under this Plan or any other stock
option plans adopted by the Company, its Subsidiaries or any predecessor
companies thereof, other than Rollover Options issued in exchange for UPC
Options which were exercisable by the Optionee at the time of exchange, shall
not exceed $100,000. If any incentive stock options become exercisable in any
year in excess of the $100,000 limitation, options representing such excess
shall become non-qualified options exercisable pursuant to the terms of Section
6 hereof and shall not be exercisable as incentive stock options.
(c) TERMINATION OF EMPLOYMENT. Upon the termination of an Optionee's
employment, for any reason other than death, his or her incentive stock option
shall be exercisable only as to those shares of Common Stock which were then
subject to the exercise of such option provided that (I) in the case of
disability as described below, any holding period required by Section 6(c) shall
automatically be deemed to be satisfied and (II) the Committee may determine
that particular limitations and restrictions under the Plan shall not apply, and
such option shall expire as an incentive stock option (but shall become a
non-qualified option exercisable pursuant to the terms of Section 6 hereof less
the period already elapsed under such Section), according to the following
schedule (unless the Committee shall provide for shorter periods at the time the
incentive stock option is granted):
(i) RETIREMENT. An incentive stock option shall expire, unless
exercised, three (3) months after the Optionee's retirement from the
Company or any Subsidiary under the provisions of the Company's or a
Subsidiary's pension plan.
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(ii) DISABILITY. In the case of an Optionee who is disabled
within the meaning of section 22(e)(3) of the Code, an incentive stock
option shall expire, unless exercised, one (1) year after the earlier
of the date the Optionee terminates employment or the date the Optionee
is eligible to receive disability benefits under the provisions of the
Company's or a Subsidiary's long-term disability plan.
(iii) GROSS MISCONDUCT. An incentive stock option shall expire
upon receipt by the Optionee of the notice of termination if he or she
is terminated for deliberate, willful or gross misconduct as determined
by the Company.
(iv) ALL OTHER TERMINATIONS. An incentive stock option shall
expire, unless exercised, three (3) months after the date of such
termination.
(d) DEATH OF OPTIONEE. Upon the death of an Optionee during his or her
period of employment, the incentive stock option shall be exercisable as an
incentive stock option only as to those shares of Common Stock which were
subject to the exercise of such option at the time of death, provided that (I)
any holding period required by Section 6(c) shall automatically be deemed to be
satisfied, and (II) the Committee may determine that particular limitations and
restrictions under the Plan shall not apply, and such option shall expire,
unless exercised by the Optionee's legal representatives or heirs, five (5)
years after the date of death (unless the Committee shall provide for a shorter
period at the time the option is granted).
(e) LEAVE OF ABSENCE. A leave of absence, whether or not an Approved
Leave of Absence, shall be deemed a termination of employment for purposes of
Section 8.
In no event, however, shall any incentive stock option be
exercisable pursuant to Sections 8(c) or (d) subsequent to the tenth anniversary
of the date on which it was granted or, in the case of a Rollover Option, of the
date of grant of the UPC Stock Option(s) for which such Rollover Option was
exchanged.
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================================================================================
9. TERMS AND CONDITIONS OF AWARDS OF RETENTION STOCK
(a) GENERAL. Retention Shares (other than Rollover Retention Shares)
may be granted to reward the attainment of individual, Company or Subsidiary
goals, or to attract or retain officers or other employees of the Company or any
Subsidiary. With respect to each grant of Retention Shares under the Plan, the
Committee shall determine the period or periods, including any conditions for
determining such period or periods, during which the restrictions set forth in
Section 9(b) shall apply, provided that in no event, other than as provided in
Section 9(c) or unless the Committee shall determine otherwise, shall such
restrictions terminate prior to 1 year after the date of grant, except for
Rollover Retention Shares, in which case such restrictions shall not terminate
prior to 3 years after the date of grant of the UPC Retention Shares for which
such Rollover Retention Shares are exchanged (the "Restriction Period"), and may
also specify any other terms or conditions to the right of the Participant to
receive such Retention Shares ("Vesting Conditions"). Subject to Section 9(c)
and any such Vesting Condition, a grant of Retention Shares shall be effective
for the Restriction Period and may not be revoked.
(b) RESTRICTIONS. At the time of grant of Retention Shares to a
Participant, a certificate representing the number of shares of Common Stock
granted shall be registered in the Participant's name but shall be held by the
Company for his or her account. The Participant shall have the entire beneficial
ownership interest in, and all rights and privileges of a stockholder as to,
such Retention Shares, including the right to vote such Retention Shares and,
unless the Committee shall determine otherwise, the right to receive dividends
thereon, subject to the following: (i) subject to Section 9(c), the Participant
shall not be entitled to delivery of the stock certificate until the expiration
of the Restriction Period and the satisfaction of any Vesting Conditions; (ii)
none of the Retention Shares may be sold, transferred, assigned, pledged, or
otherwise encumbered or disposed of during the Restriction Period or prior to
the satisfaction of any Vesting Conditions; and (iii) all of the Retention
Shares shall be forfeited and all rights of the Participant to such Retention
Shares shall terminate without further obligation on the part of the Company
unless the Participant remains in the continuous employment of the Company or a
Subsidiary for the entire Restriction Period, except as provided by Sections
9(a) and 9(c), and any applicable Vesting Conditions have been satisfied. Any
shares of Common Stock or other securities or property received as a result of a
transaction listed in Section 11 shall be subject to the same restrictions as
such Retention Shares unless the Committee shall determine otherwise.
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(c) TERMINATION OF EMPLOYMENT.
(i) DISABILITY AND RETIREMENT. Unless the Committee shall
determine otherwise at the time of grant of Retention Shares, if (A) a
Participant ceases to be an employee of the Company or a Subsidiary
prior to the end of a Restriction Period, by reason of disability under
the provisions of the Company's or a Subsidiary's long-term disability
plan or retirement under the provisions of the Company's or a
Subsidiary's pension plan either (i) at age 65 or (ii) prior to age 65
at the request of the Company or a Subsidiary, and (B) all Vesting
Conditions have been satisfied, the Retention Shares granted to such
Participant shall immediately vest and all restrictions applicable to
such shares shall lapse. A certificate for such shares shall be
delivered to the Participant in accordance with the provisions of
Section 9(d).
(ii) DEATH. Unless the Committee shall determine otherwise at
the time of grant of Retention Shares, if (A) a Participant ceases to
be an employee of the Company or a Subsidiary prior to the end of a
Restriction Period by reason of death, and (B) all Vesting Conditions
have been satisfied, the Retention Shares granted to such Participant
shall immediately vest in his or her Beneficiary, and all restrictions
applicable to such shares shall lapse. A certificate for such shares
shall be delivered to the Participant's Beneficiary in accordance with
the provisions of Section 9(d).
(iii) ALL OTHER TERMINATIONS. If a Participant ceases to be an
employee of the Company or a Subsidiary prior to the end of a
Restriction Period for any reason other than death, disability or
retirement as provided in Section 9(c)(i) and (ii), the Participant
shall immediately forfeit all Retention Shares then subject to the
restrictions of Section 9(b) in accordance with the provisions thereof,
except that the Committee may, if it finds that the circumstances in
the particular case so warrant, allow a Participant whose employment
has so terminated to retain any or all of the Retention Shares then
subject to the restrictions of Section 9(b) and all restrictions
applicable to such retained shares shall lapse. A certificate for such
retained shares shall be delivered to the Participant in accordance
with the provisions of Section 9(d).
(iv) VESTING CONDITIONS. Unless the Committee shall determine
otherwise at the time of grant of Retention Shares, if a Participant
ceases to be an employee of the Company or a Subsidiary for any reason
prior to the satisfaction of any Vesting Conditions, the Participant
shall immediately forfeit all Retention Shares then subject to the
restrictions of Section 9(b) in accordance with the provisions thereof,
except that the Committee may, if it finds that the circumstances in
the particular case so warrant, allow a Participant whose employment
has so terminated to retain any or all of the Retention Shares then
subject to the restrictions of Section 9(b) and all restrictions
applicable to such retained shares shall lapse. A certificate for such
retained shares shall be delivered to the Participant in accordance
with the provisions of Section 9(d).
(d) PAYMENT OF RETENTION SHARES. At the end of the Restriction Period
and after all Vesting Conditions have been satisfied, or at such earlier time as
provided for in Section 9(c) or as the Committee, in its sole discretion, may
otherwise determine, all restrictions applicable to the Retention Shares shall
lapse, and a stock certificate for a number of shares of Common Stock equal to
the number of Retention Shares, free of all restrictions, shall be delivered to
the
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Participant or his or her Beneficiary, as the case may be. If an amount is
payable by a Participant to the Company or a Subsidiary under applicable
withholding tax laws in connection with the lapse of such restrictions, the
Committee, in its sole discretion, may permit the Participant to make such
payment, in whole or in part, by authorizing the Company to transfer to the
Company Retention Shares otherwise deliverable to the Participant having a fair
market value equal to the amount to be paid under such withholding tax laws.
(e) ROLLOVER RETENTION SHARES. Rollover Retention Shares may be granted
only in exchange for shares of UPC Retention Stock granted and subject to
restrictions under a UPC Plan and only during the period prior to 90 days after
UPC no longer owns at least 50% of the voting power of all of the shares of the
Company entitled to vote generally in the election of directors. Unless the
Committee shall determine otherwise in a specific case, the Rollover Retention
Shares shall, on the date of exchange, have the same value, as determined by the
Committee, as the shares of UPC surrendered in exchange for such Rollover
Retention Shares.
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10. REGULATORY APPROVALS AND LISTING
The Company shall not be required to issue to an Optionee, Participant or a
Beneficiary, as the case may be, any certificate for any shares of Common Stock
upon exercise of an option or for any Retention Shares granted under the Plan
prior to (i) the obtaining of any approval from any governmental agency which
the Company, in its sole discretion, shall determine to be necessary or
advisable, (ii) the admission of such shares to listing on any stock exchange on
which the Common Stock may then be listed, and (iii) the completion of any
registration or other qualification of such shares under any state or Federal
law or rulings or regulations of any governmental body which the Company, in its
sole discretion, shall determine to be necessary or advisable.
================================================================================
11. ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION
In the event of a recapitalization, stock split, stock dividend, combination or
exchange of shares, merger, consolidation, rights offering, separation,
spin-off, reorganization or liquidation, or any other change in the corporate
structure or shares of the Company, the Board, upon recommendation of the
Committee, may make such equitable adjustments as it may deem appropriate in the
number and kind of shares authorized by the Plan, in the option price of
outstanding Options, and in the number and kind of shares or other securities or
property subject to Options or covered by outstanding Awards.
-12-
<PAGE> 14
================================================================================
12. TERM OF THE PLAN
No Options or Retention Shares shall be granted pursuant to the Plan after
September 27, 2005 but grants of Options and Retention Shares theretofore
granted may extend beyond that date and the terms and conditions of the Plan
shall continue to apply thereto.
================================================================================
13. TERMINATION OR AMENDMENT OF THE PLAN
The Board may at any time terminate the Plan with respect to any shares of
Common Stock not at that time subject to outstanding Options or Awards, and may
from time to time alter or amend the Plan or any part thereof (including, but
without limiting the generality of the foregoing, any amendment deemed necessary
to ensure that the Company may obtain any approval referred to in Section 10 or
to ensure that the grant of Options or Awards, the exercise of Options or
payment of Retention Shares or any other provision or the Plan complies with
Section 16(b) of the Act), provided that no change with respect to any Options
or Retention Shares theretofore granted may be made which would impair the
rights of an Optionee or Participant without the consent of such Optionee or
Participant and, further, that without the approval of stockholders, no
alteration or amendment may be made which would (i) increase the maximum number
of shares of Common Stock subject to the Plan as set forth in Section 5 (except
by operation of Section 11), (ii) extend the term of the Plan, (iii) change the
class of eligible persons who may receive Options or Awards of Retention Shares
under the Plan or (iv) increase the limitation set forth in Section 5 on the
maximum number of shares that any Participant may receive under the Plan.
================================================================================
14. LEAVE OF ABSENCE
Unless the Committee shall determine otherwise, a leave of absence other than an
Approved Leave of Absence shall be deemed a termination of employment for
purposes of the Plan. An Approved Leave of Absence shall not be deemed a
termination of employment for purposes of the Plan (except for purposes of
Section 8), but the period of such Leave of Absence shall not be counted toward
satisfaction of any Restriction Period or any holding period described in
Section 6(c).
================================================================================
15. GENERAL PROVISIONS
(a) Neither the Plan nor the grant of any Option or Award nor any
action by the Company, any Subsidiary or the Committee shall be held or
construed to confer upon any person any right to be continued in the employ of
the Company or a Subsidiary. The Company and each Subsidiary expressly reserve
the right to discharge, without liability but subject to his or her rights under
the Plan, any Optionee or Participant whenever in the sole discretion of the
Company or a Subsidiary, as the case may be, its interest may so require.
-13-
<PAGE> 15
(b) All questions pertaining to the construction, regulation, validity
and effect of the Plan shall be determined in accordance with the laws of the
State of Utah, without regard to conflict of laws doctrine.
(c) Notwithstanding any provision herein to the contrary, the
Committee, under terms and conditions as it may prescribe, may permit certain
Optionees (with respect to Non-Qualified Options and Stock Appreciation Rights)
and certain Participants (with respect to Awards of Retention Shares) to make
elections, engage in transactions or take any other action intended to defer the
receipt of compensation for federal income tax purposes with respect to such
Non-Qualified Options, Stock Appreciation Rights or Retention Shares. This
provision shall be effective on and after September 5, 1997.
(d) With respect to any amendment to the Plan which becomes effective
on or after January 21, 1999, if the Company, at any time, desires to engage in
a transaction which is intended to 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 amendment would violate Paragraph
47(c) thereof (or any successor thereto), then any such amendment 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, however, that this subsection
(d) shall apply only if the transaction is otherwise eligible to be accounted
for as a pooling of interests.
-14-
<PAGE> 1
EXHIBIT 10.2
1995 DIRECTORS STOCK INCENTIVE PLAN
OF
UNION PACIFIC RESOURCES GROUP INC.
AND SUBSIDIARIES
SECOND AMENDMENT
The following represents the SECOND AMENDMENT to the above-referenced Plan,
following its amendment and restatement effective July 14, 1998, made by the
Board, subject to shareholder approval, at its January 21, 1999 meeting:
1. Section 4(a) is amended by substituting "1,500,000" for
"1,000,000".
2. The foregoing amendment is effective on the date approved by
the shareholders.
3. Except as amended herein, all other terms and provisions shall
remain in full force and effect.
<PAGE> 1
EXHIBIT 11
UNION PACIFIC RESOURCES GROUP INC.
COMPUTATION OF EARNINGS PER SHARE
(Shares in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Basic weighted average number of shares outstanding ............... 248,883 247,637
Dilutive weighted average shares issuable on exercise of stock
options less shares repurchasable from proceeds .............. 162 551
----------- -----------
Diluted weighted average number of common and common
equivalent shares ............................................ 249,045 248,188
=========== ===========
Income (loss) from continuing operations (millions) ............... $ 57.6 $ (9.1)
Income from discontinued operations (millions) .................... 133.2 23.0
----------- -----------
Net income (millions) ............................................. $ 190.8 $ 13.9
=========== ===========
Per share - basic and diluted
Income (loss) from continuing operations .......................... $ 0.23 $ (0.03)
Income from discontinued operations ............................... 0.54 0.09
----------- -----------
Net income ........................................................ $ 0.77 $ 0.06
=========== ===========
</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>
Six Months Ended
June 30,
----------------
1999 1998
------ ------
<S> <C> <C>
Income (loss) before income taxes ......................................... $ 0.8 $(43.7)
Add (deduct) distributions greater (less) than
income of unconsolidated affiliates .................................. (0.6) (1.2)
Fixed charges from below .................................................. 118.7 114.2
Capitalized interest included in fixed charges ............................ (0.4) (3.0)
------ ------
Earnings available for fixed charges ............................. $118.5 $ 66.3
====== ======
Fixed charges:
Interest expense, including amortization of debt discount/premium .... $115.0 $107.0
Portion of rentals representing an interest factor ................... 3.3 4.2
Interest capitalized ................................................. 0.4 3.0
------ ------
Total fixed charges .............................................. $118.7 $114.2
====== ======
Ratio of earnings to fixed charges (a) .................................... 1.0 0.6
====== ======
</TABLE>
(a) For the six months ended June 30, 1999 and 1998, earnings are insufficient
by $0.2 million and $47.9 million, respectively, to cover fixed charges of the
Company.
<PAGE> 1
EXHIBIT 15
AWARENESS LETTER OF INDEPENDENT PUBLIC ACCOUNTANTS
August 11, 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
June 30, 1999, which includes our report dated July 27, 1999 covering the
unaudited interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not considered a part
of the registration statement prepared or certified by our firm or a report
prepared or certified by our firm within the meaning of Sections 7 and 11 of the
Act.
Very truly yours,
ARTHUR ANDERSEN LLP
Fort Worth, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNION
PACIFIC RESOURCES GROUP INC. CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION AT JUNE 30, 1999 AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF
INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 25
<SECURITIES> 0
<RECEIVABLES> 323
<ALLOWANCES> 10
<INVENTORY> 56
<CURRENT-ASSETS> 507
<PP&E> 10,979
<DEPRECIATION> 5,218
<TOTAL-ASSETS> 6,443
<CURRENT-LIABILITIES> 786
<BONDS> 3,030
0
0
<COMMON> 0
<OTHER-SE> 873
<TOTAL-LIABILITY-AND-EQUITY> 6,443
<SALES> 725
<TOTAL-REVENUES> 802
<CGS> 0
<TOTAL-COSTS> 719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115
<INCOME-PRETAX> 1
<INCOME-TAX> (57)
<INCOME-CONTINUING> 58
<DISCONTINUED> 133
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191
<EPS-BASIC> .77
<EPS-DILUTED> .77
</TABLE>
